SEPTEMBER 13, 2004
One of the many, many problems with the Bush administration is that
its slogans are crafted by powerful and highly competent wordsmiths
and strategists, such as Michael Gerson and Karen Hughes, while its
domestic polices are crafted by anonymous nobodies like, uh ...
say, who is in charge of domestic policy these days, anyway? Thus,
Bush frequently finds himself making eloquent pronouncements whose
policy ballast is formulated off-the-cuff and discarded just as
easily. Early this year, the White House announced a great
civilizational commitment to landing on Mars, apparently without
consulting any scientists first. Bush declared, "We will build new
ships to carry man forward into the universe, to gain a new
foothold on the moon, and to prepare for new journeys to the worlds
beyond our own." Or not. Bush failed to mention the proposal in his
State of the Union address six days later.Now that Bush is promising to use his second term to promote an
"ownership society," the natural reaction is to lump this new idea
in with the "responsibility era," the "compassion agenda," and
other pleasant-sounding but mostly empty Bush slogans. In this
instance, however, the rhetoric actually refers to some weighty
proposals. And, unlike the Mars trip and other schemes, Bush may
actually stick with them. Why? Because they share one crucial thing
with all the domestic policies he cares about enough to invest real
political capital in: they redistribute wealth upward.
Bush has yet to provide many details about his "ownership society,"
but he has suggested it would have three main elements. The first
are Health Savings Accounts (HSAs), a component of last year's
Medicare law, which Bush would expand by $25 billion over ten
years. HSAs are a way for individuals to buy health insurance. You
put money--say, $5,000--into an account and deduct the $5, 000 from
your income taxes. The money is then used to pay your health care
expenses up to a certain level, after which the insurance company
pays for everything. If you don't spend the money on health care,
you can keep it. Proponents claim these accounts will control costs
(by giving patients an incentive to economize on their care) while
expanding health insurance. In reality, though, HSAs are likely to
do the opposite.
For one thing, as economist Henry Aaron of the Brookings Institution
wrote in Tax Notes this year, "most medical spending occurs during
high-cost episodes in which the total cost of care charged to
patients greatly exceeds the limits of any plausible
high-deductible plan." Remember, the insurance company would pay
for anything above a set level, and, if most spending is above that
level, then patients no longer have any incentive to economize.
They would, however, have an incentive to control costs under that
level. And that's exactly the wrong incentive to give them. One of
the major problems with America's health care system is that
patients skimp on cheap preventive care and, as a result, end up
suffering (and, more to the point, paying) far more later on.
Another problem with HSAs is that they mostly help the affluent.
Financing the accounts through a tax deduction means they are worth
more to those in higher tax brackets. Take that $5,000 deposit. If
you're in the 35 percent income tax bracket, the government would
pay for $1,750 of your deposit. If you're in the 10 percent
bracket, the government would kick in just $500. If you don't earn
enough to pay income taxes, you would get nothing. (The deduction
does not count against payroll taxes.) This is extremely
unfair--why set up a health care program that gives the greatest
benefits to those who earn the most? And that unfairness undermines
the program's ability to cover the uninsured, 90 percent of whom
are in the 15 percent tax bracket or lower, according to the Center
on Budget and Policy Priorities. MIT economist Jonathan Gruber has
calculated that about 87 percent of HSAs would be purchased by
those who already have health insurance. In fact, because the
existence of the accounts would encourage some businesses to scale
back or drop health insurance for their employees, Gruber estimated
that expanding HSAs would actually increase the number of uninsured
by some 350,000.
And that's only the beginning of the problem. Insurance is supposed
to spread risk: Rather than a few people (the very sick) losing
everything and most people (the healthy) getting off scot-free,
everybody pays a little bit. That's what company health plans do.
But HSAs would encourage the well-off and the healthy to pull out
of group plans; the more that do so, the higher the rates rise for
the sicker folks remaining, leading more people to drop out. That's
the vicious cycle that has driven up both insurance costs and the
number of uninsured. Bush's plan would accelerate it.
The second element of Bush's "ownership society" is the
privatization of Social Security accounts. Social Security is
another form of insurance-- insurance against the risk of making
bad investments, the risk of outliving your savings, the risk that
a disability keeps you from working, or the risk of being widowed.
