Tuesday, May 11, 2004

The Congressional Budget Office today released Tax-Deferred Retirement Savings in Long-Term Revenue Projections. Here is part of the Preface:

This Congressional Budget Office (CBO) paper, requested by the Senate Finance Committee, examines how long-term revenue projections are affected by explicitly incorporating tax-deferred retirement savings. Using data from tax returns in a model that it constructed, CBO estimates that federal revenue will increase by 0.5 percent of gross domestic product over the next 75 years as a result of tax-deferred retirement accounts. About one-half of that increase will occur in the next 25 years.

The paper first describes the “life-cycle” of retirement accounts and explains the revenue implications of each phase. It then illustrates how revenues from retirement accounts are affected by demographic bulges such as the baby boom and by tax incentives available outside of retirement accounts, such as lower rates on capital gains and dividends. Finally, it considers alternative scenarios to the base case in the model in order to illustrate the effect of using different assumptions about such factors as the economy, tax policies, and taxpayers’ behavior in saving for retirement.