Taxation - The Ownership Society

Author: Julie Kosterlitz

Published: January 24, 2004

Last November, as President Bush made his way around the country, fundraising on the rubber-filet-mignon circuit, he suddenly began including in his speeches references to something he called "the ownership society."

"A compassionate society must also promote opportunity for all of us, and that means the independence and dignity that come from ownership," he said at stops in Greenville, S.C.; Las Vegas; Little Rock, Ark.; Orlando, Fla.; St. Louis; and elsewhere. At each place, he spoke of wanting more Americans to be able to own their own homes and their own small businesses -- and to own and manage their own health care and retirement accounts. "We understand that when a person owns something, he or she has a vital stake in the future of our country," he said.

"The ownership society" is the kind of lofty phrase that politicians use to make modest or mundane proposals sound like epochal change. But in this instance, the rhetoric actually fails to convey the sweep of the changes that Bush has in mind.

Taken together, the Bush proposals have the potential to fundamentally alter America's public and private health and retirement systems, reshape the tax code -- and, in the process, rewrite the social contract that defined much of the nation's past century. The changes could also have significant long-term budget costs.

Although Bush made only a passing mention of the "ownership" theme in his State of the Union speech on Tuesday night, he touted several measures that fit neatly under that rubric. One, health savings accounts, recently became law. Another -- replacing part of Social Security with individually owned accounts -- is a long-standing goal, although Bush has yet to offer any specifics.

Still other ideas are expected to be included in Bush's budget proposal in early February. The most significant of these are new tax-free savings accounts -- think IRAs on steroids -- that individuals could use to save for their own health and retirement needs, or for virtually any other purpose, be it college or cottage, laptop or Lexus. Bush previewed these some of these proposals in his last year's budget, but with little fanfare or follow-through.

But Bush won't necessarily push hard for his proposals this year. The word from the White House is that the president's top economic priority for now is getting Congress to make his 2001 tax cuts permanent. Still, "the ownership society" is bound to be a recurring theme on the campaign trail, as Bush outlines his domestic policy vision for a second term.

In essence, Bush wants Americans to begin using personal savings to replace some of the nation's social-insurance system -- including government- and employer-sponsored health and pension plans. That system broadly spreads the financial risks of what Franklin Roosevelt called "the vicissitudes of life" -- faced by all, but experienced randomly -- over most of the population as a whole. Now, Bush is encouraging Americans to increasingly self-insure against such risks, although he pledges to preserve residual government programs as a safety net.

Bush is essentially telling Americans that by giving up this national security blanket, they have a chance to determine their own destiny, and perhaps even become wealthy.

Bush's proposals, by allowing Americans to shelter ever-larger amounts of investment income from taxation, would, over time, fundamentally undermine the nation's progressive income-tax system. The bedrock of American tax policy since 1913, the progressive income tax posits that those with higher incomes have both the means and the obligation to pay a greater share of their income for the commonweal.

"The ownership society," with its open invitation to all Americans to join the once-exclusive investor class, puts a new face on several age-old conservative goals. In the past, conservatives attempted to rein in "the welfare state" mainly by trying to cut popular social programs -- as when President Reagan tried and failed in the early 1980s to cut Social Security's cost-of-living increases. The new tax-free savings proposals would accomplish many of the same objectives, under the mantle of promoting increased individual choice, control, and wealth.

Republicans hope the new approach will transform the party's image from one of defending the status quo to one of advocating cutting-edge change and opportunity. And some predict that the new approach could also help create a political realignment in the nation, by transforming proletarians into plutocrats. Give a man a government handout, and you have fed him for a day, the thinking goes -- in a twist on the old adage about fishing and self-sufficiency. Help that man buy tax-free mutual funds, and you have created a Republican for life, some hope. "You can't have a hate-and-envy class if 80 percent of the public owns stock," says Grover Norquist, president of the right-wing Americans for Tax Reform. "That makes it impossible for Democrats to govern. It spells the end of their world."

