House of Paine

toward a Save Free Amerika ?

NYT MARCH 14 2005 

"Without a doubt,
 the dearth of savings
 poses serious concerns."

 Economic growth requires investment,
 and investment requires savings. 

Because Americans consume
 far more than they produce,
 the country is now borrowing 
more than $600 billion 
a year from foreigners 

- almost 6 percent 
of the gross domestic product. 
Put another way, 
the United States is tapping
 the savings 
of almost every other part 
of the world - 
including relatively poor countries.
 At some point,
 those bills will come due 
and constrain growth for many years."



Another big concern 
is that millions 
of aging baby boomers 
may not have stashed away
 enough for their retirements.

 Only about half 
of all workers participate
 in a pension plan 
with their current employer,
 according to the Center 
for Retirement Research 
at Boston College. 

Less than one-quarter
 of workers are covered 
by a traditional defined-benefit 
retirement plan. 

And savings through 
individual retirement accounts 
and 401(k) plans 
have been meager:
IN
2001, the average worker 
in the 55-to-64 age group 
had a balance of only $42,000.

But if the problem is clear,
 the proposed solutions are not."

Start with President Bush's plan 
to overhaul Social Security 
by letting workers divert
 some of their payroll taxes 
to personal retirement accounts.

 Treasury Secretary John W. Snow says 
in his stump speech 
that the accounts would not only
 enable younger workers 
To "build a nest egg,
" but would also help 
the nation 
"create a larger pool of savings."

But at least for the next few decades,
 that last assertion would not be true. 

For every dollar a person contributed 
to his nest egg,
 the government would reduce 
at least a dollar 
in traditional Social Security benefits.

 At best,
savings would simply be transferred 
from government to individual accounts."

More likely,
 the government would have 
to borrow trillions 
of dollars over the next several decades 
to pay full benefits to retirees 
who earned them under today's system.

"Moving to a forced savings account
 technically does not materially affect 
net national savings," Alan Greenspan,
 chairman of the Federal Reserve, 
said last month.
 "It merely moves savings
 from the government account 
to a private account." 

Mr. Greenspan is a supporter 
of personal accounts.

Savings are also at the heart
 of the battle over tax cuts.

For the third year in a row,
 Mr. Bush is proposing 
a big expansion of tax incentives 
for savings accounts. 

The most controversial idea 
is to create "lifetime savings accounts,"
 into which individuals 
could contribute up to $5,000 a year 
and earn tax-free investment income.

The twist of these accounts 
is that people would not have to wait 
until retirement
 to withdraw money. 

They could do so at any time 
and for any reason.
 But economists are divided 
over whether tax-advantaged savings accounts
 - even traditional retirement accounts 
- actually increase national savings. 

Personal savings 
have declined fairly steadily 
for more than two decades, 
even as tax incentives 
for savings have proliferated. 
According to a recent analysis 
by Elizabeth Bell, Adam Carasso and C. Eugene Steuerle
 at the Urban Institute, 
the federal government
 now spends more on tax breaks
 for retirement savings 
than Americans actually save.

Tax breaks for retirement programs 
cost $112 billion in 2004,
according to the Office of Management and Budget.

 Personal savings - for any purpose - 
totaled only $100.8 billion,
according to estimates by the Federal Reserve.

The issue isn't whether tax incentives 
prompt people to put money into 401(k) plans 
- the answer is clearly yes.

 The question is whether people
 actually save more,
 or whether they simply shelter income 
they were going to save anyway.

"The government does not really
 subsidize saving," 
wrote Mr. Steuerle and his colleagues 
in a paper published 
in the journal Tax Notes. 
"It subsidizes deposits,
 which can then be borrowed 
for consumption."

By contrast, one of the hottest ideas 
in Washington grows out of new research
 on the behavior of savers.

 Recent studies by researchers
 at the Wharton School of Business 
and Harvard showed 
that employee contributions 
to 401(k) plans soared 
at companies that automatically enrolled
 employees and gave them 
a chance to opt out."

Representative Rob Portman,
 Republican of Ohio and a senior member
 of the House Ways and Means Committee,
 is expected to introduce a bill
 next week with Representative Benjamin L. Cardin,
 Democrat of Maryland, 
that would call for automatic enrollment
 of workers in 401(k) plans.

But there is an even more curious turn
 to the politics of savings.

 A growing number of thoughtful analysts,
 Democrat and Republican alike,
 contend that today's tax incentives 
are misdirected at those 
who already have a strong propensity 
to save: 
people with high incomes
 who can spare the money.

Yet the tax incentive for savings 
that the Bush administration 
would scrap 
happens to be
 the one aimed precisely
 at low-income families.

Peter Orszag and William G. Gale 
of the Brookings Institution note
 that tax deductions for contributions 
to a retirement account 
provide a 35 percent deduction 
for people in the top tax brackets
 but only a 10 percent deduction 
for those in the lowest bracket. 

For tens of millions 
of low-income families, 
who owe no federal income tax 
at all,
 the tax benefit is zero.

To address that issue, 
Mr. Bush's 2001 tax cuts included 
a "saver's credit" 
aimed at low-income families.
 A family with an adjusted gross income
 below $30,000 is entitled
 to a 50 percent tax credit 
for retirement contributions 
of up to $2,000 a year.

A $1,000 credit would reduce 
a family's tax bill by $1,000. 
By contrast, a $1,000 deduction 
against income would save 
a person in the 10 percent bracket
 $100 at most.

Mr. Portman is so enthusiastic
 about the saver's credit 
that he wants to make it refundable,
 so families who don't owe any federal taxes
 could still get a check 
from the Internal Revenue Service.

But for reasons that are unclear,
 the Bush administration apparently
 wants to scrap the saver's credit entirely.

 Even as it pushes Congress 
to make almost all 
its other tax cuts permanent, 

the administration is not proposing 
to renew the credit
 when it expires in 2006. 

Treasury Department officials
 gave little explanation 
of why they did not propose 
a continuation of the credit, 
saying only that they had 
"pared down" 
their list of tax proposals 
while waiting for recommendations
 from President Bush's advisory panel
 on tax reform. 

"The core of the president's priorities
 are in there, 
but a lot of other things aren't,"
 said Taylor Griffin,
 a spokesman for the department. 
"We wanted to give the tax panel 
as much flexibility as possible."

The credit's fate can't be a matter of cost:
 it costs $1.2 billion a year.
 That isn't even a rounding error 
in Mr. Bush's agenda 
to permanently extend
 all his tax cuts 
for a total of $1.5 trillion
 over 10 years.

Maybe it's time to increase savings
 without spending so much money. 



   ==========================================================