Ray Boshara New America Foundation Washington, DC 202-986-2700 boshara@newamerica

1. The “Ownership Society” and Social Policy in the 2nd Bush AdministrationPresentation at the Tokyo American CenterTokyo, JapanJanuary 14, 2005 Ray Boshara New America Foundation Washington, DC 202-986-2700 boshara@newamerica.net

2. What is the “Ownership Society”? “An ownership societyvalues responsibility, liberty, and property. Individuals are empowered by freeing them from dependence on government handouts and making them owners instead, in control of their own lives and destinies. In the ownership society, patients control their own health care, parents control their own children's education, and workers control their retirement savings.” - CATO Institute "Ownership brings security and dignity and independence. In all these proposals, we seek to provide not just a government program, but a path — a path to greater opportunity, more freedom and more control over your own life.“ - President Bush, August 2004

3. Ownership Society Policies • Structured through individual or “personal” savings accounts • Main proposals would privatize Social Security (“Social Security Choice”) and reduce taxes on saving for retirement, health care, upgrading skills, and education • Would also encourage more business ownership and homeownership

4. Who Owns America? QuintileIncomeWealth Bottom 40% 10% 1% Bottom 60% 23% 4.5% Top 20% 56% 83% • Income inequality slowing, wealth inequality rising • Non-whites hold 10% of the wealth of whites • $330 billion a year in tax breaks to support wealth accumulation, but only helps upper-half of population

5. Social Security • First and foremost, the Ownership Society means privatizing Social Security • Future retirees would be permitted to invest a portion of the 6.2% of taxes they now pay (on wages up to $87,900 per year) into a privately-owned account • Specifics of Bush plan not yet known, but “transition” cost estimated at $100 billion per year • Nearly 40% of the income of Americans aged 65 and older comes from Social Security, more than from any other single source • Will be debated in Congress in 2005. Is there really a crisis? Can we achieve the goals of privatization without privatizing? Will there be a benefits “floor” if investments don’t perform?

6. Employer-provided Pensions • Huge shift toward “defined contribution” pensions: one-third in 1975 to over 80% in 1998 • 77% of workers earning less than $40,000 don’t participate in an employer pension or have an IRA. The bottom 60% of those who do own less than 14% of the retirement assets • Failure of Pension Benefit Guaranty Corporation (a federal agency), which is designed to protect the pensions of 44 million employees; PBGC now has a $23 billion deficit • Bush Proposal: Employer Retirement Savings Accounts (ERSAs) – combines existing tax-benefited, employer-based accounts (e.g., 401(k)s, 403(b)s) into one account; contributions capped at $12,000 per year • Will ERSAs adequately address the low levels of participation and assets among lower-income workers?

7. Private Retirement and Lifetime Savings • Presently, 93% of tax benefits for retirement savings accrue to households earning more than $50,000 per year • Bush Administration has proposed two new savings products: • Retirement Savings Accounts (RSAs) – tax-free savings up to $5,000 per year for retirement • Lifetime Savings Accounts (LSAs) – tax-free savings up to $5,000 per year for any purpose at any time • Over the long-term, costs would be $30-$50 billion a year • Proposals considered in 2006 as part of tax reform and simplification • Current system is “upside down.” Do these proposals address the key challenges in the U.S. private retirement system?

8. Health Care • 45 million uninsured Americans • Health care costs are rising: • In 2004, health care premiums went up 11.2% • Total health care expenditures went up 9.3% in 2002 • Health care expenditures were 14.2% of GDP in 2002 • Rapidly rising health care costs, combined with an aging population, are by far the largest fiscal challenges in the U.S. over the long term • U.S. health-care system is highly inefficient: • Total health expenditures per capita were $4,887 in 2001, up 78% since 1990, and more than twice the per capita spending in Japan ($2,331)

9. Health Savings Accounts (HSAs) Current law: • Individuals who enroll in high-deductible health insurance plans, and not covered by other private or public insurance plans, may establish tax-favored Health Savings Accounts (HSAs) • Contributions to HSAs (capped at $5,150 per year for a family) are tax-deductible, earnings are tax-free, and withdrawals not taxed if used to pay out-of-pocket medical expenses. (HSAs are tax-favored on both ends, which is unprecedented.) Bush proposal: • President would expand HSAs by allowing HSA participants to claim a tax deduction for the premium costs of high-deductible health insurance policies if they purchase such policies in the individual health insurance market. President also proposes refundable tax credits to help the poor save in HSAs • Costs of HSAs, if expanded, would be $41 billion over 10 years • Jury still out of the effect and effectiveness of HSAs • Will they address the core challenges in the U.S. health care system?

10. Poverty and Inequality • Bush has no large, coherent anti-poverty agenda, and doesn’t see inequality as a problem • Many Americas (incorrectly) thought the poverty problem was “solved” when welfare was reformed in 1996 • President sees ownership society and “faith-based” efforts as the solutions, but these are high-rhetoric and low-budget • Most advocates see great reductions in anti-poverty programs, and believe “starve the beast” budget strategies are designed precisely to restrain government’s ability to offer programs to the poor • Most ownership society proposals based on private savings accounts are also seen as deliberate threats to New Deal social insurance programs – especially Social Security, health care, and unemployment insurance

11. Expanding ownership is exactly the right policy idea Structuring more policies through private, portable, flexible accounts works well for the 21st century global economy Returns to capital are greater than returns to labor “Choice and responsibility” are the new, broadly accepted quid pro quo of the new social contract Politically astute – plays into aspirations Excludes millions who lack bank accounts, tax liabilities, and savings Poorly targeted subsidies – encourages asset shifting, not new savings Only 5% make maximum contributions to IRAs and 401(k)s, so why raise limits? Undermines social insurance – some risks should be pooled Fiscally irresponsible – accounts not “private” and thus distorts political choices Pros - Ownership Society - Cons

12. Ownership Society: The Verdict? • Right idea, wrong set of policies – large “credibility gap” between rhetoric and proposals • Ownership society proposals are good for some policy challenges, but not all— must determine where account-based, savings-based, and tax-based accounts make sense, and where programs make sense • In fact, ownership society policies will make some key problems – the exploding deficit and wealth inequality – much worse, and will undermine traditional social insurance or “safety net” programs • However, given growing and enduring Republican domination in the U.S. – in Washington and around the country – ownership society proposals, Bush-style, are likely to move forward, for better or worse

13. Japan vs. U.S. • Lower fertility rate (1.3 vs. 2.0) • Older population (36.5% vs. 20% over 65 by 2050), but higher rate of labor force participation among the elderly • Higher rates of savings (6.4 vs. 2.1 personal savings as a percent of disposable income, 2003) • Lower consumer demand • Less income inequality (31.5 vs. 34.5 Gini coefficient) • Much more efficient health care system ($2,131 vs. $4,887 per capita in 2001)

14. For Japan: * Boost fertility by broadening the ownership of assets – similar to the post World War II “GI Bill,” which made housing and education more affordable and, thus, spawned the baby boom and ignited consumer demand * Relax immigration laws? * Would “individualized” social policies undermine Japan’s commendable “village” or communal mentality? From Japan: * How to provide health care more affordably – all domestic policy threatened if we don’t * The importance of raising the retirement age, and encouraging work in retirement * High rates of savings cannot solve many problems – government and employers still play a crucial role in providing life-long economic security Ownership Society Lessons?

15. Resources • New America Foundation: • www.NewAmerica.net • www.AssetBuilding.org • Cato Institute • www.cato.org • Brookings Institution • www.brookings.edu