Ironically, some of the ownership-society proposals owe a debt to President Clinton and the New Democrats he often allied himself with. For years, they and other maverick social-policy architects on the left have championed a variety of incentives to encourage more saving by a broad swath of the American public.

But Bush's proposals differ in several crucial respects. Where the liberals' plans tilted the savings and investment incentives toward lower-income individuals, Bush's proposals lean heavily toward the well-to-do. And while most left-leaning proposals are intended to supplement existing government or employer-based programs, those coming from Bush and other conservatives are designed to at least partially supplant these programs.

The result, say liberals, will be a society in which the already vast disparities in income and wealth are compounded, and in which most Americans face a greater degree of financial risk. Worse, they argue, Bush's approach is designed to disguise its huge costs to the Treasury, which kick in beyond the 10-year span lawmakers use in assessing budget impacts.

Government will then have to either shrink substantially or run up ever-larger debts, critics say -- and perhaps undo any economic benefits of increased private savings.

From Beggars to Burghers

No one doubts the benefits of turning renters into homeowners, debtors into savers, and paycheck peons into bond-holding coupon clippers. The benefits accrue both to individuals and to society: Individuals gain wealth, and society gains more-motivated and more-responsible citizens. Homeowners help police their own neighborhoods, according to the conventional wisdom, in part to protect the value of their homes. As Harvard University President and former Clinton administration Treasury Secretary Lawrence Summers likes to put it, no one ever washes a rental car.

And not all of Bush's "ownership" proposals are controversial. Few protested when, in December, Bush signed the American Dream Downpayment Act, which authorizes up to $200 million per year to help at least 40,000 low-income individuals buy homes. Liberals were guardedly positive when Bush proposed last year to create "personal re-employment accounts" that would let states give select unemployed workers up to $3,000 to pay for retraining and other employment services such as child care and transportation.

More contentious are Bush's proposals to substitute individual asset ownership for at least a part of the nation's social-insurance system.

That system began as Americans moved from farm to factory, and from extended families to nuclear ones. When the Great Depression highlighted the vulnerability of this new economy, President Roosevelt and his New Dealers stepped in with massive government support programs: Social Security transferred money from workers to retirees -- to protect working-class Americans against the risk of outliving their assets. Unemployment insurance transferred money from those with jobs to those laid off -- to protect individuals against the vagaries of the economic cycle.

During World War II, Big Business also began offering broad-based health and pension programs, to circumvent wartime wage controls, buy peace with the unions, and help manage their workforces. Traditional pension plans were designed to reward long and loyal service, as well as to give older workers incentives to move on and make room for younger ones.

And in the mid-1960s, Lyndon Johnson completed Roosevelt's vision by presiding over the creation of Medicare, publicly sponsored medical insurance for elderly Americans -- a group whose random but astronomical health care costs make them poor candidates for private voluntary individual insurance.

Besides spreading costs across broad populations, public and employer-sponsored health and pension plans took over a good deal of individuals' money-management. Most Americans didn't have to continually discipline themselves to save money, or figure out what mix of savings and investment they might need to finance retirement. Uncle Sam and employers made saving easy by deducting retirement contributions from paychecks before workers were tempted to spend the money elsewhere. They also hired experts to pore over actuarial tables, scrutinize stocks, and handle paperwork.

Paternalistic? Very.

And also highly effective. Together, these programs have brought enormous benefits to both individuals and society as a whole. Today, the word "elderly" is no longer synonymous with "poor," but instead conjures up a vast leisure class of "seniors," although the oldest old still have disproportionately low incomes. Today, Americans rarely have to forgo medical care because they can't afford it.

But, as conservatives are quick to note, these broad insurance schemes can sometimes encourage profligacy. Health insurance, for example, tends to shield individuals from the costs of their decisions -- potentially blunting the financial incentives to maintain healthy lifestyles, or to be discerning about the price and value of health care services. Transferring some of the costs of pension plans from workers to retirees has allowed employers and the government to make generous and popular promises to current generations of retirees on behalf of future ones. These escalating promises have come back to haunt both Social Security and the private pension plans in declining industries such as steel and autos. A declining ratio of workers to retirees is making it harder for both government and employers to pay for promised benefits.

