Bush Saving Proposal Creates The Wrong Incentive

The Bush administration needs to reconsider its ill-advised proposal to create Lifetime Savings Accounts and develop a consistent, logical strategy to encourage long-term savings.

At a time when the baby boom generation is fast approaching retirement age, and a retirement savings crisis is imminent, the administration comes forward with a proposal that creates exactly the wrong incentives.

While LSAs are presented as an incentive for Americans to save, they are in reality an incentive for Americans to consume.

And that is exactly the wrong way to go in a nation that already has one of the lowest savings rates in the industrial world.

LSAs are part of what the administration calls an effort to encourage savings and ease the tax and administrative burdens on pensions.

Along with Retirement Savings Accounts and Employee Retirement Savings Accounts, LSAs are presented as the answer to the savings crisis. But are they?

LSAs allow individuals to deposit up to $5,000 annually in a tax-free interest bearing account and withdraw the money at any time for any purpose without restriction.

Compare this to RSAs, where the same amount can be deposited, also with tax-free interest, but withdrawals before age 58 for any purpose other than death or disability are taxed.

So what is the average American, who has a finite amount of money to save every year, likely to do–lock it up in a long-term account that has tax-free interest, or put it into a short-term account that has tax-free interest?

The answer is pretty obvious. The incentive would be to place the money in the short-term account, and it would be very hard for many younger people who dont want to think about retirement to resist the temptation to withdraw the money for short-term desires.

Not only would LSAs undermine the Bush administrations own RSA proposal, but insurance products that encourage long-term savings, such as annuities, could be devastated.

Thats why we call LSAs an incentive to consume. Our tax code already creates many incentives to consume, and LSAs will provide a “savings” vehicle that encourages short-term thinking.

The issue of the ticking demographic time bomb and the lack of preparation among baby boomers for retirement is certainly not new.

But for too long, policymakers both on Capitol Hill and the White House have found reasons not to address it.

In the 1970s and 1980s, concerns over high interest rates and huge deficits led Congress to scuttle initiatives that would upgrade retirement savings.

In the 1990s, despite the economic boom and budget surpluses, the Clinton administration seemed more interested in taxing wealth accumulating life insurance products than in encouraging wealth accumulation.

Now the second Bush administration, while talking about long-term savings, encourages short-term thinking.

Frank Keating, president of the American Council of Life Insurers, proposes establishing a National Commission on Long-Term Savings.

It is an idea whose time has certainly come. The nation, starting with President Bush, must face up to the retirement savings crisis.


Reproduced from National Underwriter Life & Health/Financial Services Edition, February 13, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.