The following article is available exclusively on the Lifetime Saving Account Web Site:
Why the Arguments Against Lifetime Savings Accounts are Wrong
By Gregory Kolojeski
© 2003, 2004, Gregory Kolojeski. All Rights Reserved.
This article will focus on why the arguments made against Bushís proposed Lifetime Savings Accounts (LSAs) are not valid. It should be noted that many articles lump the three proposed plans (LSAs, RSAs, and ERSAs) together when discussing them. As such, points made against RSAs, for example, will be used to suggest that all the proposed savings plans are not a good idea. However, this article will primarily focus on the boldest proposal--Lifetime Savings Accounts.
Bushís proposed savings plans may not lead to more savings
I will not specifically deal with how the proposed RSAs and ERSAs will lead to additional savings (the higher limits and less restrictive conditions by themselves will certainly do that), but will look more closely at the absurd argument that creating the new Lifetime Savings Account will not lead to additional savings.
As was noted in a 2/6/03 article by Tami Luhby in Newsday:Öthose opposing the plan say it will benefit only a few, since just between 4 and 10 percent of traditional IRA contributors now put away the $3,000 maximum. You have to love the traditional IRA being used as an example. Letís review some of the rules for a traditional IRA. If I have another retirement plan, there are income restrictions on whether I can set up a traditional IRA and it must be wage income. If my spouse has a retirement plan, there are different income restrictions. And if neither my spouse nor I have another retirement plan, the rules are different again. And I canít take the money out of the IRA before age 59Ĺ without paying a 10% penalty in most cases unless I jump through other hoops. And when I reach age 70Ĺ, I must take out required minimum distributions. And, one more thing, the distributions are fully taxable as ordinary income. And now for the so-called good news about a traditional IRA--the small number of people who qualify for a traditional IRA can take a tax deduction.
It is often claimed that it is the income tax deduction for a traditional IRA that makes it so attractive to those at lower income levels. This argument seems weak due to the fact that those at lower income levels get little advantage from the tax deduction since they are in lower tax brackets. The National Center for Policy Analysis notes that For the vast majority of low- and moderate-income households, saving significant sums in tax-deferred retirement accounts is a bad idea. They further conclude that Low- and moderate-earning families who participate fully in these types of retirement accounts end up with less money to spend now, and higher taxes to pay later.
Even groups that did not support the original LSA proposal now support LSAs. For example, the American Society of Pension Actuaries states: In fact, ASPA believes that on balance the combined revised LSA/RSA/ERSA proposals, if enacted, would result in greater retirement plan coverage and consequently greater retirement savings for working Americans.
Now, letís compare a traditional IRA to a Lifetime Savings Account. For an LSA, there are no income restrictions of any kind; in fact, Iím not required to have any income at all. It doesnít matter whether I have any retirement plans. And as long as I am alive, there are no restrictions on when I can take out the money. And there are no restrictions on what the money can be used for. And I can place up to $5,000 in the LSA or, if I can convince my generous uncle, he can put the money in a plan for me or in a plan for my child (who doesnít need to have wage income). And, now for the best part, every dime I take out of an LSA is tax-free. All earnings are tax-free! But, of course, I donít get an income tax deduction for the money I put into an LSA. I wonder how many people would still prefer an LSA?
Now, how many taxpayers will put money into an LSA? Answer: Every taxpayer who wants to have any savings for any period of time will put money into an LSA. Yes, some may spend some of the money the next day. But one doesnít have to be a genius to realize that itís better to leave the money in the LSA as long as possible since all the earnings will be tax-free! Anyone who claims that the Lifetime Savings Account will not increase savings substantially is kidding himself. The real problem liberals have with LSAs is that that they will be so incredibly popular that virtually everyone will set them up! And since everyone would have LSAs, the politicians wouldnít easily be able to take them away.
Bushís proposed Lifetime Savings Plans favor the rich
Letís summarize the argument that LSAs favor the rich. The rich will save more money than those who are not rich and will benefit more. Therefore, thereís no reason to even discuss the benefits of the LSA for anyone else.