The Right's gripes go beyond the fiscal to the philosophical. "Misguided policies have subtly forced Americans into a position where few have the will or ability to live independently from government," said Rep. Jim DeMint, R-S.C., a leading conservative, in a speech to the Heritage Foundation in 2002. "Encouraging sameness and dependency instead of individualism and independence diminishes the will and capability of people to succeed in a free society," declared DeMint, who now has his eye on a Senate seat.

The question is, Which side of the debate will be able to muster public opinion?

Not so long ago, Americans considered employer- and government-sponsored health and retirement plans inviolable birthrights, and anyone who tinkered with them risked summary political execution. But over time, changing economics, demographics, and, perhaps, the passing of the New Deal generation may make the values of securite, egalite, et fraternite less compelling than they once were.

A Parting of Ways

In fact, the nation has already begun to drift from the social-insurance model. The 401(k) revolution is a telling case in point.

In a move that began in the late 1970s, a growing share of employers no longer offer traditional pension plans, which carry the promise of specific, defined payments for life, and pay outsized rewards to employees with the most seniority. Instead, many of these employers are offering only to contribute a specific amount toward an employee's retirement. What the worker gets at retirement isn't a monthly payment specified and agreed upon in advance, but rather the sum total of an employer's contributions plus whatever amount that money has earned in the investment markets.

That trend from so-called defined-benefit plans, such as pensions, toward defined-contribution plans, went another step further in the early 1980s, when the Internal Revenue Service liberalized an obscure provision of the tax code -- known as 401(k) -- and made it easier for employers to set up tax-free retirement savings accounts for employees, and to contribute matching funds to these accounts. The new accounts have increasingly come to substitute for, rather than supplement, traditional pension plans. They represent a significant shift of responsibility from employers to employees by leaving it up to employees to contribute to their own retirement nest egg, although many employers match workers' contributions.

Employers say the plans are better suited to a new, more competitive economy and a more mobile workforce.

But these plans may also reflect changes in executives' own personal financial interests. As the income gap between the executive suite and the shop floor has widened, top earners have increasingly chafed at government rules that keep traditional pension plans from becoming mainly tax shelters for the rich. As companies found new ways to funnel tax-free benefits to executives outside traditional pension plans, the plans began to "wither on the vine," said Dallas Salisbury, president of the Employee Benefit Research Institute. "In the good old days, when a company "could pay them as much as the company could promise, executives had an interest in funding the pension, because they benefited from it," he said.

Despite being cheaper for employers and somewhat riskier for workers than traditional pension plans, 401(k) plans have been popular with employees. Workers, say benefits specialists, like being able to see growth in their savings, something traditional pension plans made invisible; they like being able to take their savings with them when they change jobs and to borrow against those savings before retirement.

The spread of 401(k)s and individual retirement accounts, or IRAs, is also transforming America into a nation of shareholders. Thanks largely to 401(k) investments, just over half of all families owned stock in 2001, compared with 32 percent of families in 1989, according to the Federal Reserve's Survey of Consumer Finances.

But when it comes to boosting Americans' savings or retirement security, the 401(k) and IRA track record is less clear.

The accounts have done almost nothing to expand retirement coverage -- which has hovered around half of all workers since 1987. Requiring workers to contribute some of their own money to a retirement account makes participation difficult for many low-income workers. Although the growth of 401(k)s has spread asset ownership, those assets have mostly accrued to upper-income earners. In 2001, among households that include someone approaching retirement, age 55 to 59, the top 20 percent of income earners accounted for nearly 70 percent of all assets in defined-contribution plans, including 401(k)s and IRAs, according to data compiled by Brookings Institution senior fellow Peter Orszag and Massachusetts Institute of Technology economist Peter Diamond. Median account balances ranged from $0 for the lowest 40 percent of such households to $215,000 for the top 10 percent. Median account assets for these households as a whole was just $10,400.

