New Bush savings accounts aren't dead

Author: Greg Robb

Published: January 21, 2004

WASHINGTON (CBS.MW) - President Bush left his plans to boost savings through new tax-free accounts out of the State of the Union address, but that doesn't mean they are dead, administration officials say.

The new plans will be unveiled in the president's Feb. 2 budget, Treasury Department spokesman Tara Bradshaw said.

"We are committed to advocating and advancing these proposals with Congress to get them passed this year," Bradshaw said.

Many observers thought that the new savings plans - called Lifetime Savings Accounts (LSAs) and Retirement Savings Accounts (RSAs.) - would feature prominently in the State of the Union Address.

But Bush didn't mention either of the plans in his speech Tuesday. He did mention a longstanding proposal to allow younger workers to invest part of their Social Security taxes in private accounts managed by Wall Street firms.

"Younger workers should have the opportunity to build a nest egg by saving part of their Social Security taxes in a personal retirement account," Bush said.

But the new accounts would be much more ambitious. Under the latest version of the lifetime saving plan, a married couple would be allowed to put $10,000 after-tax money into a savings account, according to American Council of Life Insurers President Frank Keating. They wouldn't be taxed on any gains generated by the investments and the money could be used without any restrictions.

In essence, the LSA would eliminate capital-gains taxes to some degree on general savings and investing. Bush proposed LSAs last year at a far higher level -- $15,000 per individual and $30,000 per couple -- but dropped the idea after it came under attack as a backdoor attempt to eliminate capital-gains levies.

The retirement saving plan, which would restrict any withdrawals until retirement age, is meant to consolidate the hodgepodge of tax-advantaged retirement accounts, from traditional and Roth IRAs to SEPs and Keoughs.

Despite the administration's reduction in the LSA contribution limit, the proposal is certain to be controversial.

Wall Street firms are backing the proposal because of the potential of large investment fees. Washington budget experts argue the plans would make the long-term fiscal problems substantially worse.

The Urban Institute -Brookings Tax Policy Center said revenue loss from the plans would reach $50 billion annually because the government would be precluded from collecting taxes on so many investments.

Democrats have opposed the proposals as primarily benefiting only the wealthiest Americans.

Insurance firms are worried that the plan might harm the annuity and 401-K businesses.

In a speech at the National Press Club on Monday, Keating argued the lifetime savings plans would be used for consumption, not savings. He urged the administration to establish a commission to examine ways to increase national savings.

Said Keating: "The lifetime savings account effectively is a consumption account - and I think all of us know we consume enough, thank you."

Charles Gabriel, an analyst at Prudential Securities, said he didn't think Congress would take up the new saving plans during this election year. "I personally don't think they are going to go anywhere," he said.

There are serious doubts that tax cutters in the Republican Party will be able to pass a tax bill this year with the federal budget deficit approaching $500 billion, he said.

"The administrations like the theology behind these accounts," Gabriel said. "But these things were ill-fated they way they were handled initially and politically these things were tin-eared in the sense they would eliminate the only tax-preferred savings vehicles for people of modest means.".

"I think you would have a mutiny on your hands" if the administration proposed the elimination of 401K plans, he said.