Costs Of Bush Savings Proposals Underestimated, CBO Reports

According to the report by CBO staffer Paul Burnham, the administration’s proposal to consolidate various existing savings vehicles into LSAs and RSAs would cost about $17 billion annually once they were in operation for some time. The bulk of the cost in government revenues, 90%, would be from diversion of taxable assets into LSAs, Burnham projects.

If President Bush’s tax cuts were extended, as the administration has proposed, the cost would rise even further, to $19.9 billion, the report said.

By contrast, the 2006 budget year “blue book” explaining the administration’s revenue proposals, released last February, project the RSA/LSA proposals as boosting revenues in the early years. For example, the blue book report said that the RSA/LSA proposals, in operation for the 2006 fiscal year, would be $3.71 billion and would have raised revenues by $1.46 billion over the 2006-2015 time period.

Burnham’s analysis said, however, that the RSA/LSA programs would cost the government $2 billion in revenue over the first 10 years they would be in operation.

In new figures issued with the fiscal year 2007 budget year blue book, the White House showed a $4.8 billion boost in revenues for the 2007 fiscal year but a loss of $383 million in 2011 and a loss of $122 million over the 2007-2016 time frame. Updated CBO estimates will be released in March.

Burnham’s projections were based on a “steady state” analysis, essentially an estimate of the cost of the proposal 26 years or more years in the future as similar groups of contributors and withdrawal recipients would be entering and leaving the proposed system.

Burnham’s report is a CBO working paper titled: “A Steady-State Analysis of Proposals to Reduce the Tax on Saving.” The paper is one in a series of occasional academic papers in the CBO’s Working Paper Series meant to “stimulate discussion and critical comment.” It was posted on CBO’s website Feb. 10.

Under the LSA proposal, individuals could contribute up to $5,000 annually to an account in which any earnings would accumulate tax-free. The contributions would not be tax deductible, however. Burnham’s report said most of expected revenue losses would come from the LSA proposal, or about $15.3 billion of the projected $17.0 billion “steady state” loss.

Unlike RSAs, there would be no time or purpose restrictions on withdrawals. LSAs and RSAs are meant to consolidate and simplify the current maze of retirement savings vehicles, including individual retirement accounts and 401(k) savings plans. Individuals could use LSA assets to cover any kind of expense, such as health care costs, education costs or business costs.