And these plans have not come cheap: The White House estimated that 401(k) plans, which allow workers to make pre-tax contributions, cost the Treasury nearly $53 billion in forgone revenues last year -- on top of the $63 billion for other employer pension plans. IRAs accounted for another $21 billion in lost revenues.

The trend has also spawned a lively academic debate over whether tax-free savings accounts actually spur much new savings, or whether they mainly offer a tax windfall to those who already had a bundle invested in the markets.

Viva la Revolucion

Now Bush's "ownership society" proposes to bring the 401(k) revolution to Social Security, and to take the credo of personal savings home from the workplace to the kitchen table. In touting several large new tax-free savings accounts for individuals, Bush and fellow conservatives say they hope to replicate the success of 401(k)s.

Specifically, in his last budget, Bush proposed a retirement savings account plan that would be like a mega-Roth IRA. (In contrast to traditional IRAs, the money contributed to Roth IRAs is taxed, but the income and withdrawals are not.) The annual contribution limits for Bush's proposed retirement accounts would be far higher than the current $3,000 for both kinds of IRAs. All interest, dividends, and capital gains would be tax-free upon withdrawal. In a significant difference, Bush's retirement accounts would be open to participants at all income levels. (With Roth IRAs, eligibility phases out for individuals with incomes between $95,000 and $110,000, and for couples with incomes between $150,000 and $160,000.)

Bush also proposed lifetime savings accounts, which would allow individuals to sock away, another $7,500 per year for themselves, and another $7,500 per child. The money could be withdrawn tax-free, for any type of expenditure, at any time.

All told, Bush's proposals would allow a family of four to set aside up to $45,000 a year, tax-free -- apparently in addition to other tax-deferred savings plans, such as 401(k)s and education-oriented accounts.

In the same vein, a provision of the Medicare prescription drug law passed late last year allows individuals and their employers to put a total of $2,600 ($5,150 for a family) in pre-tax dollars into health savings accounts, to supplement high-deductible, low-premium health insurance policies. In a novel twist -- and one that budget hawks find alarming -- both contributions to and withdrawals from these accounts would be tax-free -- as long as the payouts were used for health costs. (See this issue, p. 248.)

Why the vast expansion in tax-sheltered accounts?

The administration and its backers say that expanding Americans' anemic savings rate is vitally important. Norquist's Americans for Tax Reform is already lobbying for the new accounts on Capitol Hill. A recent report by the American Shareholders Association -- which is a project of ATR -- cites the costs of American profligacy: The nation's personal savings rate tumbled from 10.9 percent in 1982 to a scant 3.7 percent in 2002, even though the aging of the population and the impending shortfall in Social Security make greater savings imperative. Higher savings rates are also key to expanding the economy and raising living standards for all.

Tax-free savings accounts can do the job, backers argue, by doing away with the double taxation of savings. Under current tax laws, all income to individuals is taxed once, through the federal income tax. If you spend your money, you pay no additional federal tax, but if you invest it, the returns are taxed again. "These tax biases reduce the ability and the incentive to save," says the report.

But most Americans have yet to run out of tax-free savings opportunities. A report by two former Clinton administration officials, Orszag of Brookings and Gene Sperling, now with the Center for American Progress, a new liberal think tank, notes that fewer than 7 percent of those already eligible to participate in 401(k)s or IRAs have contributed the maximum allowed.

People who have maxed out on existing tax-free savings options, the report notes, tend to be higher-income people able to save and invest on their own -- just over 60 percent of this group had household incomes over $120,000. Why give these people a tax windfall? And if the goal is to encourage more savings by lower-income people, the financial incentives are stacked backwards: The higher your tax bracket, the greater the benefits of the accounts. This is an "upside-down savings system," Sperling says.

"The easier it is for you to save, the more we help you. The harder time you have saving, the less we help you," he told a conference of the New America Foundation in December.

Treasury officials say that the new accounts can encourage saving by simplifying the bewildering alpha-numeric jumble of special-purpose tax-free savings accounts -- 401(k)s, IRAs, Roth IRAs, education savings accounts, so-called 529 college savings plans (named for a provision in the tax code), and many, many more.

