Bush's Schemes To Fleece The Poor On S.S., Health, And Taxes

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BUSH'S SCHEMES TO FLEECE THE POOR.

Up and Away

by Jonathan Chait

 

Post date 09.02.04 | Issue date 09.13.04

 

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.

 

Jonathan Chait is a senior editor at TNR.