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CBO: LSAs And RSAs Could Cost $17 Billion Each Year

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The new savings accounts proposed by President Bush might cost the federal government more revenue than administration officials have estimated.

Paul Burnham, an analyst at the Congressional Budget Office, makes that prediction in a new CBO working paper about Bush administration efforts to create Lifetime Savings Accounts and Retirement Savings Acts.

Individuals could use LSA assets to cover any kind of expense, such as health care costs, education costs or business costs. LSA contributions would not be tax deductible, but earnings on contributions would accumulate free of taxes.

Individuals could use RSAs to save for retirement. RSAs would replace individual retirement accounts and many other types of individual retirement and investment vehicles. Contributions would not be deductible, but earnings would accumulate free of taxes. Once individuals reached age 58, died or became disabled, they (or their beneficiaries) could take out cash without paying income taxes on the distributions.

The LSA and RSA proposals would cost about $17 billion annually once they were in operation for some time, and about 90% of the revenue loss would come from diversion of taxable assets into LSAs, Burnham writes.

Burnham’s projections are different from the Bush administration’s budget estimates, which focus on the cost of setting up LSAs and RSAs over the next few years.

The Bush administration’s 2007 budget year “blue book” released in February predicts that the LSA-RSA programs would boost revenue in the early years. For example, the blue book shows that the LSA-RSA proposals would add $4.8 billion in federal income tax revenue if they were in effect in fiscal year 2007, and that the account program would lead to only $122 million in lost revenue between 2007 and 2016.

Burnham predicts in his working paper that the LSA and RSA programs would cost the government $2 billion in revenue during the first 10 years that they were in operation.

Burnham says his long-range projections are based on a “steady-state” analysis, or an estimate of the cost of the proposal 26 years or more years in the future, at a time when similar groups of contributors and withdrawal recipients would be entering and leaving the proposed system.

Burnham says $15.3 billion of the projected $17 billion in “steady state” revenue losses would come from the LSA program.

The American Council of Life Insurers, Washington, and other insurance industry groups have opposed the president’s LSA and RSA proposals.

The new CBO report “provides further evidence of problems that would result from adoption of these proposals,” says Jack Dolan, an ACLI spokesman.

A copy of Burnham’s working paper is on the Web at Document Link