"There are so many complicated eligibility rules for these plans, with different contribution limits for each," said Andrew B. Lyon, former deputy assistant secretary for tax analysis at the Treasury Department and now an associate professor of economics at the University of Maryland. The confusion, he says, dampens participation in savings plans even among those who are eligible. Treasury officials cite a case in point: When Congress slapped income limits on IRA participation in 1986, contributions fell by roughly 40 percent the following year, even among those still eligible.

The simpler and less restricted these accounts are, Treasury officials have maintained, the more likely are people of all incomes to participate.

Moreover, Lyon argues, unless the accounts are available to a broad portion of Americans, investment firms won't have sufficient incentive to market and promote them enough to encourage mass participation. The proposed accounts, he says, "recognize that universality is important in getting the savings message across."

Letting people use tax-free savings for any purpose will also encourage greater savings, Lyons contends, because "people who have limited funds available for saving might be reluctant to lock it up for a special purpose." Lifetime savings accounts, he says, let people meet needs as they arise.

Cutting the Cord

But the accounts could have other consequences, intended or no.

For starters, they could kill many smaller employers' incentives to offer 401(k)-type savings plans, since the executives who make such decisions could now save for their own retirement tax-free, with less fuss and muss, in a personal retirement savings account. Just as traditional pension plans lost their staying power when corporate executives found new ways to put away money tax-free in other specialized accounts, the advent of RSAs and LSAs could sever the link between executives' self-interest and the interest of lower-income employees.

Without employer-provided prods and incentives, however, low-income individuals, who are most in need of increased savings, are actually less likely to save. "Low- and moderate-income individuals have always participated lightly in individual accounts. Those without 401(k)s contribute at very low levels," said Salisbury of the Employee Benefit Research Institute. In the employer plans, "an employer who sponsors and matches those people's contributions essentially bribes them into participating. Under a total individual system, you get rid of the incentive to bribe." Pension advocate Rep. Rob Portman, R-Ohio, and employer groups raised similar concerns last year.

And extending the same tax advantages now available mainly for retirement savings to the new all-purpose lifetime savings accounts makes it likely that most individual saving -- especially saving by low-income people -- won't be exclusively set aside for retirement.

Bush would be undermining the retirement savings of low-income workers, critics say, at the same time he is cutting back on their one predictable source of retirement benefits: Social Security.

By letting individuals divert some payroll taxes into individual accounts within Social Security, Bush is essentially proposing to change the system from a defined-benefit plan to a defined-contribution plan.

Of course, even without Bush's proposed changes, Social Security's expected future shortfalls will likely force government to scale back the defined benefit it promises -- or to come up with new revenues. But most plans that allow individuals to divert some of their Social Security payroll taxes into individual retirement savings accounts invariably propose to reduce Social Security's defined benefit even more.

The idea, of course, is to let individuals reap the higher investment returns on the portion of their Social Security taxes diverted to individual savings -- and leave them better off than they would be under the current system.

But carving out individual accounts would invariably make it harder for the program to continue the cross-subsidies from rich to poor that are an intrinsic part of Social Security. And it would make it harder for society to spread the financial risks of outliving one's savings. "One thing we know is that ownership of assets does not spread risks in the way that insurance does," said Michael J. Graetz, a Yale University Law School professor who specializes in taxes and social insurance and was a Treasury official during the George H.W. Bush administration.

And while investing in stocks can offer returns higher than Social Security's promised benefits, those higher returns come with commensurate risks. And the risks are of far greater consequence to those who have scant savings outside of Social Security.

Rumors circulating in the tax and employee-benefit communities suggest that Bush may modify his personal-savings proposals this year to address at least some of these concerns. One possibility: scaling back individual contribution limits, to perhaps $5,000, to keep small-business owners interested in maintaining 401(k) programs for employees. Another: expanding an existing small program of tax credits for low-income people who contribute to a retirement savings account, even to some people who earn too little to owe taxes.

While such fixes might appease employers (and an insurance industry worried about maintaining the appeal of its tax-free annuity products), they're unlikely to appease many on the left. Even the offer of some subsidies to low-wage earners, critics contend, could not compensate for the cumulative harm that Bush's "ownership society" would visit on this group by transforming the American tax system.