(To some extent, it also treats the possibility of earning a low
income as a risk, giving low-earning workers a higher return on
their payroll taxes than high-earning workers.) The program is
designed to spread those risks among the working population.
But Bush insists that workers "need to own and manage their own
pension and retirement systems." He proposes that, instead of
giving your payroll taxes to support somebody else's retirement,
you should be able to keep some of it for yourself. Unfortunately,
there is an arithmetic problem with that idea. Right now, payroll
taxes go to fund people who are currently retired. If that money
were instead diverted into the individual accounts of those still in
the workforce, it would open up a huge financing hole (at least $1
trillion over a decade). And remember, Social Security is already
facing a financing hole as it is.
Beyond the shaky math, there's a deeper philosophical principle at
stake. If you control your own retirement, you have a better chance
of striking it rich in the stock market. But you also have a better
chance of losing your money. In other words, privatization
concentrates the risks on the individual, making impossible the
risk-spreading that's the entire point of Social Security. As
former Bush I Treasury official and current Yale Law School tax
professor Michael Graetz told National Journal, "ownership of
assets does not spread risks in the way that insurance does."
The last element of the "ownership society" is Bush's plan to cut
taxes on investment income (again). Bush has pitched this idea as a
way to modernize and expand pension coverage for workers, but his
actual proposal--which he offered up in his 2004 budget but quickly
withdrew--bears no relationship whatsoever to this goal.
The problem Bush purports to address is real: Americans save far too
little money for their own retirements. The government has
established incentives to promote savings, like Individual
Retirement Accounts (IRAs) and Roth IRAs, but they haven't proved
particularly effective. The average worker in the middle fifth of
the income distribution has a paltry $7,200 in his IRA.
One problem is that low- and moderate-income workers tend to spend
all the money they have. Another problem is that, as noted above,
IRAs work by offering tax deductions, and tax deductions are worth
far more to those at the top than those at the bottom. People in
the top tax bracket get 35 cents back from the government for every
dollar they deposit into an IRA. People in the bottom tax bracket
get 10 cents, and the 33 million workers who don't pay income taxes
get nothing. So it's not surprising that these accounts are mainly
used by the affluent. And most studies have found that they don't
encourage new savings. Mostly they're a windfall for those who
would have saved the money anyway.
To "fix" this situation, Bush wants to take all the elements that
don't work and make them bigger. His plan creates new accounts very
similar to IRAs--they would be called Lifetime Savings Accounts,
Retirement Savings Accounts, and Employer Retirement Savings
Accounts. They differ from IRAs mainly in that they would eliminate
the income ceiling that limits which families can transfer money
into Roth IRAs and allow them to deposit even more money tax-free.
(All in all, Bush's new savings accounts would allow a family to
shelter $45,000 per year tax-free.) In other words, most people
have the right to put away $3,000 a year, but they don't do it, and
Bush claims that somehow they will if only you let them put aside
more. The logic seems to be: Everybody says they're too stuffed to
try a piece of my homemade casserole, but maybe they'll take it if
I offer them even more casserole.
Bush's economists can't be stupid enough to think this will work.
The real intent of the plan is to take another step toward the
conservative dream of a revenue system that taxes only wage income
and exempts investment income altogether. The problem is that, by
giving such generous retirement tax shelters to those at the top,
employers may feel less need to provide companywide pension plans
for their (less well-off) workers, given that their own needs can
be met through an individual government savings account.
It's tempting to conclude that the "ownership society" won't
actually come to pass if Bush is reelected--that it's merely
rhetoric generated by campaign strategists concerned that the
president lacks a second-term agenda. And that might be. But it's
important to remember that Bush used the 2000 and 2002 elections to
spur his redistributionary agenda, even though the Republicans won
both times in spite of, not because of, his economic proposals.
Right now Bush faces strong public opposition to his economic
record and has avoided spelling out the details of his plans. If he
wins, it won't be on the strength of the "ownership society"--but
that won't stop him from claiming next year that the people have
demanded new upper-bracket tax cuts and privatized Social Security.