Vice President Al Gore’s newly proposed Retirement Savings Plus Plan does absolutely nothing to either save or reform Social Security. And it might even damage his election prospects. But one thing is for sure; it shows the newfound political muscle of the 100 million strong investor class.
THE POWER OF THE INVESTOR CLASS I believe this group is the invisible whip-hand of American politics today. And there can be little question that Gore’s initiative derives from the extraordinary polling strength of this group. For example, after George W. announced his personal retirement account reform of Social Security, a Zogby poll found that 55% of those surveyed preferred to invest their payroll-tax contributions through individual accounts, while 31% opposed the idea. Even among Democrats the split was 46% in favor and 38% opposed.
But get this: In the 18- to 29-year-old group, 78% favored private investing, while only 18% were against. And in the 30- to 49-year-old bracket, 71% endorsed Bush’s idea, while only 18% opposed it. So it’s not much of a reach to say that Al Gore and his genius advisors took one look at these numbers and then realized they had made a monumental political blunder in trashing Bush’s plan.
That a liberal Democrat like Gore would acknowledge the political strength of American shareholders is itself an important breakthrough. Gore is, perhaps, the clearest example of the gathering influence of investors who believe that free-enterprise stock-market investing, not government planning, is the key to creating retirement wealth. These are folks who believe that the words “business” and “profits” are not dirty words. They also strongly believe that the best pro-growth economic policies from Washington are those which either lower tax and regulatory barriers to business, or at least leave business alone.
BUT WHERE’S THE SOCIAL SECURITY REFORM? All that said, the Gore plan itself really has nothing to do with Social Security. “Gore is adding another government entitlement program,” Bush economic adviser John Cogan told me in a telephone interview. “There is no impact on contingent liabilities or payroll tax revenues.”
Cogan is certainly right in this. While the Bush plan would use the magic of stock-market compounding to fill the Social Security funding gap between benefits and revenues, Gore’s approach provides no clues as to how he would do it. The issue of benefit reductions or payroll-tax hikes is left unresolved in Gore’s non-blueprint. What’s more, if you buy Gore’s $200 billion price tag for his savings-grant proposal, along with his $500 billion dollar tax credit, and his $1.3 trillion estimate for various new spending proposals — Gore looks very much like a traditional big-spending and budget-busting liberal.
GORE THE LIBERAL In fact, recent Rasmussen polling data show that it is precisely Gore’s big-spending government-activist profile that explains the fact that Gore is trailing Bush by 10 points in polls. According to Rasmussen, “At the most basic level, Bush is leading because he is seen as closer to the political center than Gore.” Thirty-one percent of voters see Gore as a liberal. But among the general voting public, 73% identify themselves as either moderate or somewhat conservative. Sixty-two percent of likely voters see Bush in the middle categories of “somewhat conservative” or “moderate,” while only 48% see Gore in those middle ranges.
So Gore’s political problems do not stem from the color tones of his suits, shirts, and ties. Nor from his Nashville or Washington location of his headquarters. Nor from whether Tony Coelho or Bill Daley manages his campaign. Instead, the public has fingered Gore as a liberal and liberals don’t win. Fancy that.
THE DEVIL IN THE DETAILS As for the details of Gore’s savings plan, there is some good and some bad. The bad is an overreliance on tax credits. Gore would provide a $3-for-$1 matching grant for couples earning $30,000 or less a year (i.e., for every dollar saved, the government kicks in three); a $1-for-$1 matching grant for couples earning between $30 and $60k; and a 33 cents-for-$1 grant for couples earning $60k to $100k. This would heap even more tax credits upon a tax code already bursting with them. Bush, by the way, is guilty of the same tax-complexity and tax-clutter sin.
Bear in mind that tax credits do not affect marginal tax-rate incentives for economic behavior. Nor do they improve after-tax returns on investment. Remember: People save to invest profitably, on an after-tax basis. Otherwise, they will consume disposable income, not save it. In fact, with means-tested income thresholds of the sort featured in Gore’s plan, the extra dollar earned from someone’s extra hour of work is actually penalized — this is basic accounting.