If Bush's proposed savings accounts become law, Americans would be able to shelter so much investment income from taxes each year, opponents charge, that sometime in the future, all investment income would be tax-exempt.

That would change the income tax into a tax on wages alone. And because wages constitute a larger share of income for people of modest means than for the wealthy, a wage tax would substantially erode the progressivity of the tax system.

Indeed, liberal critics suspect that all the high-minded rhetoric about savings, ownership, and empowerment is mere cover for conservatives' sneak attack on the progressive income tax.

Former Treasury official Lyons downplays the tax-sheltering significance of the proposed accounts. "A lot of those same opportunities exist today," through college savings plans, annuities, and other tax-sheltered investments, he said. "So higher-income individuals already know how to do this. It's more the middle-income saver who might not know how to save in taxes."

But outside the administration, some conservative supporters of "the ownership society" unabashedly own up to liberals' charges. At the New America Foundation forum in December, conservative activist and Republican campaign advertising consultant Richard Nadler said that a key goal of the movement was to "create a flat, consumption-based tax system by stealth," adding sardonically, "I hope I'm not giving anything away."

Bush's tax-free mega-savings accounts don't by themselves create a flat, or consumption-based tax, in which all individuals pay the same tax rate on their wages, but, Nadler contends, they are a giant, if unadvertised, step toward that goal. "If one exempts savings for life-cycle events from taxation, what's left is current consumption," he said. "Even a graduated income tax on such consumption is far flatter than a comparable tax on current consumption and savings."

Flat Tax Redux

The ideological divide over the flat tax hasn't changed much since publishing magnate Steve Forbes last made it a national issue, during his 1996 bid for the Republican presidential nomination. Indeed, the debate sounds remarkably similar to the one set off when conservative economists Robert Hall and Alvin Rabushka first unveiled their flat-tax plan in 1981.

Conservatives contend that a flat tax would spur more work, savings, and investment, and therefore faster economic growth, and that its simplicity would cut both the wasteful costs of compliance and the incentives for evasion.

Liberals argue that it's folly to think that the well-heeled won't find ways to game a flat tax as effectively as they do the present system. Instead, its main impact would be to shift the tax burden from higher-income people, who get a larger share of their income from investment, to lower-income people, who get most of their income from wages.

But if the debate hasn't changed, the political impetus for change may have grown along with the rising disparities in income and wealth in America. As incomes at the top of the distribution curve have skyrocketed, so too has the wealthy's share of the nation's tax bill.

Between 1986 and 2000, the portion of the nation's income-tax bill paid by the top 10 percent rose from roughly 55 percent to about 67 percent -- a 22 percent increase.

The wealthy's share of the tax bill grew not because of a hike in their tax rates -- indeed, tax rates for the group were a hair lower in 2000 than in 1986 -- but because of a large rise in their income. Between 1986 and 2000, the share of national income accruing to the top 10 percent of Americans rose from 35 percent to 46 percent -- a 31 percent increase, according to tables published by the Tax Policy Center, a joint project of the Brookings Institution and the Urban Institute.

Still, in recent years, some conservatives have begun to argue that forcing the wealthy to shoulder such a large share of the cost of government is both morally and politically pernicious. "The underlying problem is that, every day in America, more people are receiving benefits from government, and fewer are paying the taxes that fund these benefits," said Rep. DeMint in his Heritage Foundation address. "Our democracy cannot continue if we do not reverse this trend."

Liberals see a similar threat to democracy -- from Bush's tax proposals. The plans would create "two Americas," Democratic presidential hopeful John Edwards has begun saying on the campaign trail. "By the time he's done, the only people who pay taxes in America will be the millions of middle-class and poor Americans who do all the work," Edwards said in a late-December speech in Des Moines. "That's wrong. It's wrong for a millionaire who sits by the pool, on the phone to his broker, to pay tax at a lower rate than the cop on the beat or the waitress working two shifts."

Where does the public stand?

