Slouching Towards a Consumption Tax and the End of Retirement Income Security

I presented a version of this paper at a 2003 symposium on public policy for retirement security at the Ohio State Moritz College of Law.In 2003, the Bush Administration proposed two ideas that I (and others) feared would undermine the retirement income security of millions of Americans. The first idea was to create two new tax-favored personal savings vehicles: the retirement savings account and the lifetime savings account. These tax-benefited accounts, which would have existed outside the employer-based retirement system and replace individual retirement accounts, would each have permitted annual contributions of $7,500 each, or $15,000 in the aggregate. (An individual could also have set up lifetime savings accounts for family members without earned income, into which he could contribute $7,500 annually.) The contributions were to be made on an after-tax basis, but the earnings would be exempt from income tax, a schemata based on the Roth IRA. The RSA would impose penalties on pre-retirement withdrawals; the LSA would not. These ideas did not find favor in the Congress and were generally opposed by the business community, organized labor, and liberal think tanks, for reasons I will summarize shortly. Nevertheless, the White House and members of Congress have introduced similar proposals in 2004, 2005, 2006, 2007, and 2008, and the President’s Advisory Panel on Federal Tax Reform adopted retirement and lifetime savings accounts as part of its blueprint for reform, which was released in late 2005. Thus, the idea of these new accounts retains political and intellectual currency, like the proverbial bad nickel, and they, or variations on them, are almost certainly to survive the end of the Bush presidency.