Creation of new savings accounts as proposed by President Bush in his last few budgets would cost the Treasury Department far more in revenues annually over time than the government currently is estimating, a Congressional Budget Office staffer says in a new working paper.
The bulk of the cost would be through the creation of Lifetime Savings Accounts, which the insurance industry opposes, the report says.
The report is likely to add fuel to the fire over the cost and advantages of the new savings vehicles, which include LSAs and Retirement Savings Accounts, or RSAs.
The projections in the report are different from the near-term budget estimates that have looked at the cost of setting up LSAs and RSAs in the next few years.
“This report provides further evidence of problems that would result from adoption of these proposals,” said Jack Dolan, a spokesman for the American Council of Life Insurers.
Spokesmen for the National Association of Insurance and Financial Advisors also said the report buttressed their long-standing opposition to creation of both instruments.
“Since LSAs first were proposed, NAIFA vehemently has opposed thembecause they undermine, rather than promote, long-term savings,” said Jim Edwards of NAIFA.
He added that the CBO report “now gives us another reason to questionwhether these savings vehicles are a good idea.” He explained that the CBO study “underscores the point that little new savings will be created over 25 years. Rather, people who are now currently saving will tend to move currently taxed savings into non-taxable LSAs.”
Edwards said the CBO paper notes that doing so will produce a significant downturn of federal revenues in the future. “We are left with a proposal that discourages long-term savings and decreases federal revenue over time,” he said. “NAIFA then asks: for what purpose?”
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.