Let’s look at Gore’s plan more closely. A couple earning $29,999, and saving $500 on their own, is eligible for a $1,500 matching grant from the government. That means their total income for the year increases to $31,499. A nice deal? Not so fast.
If in the next year, the couple earns just two dollars more — for a $30,001 annual income — they lose the $3-for-$1 grant, and consequently the $1,500 subsidy. They drop down to the $1-for-$1 grant, and will get only a $500 grant for their $500 in savings — roughly $1,000 less than the year before. So, their income goes from $31,499 back to $30,501 — the couple actually loses money by earning $2 more over the course of the year.
This represents a 50,000% tax-rate on the extra $2 earned. So, they have a whopping disincentive to work harder and earn more income. Welcome to means-tested tax-credit economics.
The Gore plan would also make use of a refundable tax credit — meaning a direct government subsidy for the lowest earners. And that is nothing if not an entitlement.
WHAT ABOUT TAX CUTS? It is further worth noting that no one can be sure that low-end earners would save even the entitlement grant. The data on saving show that people who earn less than $30,000 a year have significantly negative saving rates. Going up the income ladder, folks in the 30k-to-40k bracket have a roughly 4% saving rate. Those in the $50,000-to-$70,000 bracket have an 8% saving rate, while those in the 100k and higher bracket actually save more than 20% of their disposable income.
So, if history is any guide, Gore’ s saving plan will not generate the hoped-for investor-class response in the lowest income bracket. It will, however, exert a considerable drain on general revenues that could otherwise be used for across-the-board personal tax-rate reduction, which would strengthen overall economic activity. Such tax cuts would promote greater investment, productivity growth, and job creation, all of which would strengthen the Social Security system. Gore’s plan would make it more difficult to implement this sort of broad-based tax reduction.
THE ADVANTAGE On the plus side, however, it is worth noting that Gore’s plan does, for the first time, introduce the notion of a universal savings account that could be used for health care, education, home purchases, and retirement. This is a good thing, and it should not be lost in the general criticism of Gore’s mistaken policies. But there’s no reason why Bush or, for that matter, Congress, couldn’t simply expand the eligibility for IRAs and 401ks by raising contributory limits and income thresholds and then making them universal for multi-purpose uses.
There are a number of bills kicking around the House of Representatives to expand savings accounts, most notably two by Reps. Elton Gallegly (R., Calif.) and Dennis Moore (D., Kansas). Both Bill Archer and William Roth of the tax-writing committees are looking at saving-expansion proposals. If they were made deductible on the front end, there would be a static-revenue loss but it would be much less than Gore’s idea. If these plans were taxed at the back end, there would be no budget-receipt loss.
WHAT NEXT FOR BUSH? All of which leads to some of the ongoing deficiencies in George Bush’s current tax-cut plan. The fast-growing Internet economy has generated an overflowing of the surplus coffers. Bush so far seems content to simply say the additional tax-revenue surplus “proves” that his own tax-cut plan is viable. However, he should be much bolder.
Not only should he be using the new surplus numbers (which could raise the ten-year totals by $1 trillion) to expand IRAs and 401ks, but he should also add business tax relief to the mix. For example, the massive rise in technology-equipment investment by business firms both large and small will soon have to be replaced by the next new high-tech breakthrough. Wouldn’t it be helpful if the government provided 100% cash expensing for the depreciation write-offs for future equipment purchase? Businesses have not had any depreciation reform since 1981. That’s a long time between haircuts.
Turning back to the nexus of Social Security reform and savings accounts, I still believe that Bush is on the right track. He is providing savings resources to all workers, by turning back a portion of their payroll taxes for private investment accounts. This is more efficient than matching grants and tax credits, and it will mandate saving for those with the worst saving history. It will also enable private investment markets, rather than the government, to fund the unfunded future Social Security liability. And getting the camel’s nose under that tent would be the single most important fiscal reform in 60 years. It would also allow the on-budget surpluses that are expected to roll in over the next decade to be used for supply-side tax-rate reduction and tax-code simplification.
As for Mr. Gore, he thinks he’s hopping on the investor-class bandwagon. But in reality, his plan merely reinforces his liberal big-government image. His plan is a loser. His campaign will be too.