WASHINGTON - Vice President Al Gore will propose tomorrow a plan to set aside $200 billion over 10 years from the projected federal budget surplus to entice spendthrift Americans to save more money for retirement, a first home, education or catastrophic health care costs.
Gore's Family Savings Accounts - the largest piece of a tax cut package totaling $500 billion - is the Democratic presidential candidate's answer to his Republican rival, Texas Gov. George W. Bush, who has proposed the partial privatization of the Social Security system.
Although Gore would not touch Social Security benefits, both candidates would allow individuals to invest tax dollars in the stock market, a major shift in government policy. Under the Bush plan, taxpayers would use dollars diverted from the Social Security payroll tax. Gore would have taxpayers use general revenues, such as income taxes, to create a new retirement savings system that would supplement Social Security.
"It's changing the whole debate," said William Gale, an economist at the Brookings Institution who specializes in savings issues. "Now all sides agree in some form of private savings with tax money. It's just a question of whether that money will be carved out of Social Security or added on" to the Social Security system.
Gore has said since last year that he would use some of the surplus to encourage private savings and investment. But he has waited until now to formulate a policy, in large part because he wanted to see if surplus projections - already totaling close to $1 trillion over 10 years - would go even higher with the nation's continued economic growth. Late this month, congressional and White House budget forecasters are expected to nearly double the projected surplus generated by revenues other than Social Security taxes. That will leave both Gore and Bush much more room for new policy pronouncements.
The proposal that Gore will lay out in Lexington, Ky., tomorrow will be far more detailed than the general principles on Social Security privatization that Bush has outlined. Under the Gore plan, millions of workers would set up accounts similar to an Individual Retirement Account with private financial firms contracting with the government.
Variable federal contribution
The federal government would contribute $3 for every $1 that workers earning below $30,000 would deposit into the account, up to an annual maximum of $2,000. For such lower income workers, a $500, tax-free contribution would generate the maximum $1,500 match from the government. That money could then be invested in a narrowly prescribed set of investment options, such as widely diversified stock funds, bond funds or Treasury bills. That would cut down on administrative costs, potential fraud and stock market losses, a Gore adviser explained yesterday.
For workers earning between $30,000 and $60,000 a year, the government would match contributions dollar for dollar, meaning a $1,000, tax-free contribution would yield the annual maximum of $2,000. Workers earning $60,000 to $100,000 would receive $1 from the government for every $3 they contribute. For these workers, it would take $1,500 to reach the $2,000 limit.
Gore aides say the sharp drop in government matching rates is designed to entice the poorest workers - precisely the ones with the lowest savings rates - to put more money aside. The accounts could be accessed at 59 1/2 years of age to help pay for retirement, but withdrawals could also be made earlier to defray the price of education, catastrophic health care or a first home.
And to encourage even the most cash-strapped Americans to save, Gore would devise ways to make a minimum contribution easy. The Internal Revenue Service could be instructed with a simple check mark to deposit tax refunds in a Family Savings Account. Or employers could divert just $10 a week from low-income workers' paychecks into the accounts to reach the $500 limit.
Gore advisers estimate that a worker saving the maximum amount for 35 years and earning a conservative 5.3 percent return on investments would retire with $202,000. For low-income workers, a $17,500 investment over 35 years would grow more than eleven-fold.
The plan is similar to a proposal by President Clinton two years ago to use $250 billion from the surplus for so-called Universal Savings Accounts, a proposal that has gone nowhere. But Gore made some important changes to make the plan more politically palatable.
Private sector tie
For the poorest workers, Clinton had proposed an automatic direct government deposit of $500, meaning that no personal savings were necessary to maintain an account. And those accounts would be administered by the government, most likely the Social Security Administration.
Gore decided to keep a more private-sector bent to account management, and he wanted even the poorest worker to have to save money. That would encourage fiscal responsibility and remove the mandatory element of Clinton's proposal, a Gore adviser said.
In contrast, under the Bush plan, all workers would have some money to invest, since those funds would come from payroll taxes that all workers must pay. Michael Tanner, director of the Project on Social Security Privatization at the libertarian Cato Institute, said the poorest workers would not benefit from Gore's proposal, since even a small contribution could be too difficult to swing.
It is a point that a Gore adviser conceded, but, she said, the generous match would entice most people into the program.
"Do I think every single American will participate? Probably not," the adviser said. "Do I think it will make an enormous difference for most Americans? Absolutely."
Brookings' Gale said that matching grants offered by employers to lure people into 401(k) programs were only moderately effective, but, he said, even the most generous employer does not offer a 3-for-1 match like Gore would for low-income workers. That could be enough to create significant participation levels, he said.
Still, Bush aides noted, while both candidates support using the stock market to create retirement wealth, Gore does nothing to fundamentally restructure Social Security to cope with the challenges presented by the retirement of the baby boom generation.
Under privatization proposals like Bush's, guaranteed Social Security benefits would eventually be slashed to extend the system's solvency, though theoretically, those benefit cuts would be more than made up in high investment returns from personal savings accounts. Gore has proposed using Social Security surpluses to pay down the federal debt. The interest savings would then be dedicated to extending Social Security's solvency, but no changes in benefits are contemplated.
"At the end of the day, the question is, which candidate is trying to actually keep Social Security solvent," said Dan Bartlett, a spokesman for the Bush campaign.
But Robert Reischauer, president of the Urban Institute and a federal budget expert, suggested Gore's proposal could end up doing exactly what Bush's would ultimately do. If in 30 years millions of retirees found that their Family Savings Accounts had significantly bolstered their retirement savings, Congress could be emboldened to cut Social Security benefits to keep the system from going bankrupt, Reischauer suggested.