February 11, 2003

Administration Savings Plan Would Lead to Very Large Revenue Losses

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The Center on Budget and Policy Priorities has released Proposed “Savings Incentives” Would Cause Revenue Hemorrhage in Future Decades, an analysis of the Administration’s new tax-cut proposal related to savings.

The proposal, which is being touted as a way to increase national saving and help workers save for retirement, would create three new savings vehicles: (1) “Retirement Savings Accounts,” which would replace existing IRAs and be structured like Roth IRAs (except that there would be no income limits on who could use them and the contribution limits would be raised to $7,500); (2) “Lifetime Savings Accounts,” which would operate like Retirement Savings Accounts except that funds could be withdrawn at any time and be used for any purpose; and (3) “Employer Retirement Savings Accounts,” which would resemble 401(k)s but with fewer protections for low- and moderate-income workers.  The Center’s report finds that this proposal would:
Moreover, these revenue losses would mount in the same period that the baby boom generation will be retiring in large numbers and Social Security and Medicare costs will swell.  The Congressional Budget Office, the General Accounting Office, and independent analysts already project that federal budget deficits will reach alarming levels in those decades.  This proposal would aggravate that problem, further burdening future generations.
Today, a couple can contribute up to $6,000 a year to IRA accounts.  Under the proposal, a wealthy couple with two children could place $45,000 every year into the new accounts, and all interest, dividends, capital gains, and other earnings on these accounts would be permanently tax free.  Only people with very large incomes or considerable wealth would be able to take full advantage of these new accounts.  These affluent individuals would receive extremely large tax cuts over time.
National saving is the sum of public saving (i.e., government surpluses or deficits, with deficits constituting negative saving) and private saving (saving by private individuals and institutions).  The Administration’s proposal would substantially reduce public saving over time by swelling the deficit. It would be unlikely to generate enough new private saving to offset this decline in public saving because those who would be able to take full advantage of the proposal would primarily be high-income individuals with significant wealth.  Economic research has shown that such individuals are more likely to shift existing savings from taxable accounts to the new tax-free accounts than to undertake new savings in response to tax breaks of this nature.
By contrast, under the proposal, business owners and executives could put away $30,000 a year for themselves and their spouses through expanded IRAs and new “Lifetime Savings Accounts,” plus an additional $7,500 a year for each child they have, without having to offer any retirement plan through their firm.  Leading pension experts have warned that over time, this is likely to lead to a reduction in the number of small businesses that offer pension coverage for their workers and that make pension contributions on their workers’ behalf.
The Center’s analysis concludes that the proposal is likely to be disadvantageous to ordinary Americans over time.  While some middle-income families would benefit from the new tax-sheltered saving accounts the proposal would create, they would be harmed by the larger federal budget deficits that would result (since the deficits would likely lead to slower economic growth, higher interest rates, and cuts in federal programs on which many families rely).  Middle- and low-income families also would be adversely affected by state-level budget cuts and tax increases instituted to make up for the state revenue losses the proposal would trigger, and by the reductions that the proposal would induce in pension coverage for workers.