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?