February 2006 #1
Life Savings Accounts

In 2004, President Bush proposed to expand savings opportunities through the creation of Retirement Savings Accounts (RSAs) and Lifetime Savings Accounts (LSAs). According to the White House, RSAs would provide all Americans with an easy, tax-preferred way 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. LSAs would give all Americans the opportunity to save tax free to pay for job training, college tuition, the down-payment on a first home, a car to drive to work, or their retirement. 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. (Source.)

On paper the creation of LSAs and RSAs for that matter sounds reasonable. At present, we know a few things about retirement in America. There are too many vehicles retirement savings vehicles, such as traditional deductible IRAs, traditional non-deductible IRAs, Roth IRAs, 401(k)s, Roth 401(k)s, solo 401(k)s, 403(bs), SIMPLE IRAs, etc. And if that wasn't bad enough, there are such things as 529 plans, and immediate, deferred, fixed, variable, and equity-index annuities, all of which could be used for long-term or intermediate savings goals. (As we already know, having too many choices leads to inertia and confusion.) and that means having fewer rather than more vehicles could help solve the retirement savings crisis.

Two, Americans tend to have short-term, intermediate-term and long-term savings goals. So providing Americans with "envelopes" or "jars" that match their investment horizon seems like a good idea on the surface.

And three, few Americans are saving as evidenced by the negative savings rate in America. We need to help people understand the value of saving a dollar today vs. spending a dollar today. Having an LSA and an RSA could help do that.

Of course, there's been lots of push back to these accounts so they are unlikely to ever become a reality. For instance, the insurance lobbying group, the ACLI, is opposed to LSAs because of the adverse effect such accounts could have on annuity and life insurance sales.

What's more, the CBO this week released a report saying the new savings accounts proposed by President Bush might cost the federal government more revenue than administration officials have estimated. National Underwriter write the following in today's online newsbrief: Paul Burnham, an analyst at the Congressional Budget Office, makes that prediction in a new CBO working paper about Bush administration efforts to create LSAs and RSAs.
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 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 available here.

 

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