Liberals are masters of class warfare. First, they help design a very progressive income tax system where the lionís share of the federal income tax is paid by those with higher incomes. Then they claim any tax cut that is not targeted to a narrow group of taxpayers (those that already pay little or no income tax) is a giveaway to the rich. They also like to ignore the fact the most people move through income tax brackets during their life. Not surprisingly, taxpayers often move into higher brackets later in life as they enter the years of their peak earnings. (For more discussion of the high degree of income mobility, see a discussion of this issue by Bruce Bartlett; also see the 2003 Economic Report of the President.)
The usual Democrat income-redistributionists started attacking the LSA and other proposed Bush savings plans almost immediately. Not surprisingly, the reflexively liberal press repeated the same arguments endlessly with most ignoring any other arguments. And there are other arguments. For example, as noted by columnist Christine Hall: Heritage Foundation scholar David John believes that what's lost in future tax revenue will be more than made up for by investment-spurred economic growth. Or as noted by columnist Walter Updegrave: we all benefit from higher national savings, so why prevent people who might take advantage of higher limits from doing soÖ
Numerous columnists have claimed the LSAs will benefit the rich, but none of the same columnists ever define who the rich are. This may be because such a definition of the rich would likely start at income levels most of us would not consider to be rich. For example, you only need to have income above $55,225 to be in the top 25% of taxpayers who paid 84.0% of federal income taxes. Or you if you had income above $92,114, you would be in the top 10% of taxpayers who paid 67.3% of federal income taxes. (These statistics were furnished by the IRS and are shown at the Tax Foundation web site).
So, who would benefit from an LSA? The answer is anybody who saves. This includes the so-called rich, but it also includes everybody else. For most people, the LSA as proposed (up to $5,000 per person per year) would allow one to put 100% of their savings into tax-free accounts. With their concern that the successful may save more than the average person, too many columnists seem blind to the fact that LSAs are likely to be incredibly popular with the average person. Anyone who is capable of saving anything will be able to put his money into an LSA. Anybody eligible to save in an LSA who saved outside an LSA (or some other tax-advantaged plan) would generally be making a poor financial decision.
The flexibility of Lifetime Savings Accounts may result in people spending money on the wrong things
Another variant of this argument is that people may decide to save with Lifetime Savings Accounts rather than in the more restrictive retirements accounts and that that is a bad thing. Or as Tami Luhby stated in a 2/6/03 article in Newsday: itís elements of the proposal's flexibility, particularly the lack of penalties for withdrawing funds from the Lifetime Savings Accounts, that concerns most of the critics. This "government as nanny" approach is astounding in its demeaning way of looking at American citizens. It says that tax-advantaged savings is not a good idea unless it is savings for a purpose that someone else (i.e., liberals?) thinks is for a good purpose. According to some, freedom of choice is apparently not a good concept when it comes to oneís own financial affairs.
The government may lose a lot of future tax revenue if the proposed Lifetime Savings Account is enacted
I am tempted to say "I certainly hope so and that would be a good thing (letís take the bottle out of the drunkís hands)." Or as columnist Walter Updegrave put it: yes, the government may get less tax revenue from us, and maybe it will have to be more judicious in its spending or, heaven forbid, spend lessÖ
The answer to this question is that it really is not all that clear whether LSAs would result in less future tax revenue or, if so, how significant the amount would be. If increasing savings is a good thing economically, the beneficial effects of that savings may partially or even fully offset any lost tax revenues in the future. Also, increased savings would make many taxpayers less dependent on future Social Security payments. Many columnists seem to give no consideration whatsoever to such arguments or they buy into the absurd argument that savings will not increase. However, there are two sides to this argument even if much of the press refuses to acknowledge it. Let the debate begin!
The Lifetime Savings Account is an idea that will be wildly popular with most people. There is no question that due to its flexibility and other features that it would encourage savings by virtually everyone. It seems absurd to even suggest that it wonít dramatically increase overall savings. LSAs may benefit the so-called rich, but they benefit everyone else even more. The argument that LSAs will cost the government untold sums of future tax revenues seems vastly overstated. Liberals dislike LSAs since they may lower some future tax revenues, but they hate the idea that the lack of restrictions on LSAs would give savers total freedom of choice with what they do with their savings. And there are numerous special interests (those offering savings vehicles with various restrictions) that will oppose LSAs.
When LSAs were first proposed at the beginning of 2003, the odds appeared to be heavily against them being passed into law. They have been proposed again in 2004 in President Bush's Fiscal Year 2005 Budget. Prospects for passage in 2004 or 2005 now appear to be excellent.
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