According to a poll by Harvard's John F. Kennedy School of Government, the Henry J. Kaiser Family Foundation, and National Public Radio in April 2003, Americans are split down the middle: Just over half of those with an opinion would trade the current system for a flat tax.

With public opinion on the future of the tax system up for grabs, a good sales job by either side could muster majority support. One factor that could tip the balance is the impact that Bush's proposals would have on the budget. Alas, here too, the public will have to wade through a complicated debate.

The administration says the new savings accounts are virtually costless. Indeed, the Treasury Department estimated last year that its LSA and RSA proposals would bring the Treasury more revenue in the first five years and cost money in the second five years, resulting in a $2 billion net gain in the first 10 years. The congressional Joint Committee on Taxation found the same revenue trends -- but forecast a net $5 billion cost to the Treasury by 2013.

Moreover, the short-term estimates may disguise huge long-term costs. The Congressional Research Service recently concluded that the costs of the plan in later years -- while tough to forecast with precision -- could run between $300 billion and $500 billion a decade. William G. Gale and Orszag of Brookings and Leonard Burman of the Urban Institute also came up with a comparable estimate in an article for the newsletter Tax Notes in March 2003.

Why do the revenue losses balloon over time? Because, in contrast to traditional IRAs and 401(k)s, the new savings accounts make withdrawals, not contributions, tax-free, so the cost of the accounts, in tax revenue forgone, won't show up until people build up sizable balances and then start withdrawing the money. And if, as expected, many people shift money out of IRAs and 401(k)s to take advantage of the new accounts, they'll pay taxes on that money now. That gives the Treasury a short-term revenue windfall -- and a future liability that doesn't show up on the books. This is becoming a standard Bush method -- set up programs whose expenses crop up only after he's left office.

Moreover, the new savings accounts are only part of the government's cost to create "the ownership society." Some Social Security reform proposals that hew to Bush's principles would actually require substantially more cash infusions from the rest of government than would be needed to just plug the holes in Social Security over the next several decades. (See NJ, 12/13/03, p. 3760.)

Unfortunately, the government doesn't have revenue to spare. Although the Congressional Budget Office has estimated that the deficit over the next decade will total just $1.4 trillion, several nonpartisan and Wall Street estimates -- not constrained, as is the CBO, to look only at current law -- have put that figure closer to $5 trillion.

The CBO itself, in a late-December gesture worthy of the Grinch, released a study showing that under one pessimistic -- but not unrealistic -- scenario, annual budget deficits could climb from 3 percent of gross domestic product in 2003 to 14 percent by 2050; and over the same period, federal debt could leap from 38 percent of GDP to what the CBO mildly termed an "unsustainable" 185 percent of GDP.

Unfortunately, escalating deficits would undermine one of the major justifications for "the ownership society": boosting national savings. It doesn't help national prosperity when individuals sock away extra money if, at the same time, Uncle Sam is going further in hock.

The administration shrugs off such doom and gloom. Current deficits are not outsized by historical standards, Budget Director Joshua Bolten opined in The Wall Street Journal in December. And Bush, in his State of the Union address, promised a budget that would cut the deficit in half within five years.

Budget constraints and competing priorities, however, will likely force the administration to scale back its savings proposals. One popular scenario has the administration jettisoning the lifetime savings accounts, but keeping the retirement savings accounts proposal. The RSAs would have substantially less impact than LSAs on the current social-insurance system and tax code. Conservatives' battle to remake the programs they lump under the term "welfare state" would have to be fought another day.

But as Bush demonstrated with his 2001 tax cuts, by aiming impossibly high, you can alter the terms of the debate. Even a scaled-back version of Bush's plan, says Brookings's Orszag, could win a victory many thought unlikely just a few years ago: doing away with income limits on Roth IRAs. "Obviously, it's not as sweeping and fundamental a shift, but it's still significant, in the face of a large budget deficit, to create a huge tax deduction for savings that people would have done anyway and that go disproportionately to those with high incomes," he said. "Only by comparison with eliminating the tax on all capital would this seem reasonable and moderate."