Rep. Earl Pomeroy (N.D.), a Ways and Means committee Democrat, called the president's proposal "nothing more than a Trojan horse that in the end ends all taxation on investment income, leaving it to taxes on wage income as well as sales tax-type revenue raisers to fund the federal government."
"The fundamental problem with this is [that it] benefits the most affluent in this country, leaving the tab to be picked up by everybody else," he said.
Pomeroy described the Bush plan as a "completely wrong-headed policy at encouraging savings" because most Americans earning $50,000 or less who are already eligible for tax-deductible IRAs aren't even maxing out their tax deferred accounts now.
The Bush administration has described the proposed accounts as a way to help workers and employers save more for retirement, as well as simplify the many tax rules governing current savings accounts.
The national savings rate plummeted from 7.8 percent in 1990 to around one percent today. That's lower than the savings rates in most other developed countries and only about one-third that of Japan.
The Bush plan would replace current savings vehicles (like traditional IRAs, nondeductible IRAs and Roth IRAs) and set up three new savings accounts, with higher ceilings on tax-free contributions and no limits on contributions by older and higher income workers.
Current Roth IRAs are limited to $3,000 in contributions per year and are denied to workers earning over $110,000 (or $160,000 for couples). Thus, only half of the American workforce is eligible, according to the administration. The Bush plan would change that.
- Under the "Lifetime Savings Accounts" plan, workers could save up to $7,500 annually for any purpose, such as a child's education, a new home, healthcare needs or to start a business. When the money is withdrawn, earnings and distributions will be tax-free. For a limited time, individuals could convert balances in an Archer Medical Savings Account (MSA), Coverdell Education Savings Account, or Qualified State Tuition Plan into an LSA.
- Under the "Retirement Savings Accounts" plan, workers could save an additional $7,500 annually, free of tax on earnings and deductions after age 58 (or death or disability).
- Under the "Employer Retirement Savings Accounts" plan, 401(k)'s, thrift, 403(b) and other retirement savings accounts would be replaced by ERSAs which could be sponsored by any employer. ERSAs would follow existing (but simplified) rules for 401(k) plans.
Pomeroy also views the plan as a path to high budget deficits in the decades to come, because it exempts more money from future taxation as people leave traditional, tax-deductible IRAs in favor of accounts that are tax-free in the future.
But Heritage Foundation scholar David John believes that what's lost in future tax revenue will be more than made up for by investment-spurred economic growth.
"This is actually an important vehicle for economic recovery," John said. The tax code discourages savings now, he suggested, because of the many rules and levels of tax governing investment income.
"This retirement savings account plan improves the opportunities for small business workers, especially, to take advantage of various pension savings plans," John added.
"Not only do they have the increased opportunity for their employer to offer a plan, but if their employer chooses not to... they have essentially the same opportunities as somebody who works for a large company that offers a 401(k) plan," he said.
The one potential pitfall, John cautioned, is that because money going into the plans comes from after-tax dollars, a future Congress could decide to impose a tax on it, as was the case in Britain and Australia.
In any case, it remains unclear how much support the Bush plan will win from congressional Republicans.
So far, it's winning only cautious praise from Rep. Portman, who co-authored the 2001 Comprehensive Retirement Security and Pension Reform Act ("Portman-Cardin") simplifying pension laws and increasing contribution limits for IRAs.
"[Portman] has been very supportive of the goals of the package, which is simplifying the retirement security system," said Jim Morrell, Portman's communications director.
"He is still taking a look at some of the specifics of the package, some of the details, and wanting to more closely examine how these changes would work and how they would affect the retirement security system," Morrell added.
"At this point, we can say that we do believe that this package is a step in the right direction," he said. "We believe simplifying the retirement security system would encourage more middle- and lower-income workers to save."
Pomeroy, however, suggested that not even congressional Republicans had been consulted by the Bush administration prior to its unveiling.
"From what I've been able to learn, neither Republicans nor Democrats on Capitol Hill had any input whatsoever, nor any of the major players in the industry providing retirement savings benefits to the American people," he said.
"It's reminiscent of other efforts-- I think about that Clinton health package, just for an example, [which was] devised without any input from affected industries," said Pomeroy. "This, also, was devised without any input."
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