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Bush's Savings Strategy Is Missing in Action

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Bush's Savings Strategy Is Missing in Action: Gene Sperling

Feb. 20 (Bloomberg) -- While President George W. Bush's economic report to Congress last week was on the mark when it cautioned that our national savings rate is ``extremely low by historical standards,'' one would have to declare any Bush strategy to actually increase national savings ``missing without a trace.''

Most damaging for the future is that the greatest contributor to our national savings rate in the 1990s -- the turn from deficits to surpluses -- has headed dramatically the wrong way.

The swing from projected surpluses of 4.7 percent of gross domestic product over the coming decade to projected deficits of 3.2 percent of GDP (assuming extension of the tax cuts and a modest alternative minimum tax) represents a whopping 7.9 percent of GDP deterioration in the public sector side of our national savings rate.

Bush administration officials like to divert focus to the private savings side with two self-described pro-savings initiatives: Social Security individual accounts, new Retirement Savings Accounts (RSAs) and Lifetime Savings Accounts (LSAs).

Yet if the bumper sticker for the administration's public savings strategy is ``Tax Cuts Matter - Not Deficits,'' its private savings proposals could easily be summarized as ``Shift Funds, Don't Actually Save More.''

Diverting Money

Consider the White House's proposals to ``carve out'' existing payroll taxes for Social Security individual accounts. Whether you are a fan or critic of such proposals, one can't escape the following simple math: Since every dollar from our Social Security payroll tax is designated for current retirees, diverting money into individual accounts is at best a wash.

It's like an older couple taking money out of their 401(k) retirement accounts and putting it into their daughter's IRA plan. The family has shuffled savings around, and hasn't increased their overall savings one penny.

When economists Peter Orszag and Peter Diamond analyzed the individual account plans in the president's 2001 Social Security Commission report, which claimed to increase national savings, they found that all of the additional savings came not from the new accounts, but from either benefit cuts or huge unspecified general revenue transfers, both of which could be implemented independent of the accounts themselves.

Claims that simply carving out private accounts is a pain- free way to increase national savings are a bit like those late- night ads, which claim a special pill -- and not thousands of sit- ups -- will give you abs of steel.

`Shift, Not Save'

The newest components of the administration's ``shift, not save'' strategy are its RSAs and LSAs. Certainly, there are compelling arguments -- wealth inequality, dignity in retirement, and increasing national savings -- why we should help people save more for retirement. In any given year, more than 50 percent of the workforce lacks any employer-sponsored pension, and, in addition, of those people working part-time or for small businesses, about 80 percent have no employer-sponsored pension. Among households headed by 55- to 59-year-olds, the median amount held in IRAs and 401(k)s is only $10,400.

The problem is that the new accounts aim almost all of their benefits at the 5 percent of American households -- mostly high- income households -- who are already ``maxing'' out their 401(k)s and IRAs.

While one can -- and I often do -- criticize these proposals on the grounds of exacerbating wealth inequality, they are also a bad savings policy.

Tax Windfall

An extensive body of research confirms what common sense suggests: When you offer high-income Americans who are already saving a lot a new tax-preferred savings incentive, their reaction is not to actually save more, but to simply shift existing savings to gain a tax windfall.

In a review of the academic literature, Jane Gravelle of the Congressional Research Service concluded that ``in general neither conventional economic theory nor the empirical evidence on savings effects tends to support an expectation that increased IRA contributions are primarily new savings.''

Economists Eric Engen and William Gale find that among higher-income households, new contributions to 401(k) accounts for the most part represent only a reshuffling of assets. Indeed, even the Congressional Budget Office, in an analysis of the RSAs and LSAs last March, found that they would lead to a shifting of assets, ``an action that would have no effect on private savings.''

On the other hand, since 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 to pay later, resulting in a dramatic decline in our public savings over the long-term.

Budget Hole

Over 75 years, the LSAs and RSAs would blow a hole in the federal budget more than one-third the size of our Social Security deficit. Since the administration, as usual, offers no offsetting budgetary savings for the accounts, and there is no evidence that they would generate private savings, the overall impact would be a large net loss to national savings.

Finally, take President Bush's 2001 and 2003 income-tax cuts, including on income from dividends and capital gains. Advocates have argued that by taxing investment income less, people will save more so they can invest more. Yet, as Joel Slemrod, a University of Michigan tax economist, and Jon Bakija of the Brookings Institution have pointed out in their 1996 book, ``Taxing Ourselves: A Citizen's Guide to the Great Debate Over Tax Reform,'' studies that control for other factors find that ``any response of the saving rate to the incentive effect of a higher after-tax rate of return is likely to be fairly small.''

Dynamic Scoring

Even when the administration was finally successful in getting the Joint Committee on Taxation to run a so-called dynamic scoring analysis of their tax cuts, the committee found that ``eventually the effects of the increasing deficit will outweigh the positive effects of the tax policy, and the build-up of private nonresidential capital stock will likely decline.''

While others continue the hunt for weapons of mass destruction in Iraq, I'm still looking for any real savings strategy from this administration. So far it's still missing.

To contact the writer of this column:

Gene Sperling, or at [email protected].

To contact the editor of this story:

Bill Ahearn at [email protected].

Last Updated: February 20, 2004 00:07 EST

http://www.bloomberg.com/news/commentary/gsperling.html

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