In the years ahead, the United States faces a serious retirement savings crisis, and the Bush administration's plan to deal with this problem will make it worse instead of better.
Currently, only about 5% of people contribute the maximum amount allowable to IRAs and 401(k)s. The other 95% either can't afford to put away that much or have no retirement savings at all. Among households of those 55 to 59 years old, the median amount held in IRAs and 401(k)s is only $10,400, and in 2001, 92% of the working poor and 77% of small-business employees lacked any employer-sponsored pension.
Rather than helping these modest-income Americans save for their retirement, our current system of relying only on tax deductibility to encourage savings exacerbates the problem by giving all the incentives to upper-income taxpayers. If you are in the 35% tax bracket, you receive 35 cents for every dollar you save; if you are in the 15% bracket you only get 15 cents; and if you are one of the 33 million American workers who do not make enough money to owe income tax, you get nothing. No wonder only 2% of tax expenditures for retirement savings go to the bottom 40% of taxpayers.
The system is ripe for reform, but President Bush's main retirement savings proposals — retirement savings accounts, or RSAs, and lifetime savings accounts, or LSAs — which are expected to be re-released on Monday in his 2005 budget request to Congress, offer nothing to help the 95% who cannot afford to take full advantage of existing incentives.
If unchanged from last year's proposal, the new accounts would remove existing income caps on tax-deferred IRA saving — which by definition would help only the currently excluded households that make more than $160,000 a year. In addition, they would raise the contribution limits to allow a family of four in which the parents are currently "maxing out" their IRA accounts at $3,000 apiece to now save up to $45,000 tax-deferred a year, if the parents put $7,500 apiece into RSAs and $7,500 in LSAs for themselves and their children.
As policies to address our distressingly low rate of private savings, RSAs and LSAs represent backward thinking. Studies have shown that offering high-income savers new incentives to save causes them to simply shift their existing savings to capture the tax windfall, rather than actually save more. When the Congressional Budget Office analyzed Bush's proposals last March, it found that "most taxpayers would simply save the same amount in one of the new accounts as they would have saved in one of their current tax-free accounts."
On the other hand, the proposals would have a dramatic, though deceptively negative, impact on overall national savings by increasing the long-term deficit.
Because the LSAs and RSAs require contributions of after-tax income, they essentially encourage people to pay taxes now that our budget forecasts are counting on them pay to later. This massive fiscal gimmick boils down to robbing the revenue from our future. Brookings Institution economist Peter Orszag estimates that by 2028, the fiscal deficit created by LSAs and RSAs would be half as large as our already gaping Social Security deficit.
There are ways that we could address our nation's savings challenge. A good start would be to offer a new progressive universal 401(k) account to all Americans. With such an account, the government could provide the same matching contributions that 401(k)s in the private sector receive, through refundable tax credits on a taxpayer's first $1,000 of savings, and an extra 2-1 match for the poorest families.
If the notion of the government providing a matching contribution for savings seems radical, remember it is exactly what every member of Congress and the administration are offered right now.
Don't hold your breath for such a proposal from the Bush administration. The new RSAs and LSAs are clearly part of a larger Bush agenda to tax only the work that Americans do and not the wealth of the wealthiest among us. Imagine what our world would look like if the administration was successful in achieving zero taxes on dividends, zero taxes on even the richest estates and near zero taxes on capital gains, along with this new opportunity for the fortunate family of four to put away up to $45,000 a year and never pay taxes on the earnings. We would be living in a world where a precious few amass larger sums of tax-free passive wealth, while we shift more of the tax burden onto the hard work of families who themselves receive little assistance or incentive to save for their future.
Gene Sperling is director of economic programs for the Center for American Progress and was national economic advisor to President Clinton from 1996 to 2000.
This story originally appeared in the Los Angeles Times on Feb. 1, 2004.