Outside View: Saving private savings
Cesar Conda and Eric V. Schlecht (archive)
March 11, 2004 | Print | Send
WASHINGTON (UPI) -- While most of Washington has focused on President George W. Bush's proposal to extend the expiring portions of his 2001 and 2003 tax cuts, a budget provision of similar value has gone largely unnoticed.
The proposal for three new kinds of savings accounts combines the equally important issues of tax reform and retirement security that, if enacted, will simplify and expand savings opportunities for all Americans.
The president's budget calls for the creation of Retirement Savings Accounts, Lifetime Savings Accounts and the consolidation of numerous employer-sponsored retirement instruments into simplified Employer Retirement Savings Accounts. Together, these programs would allow all Americans to save for their retirement, their children's education, medical expenses and other significant needs while increasing the national savings rate and expanding economic growth through an increased capital stock.
Because these accounts don't tax savings twice, they provide the added bonus of creating significant momentum for real tax reform.
Under current law, some Americans can take advantage of preferentially taxed financial instruments including traditional IRAs, Roth IRAs, Coverdell Education Savings Accounts and Archer Medical Savings Accounts. Unfortunately, the common thread that links all of these accounts is the significant eligibility restrictions and the mind-numbing, complex rules that govern them.
Eligibility restrictions and contribution limits significantly reduce the number of people who can participate and the amount they can save, while the complexity of the plans prevents many Americans who are eligible to participate from doing so.
As a recent U.S. Treasury publication succinctly puts it, "The plethora of individual savings accounts, each subject to different rules regarding eligibility, contributions, tax treatment, and withdrawal, creates complexity and redundancy in the (tax) code."
In response, Bush has proposed replacing these numerous and complex options with RSAs and LSAs.
RSAs resemble simplified and expanded Roth IRAs. They would be dedicated solely to retirement savings with penalties on withdrawals made before the individual reaches 58 years of age. There would be no income limits on who could contribute to an RSA, with each individual allowed to contribute up to $5,000 each calendar year to his account.
Like a Roth IRA, contributions would be nondeductible, but earnings would accumulate tax-free.
Rather than having a complex and needlessly limiting list of penalty-free early withdrawal options from RSAs (as current IRAs have), the administration also made provisions for the separate LSAs.
The administration promotes LSAs because it recognizes that Americans also need to save for more short-term needs such as education, medical, housing and other costs. The common sense principle being applied here is that individuals -- not Washington bureaucrats -- know best how to manage their savings.
Many Americans do not have the financial flexibility to lock away significant sums of money in accounts they can't tap until they are 58. As House Ways and Means Committee member Rep. Paul Ryan, R-Wis., puts it, "LSAs are a tool for lower-income workers to set aside savings with the comfort of knowing that if they need the money they can get to it. This will help everyone become a member of the savings and investor class."
As with the RSAs, individuals could contribute up to $5,000 a year to LSAs, with those contributions being nondeductible but earnings accumulating tax-free.
The president's plan consolidates many of the overly complex employer-managed retirement plans into a simplified plan resembling a current 401(k) plan. While everyone with a defined contribution retirement plan would benefit from the more efficient plans known as ERSAs -- Employer Retirement Savings Accounts -- the biggest beneficiaries would be small business owners and their employees (the largest section of the American workforce).
The extreme costs associated with managing their current retirement plans lead many small business owners to conclude they cannot afford to provide their employees with retirement plans. Under ERSAs, compliance costs will drop significantly, and many more small businesses will be able to provide plans to their employees.
By consolidating and simplifying the many different savings plans and removing many of the eligibility requirements that prevent most Americans from taking advantage of them, the administration's proposal will encourage many more Americans to save for the future. This will increase America's dangerously low personal and national savings rates, which will increase the capital stock that feeds our economic productivity that, in turn, lifts the standard of living for all Americans through higher wages and increasing employment.
Taxing contributions but not the withdrawals, as would be the case with these new plans, moves the United States toward a tax code in which savings are no longer taxed twice. Not bad for a relatively unknown proposal.
Cesar Conda, former assistant for domestic policy under Vice President Dick Cheney, is a board director at Empower America. Eric V. Schlecht is a writer living in Arlington, Va., who has worked on tax, budget, and economic policy issues in both Congress and the private sector.
©2004 Cesar Conda and Eric V. Schlecht |
