« There is No Crisis | Main | Do We Have to Be Quiet about Genesis
to Fight Creation-Science »

January 19, 2005

The Bush Social Security Feint?

With social security privatization looking like such a political loser, Kevin Drum wonders what the Bush administration was thinking. Kevin himself points to Ed Kilgore with the answer:

You have to wonder if the purpose, if only the fallback purpose, of the Bush SocSec campaign is to suddenly shift the debate from personal retirement savings accounts financed by payroll taxes to personal general savings accounts stuffed with sheltered upper-crust investment income. If there's any chance of that, Democrats needs to start preparing for it.

The details of the Bush proposal always looked suspiciously modest-- no more than $1000 per worker per year going into the accounts. Where was the boost to the wealthy in that?

But as part of Bush's "ownership society", Bush wants to make taxing work the focus of the IRS, while leaving capital gains and interest income in special savings accounts not only untaxed today, but untaxed in perpetuity. This article describes the goals in depth, but the key part of the Bush 2001 tax cut to go into effect in 2006, is to expand the idea of Roth IRAs to become Roth 401(k)s:

Another provision that can help the next generation will be Roth 401(k) plans, which employers will be able to offer beginning next year. Like Roth IRAs, they will be funded with a worker's after-tax dollars; similarly, withdrawals will be tax-free. But Roth 401(k)s will also allow much higher contributions than regular IRAs — the same as those for other 401(k) plans — thus allowing an end run around the income limits that make many well-to-do people ineligible for a Roth IRA.

The advantage for the next generation is that those affluent enough to let the money accumulate until they die will be able to name a child or grandchild as the beneficiary of the account. The child will be required to withdraw the money over his or her expected lifetime, receiving what is essentially a lifetime stream of tax-free income.

Read that last phrase.

Read it again.

This is the politics of creating an aristocracy of multi-generational untaxed incomes, enriching the already wealthy while starving future governments of a source of revenue.

And due to compound interest, the numbers are remarkably scary. Back in 2002, I wrote this article, which looked at some of the numbers:

Imagine a Roth 401K owner in twenty years with $1 million in his account at death; he leaves $100,000 to each of ten grandchildren. Under the exponential math of compound interest, those grandchildren could each enjoy by some estimates as much as $50-100 million of tax-free income over their lives from these Roth 401K bequests.

That's bad enough, but Bush wants to keep expanding the realm of untaxed investment income until nothing is left to tax but the wages of the workers. The hope no doubt on the Right is that those workers will slash the remains of the welfare state to escape that tax burden, achieving a step-by-step starving of the New Deal into non-existence.

Social security privatization would be a home run for the rightwing if achieved, but if it allows them to advance a few bases through the creation of more untaxed savings boondoggles, they'll take that as a win.

Posted by Nathan at January 19, 2005 01:23 PM