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Letter from June E. O'Neil, Director Congressional Budget Office to Bill Archer includes report: Analysis Of a Proposal by Professor Martin Feldstein to Set up Personal Retirement Accounts Financed by Tax Credits 1 (August 1998)

handle is hein.congrec/cbo10147 and id is 1 raw text is: August 4, 1998 Honorable Bill Archer Chairman Committee on Ways and Means U.S. House of Representatives Washington, D.C. 20515 Dear Mr. Chairman: In response to your letter concerning Professor Martin Feldstein's proposal to set up private savings accounts financed by tax credits, the Congressional Budget Office (CBO) has prepared the following analysis. Feldstein originally sketched his proposal in two editorials in the Wall Street Journal last winter. CBO's analysis relies on two more recent articles by Feldstein that clarify some issues and also modify his earlier proposal. In its most recent version, that proposal would introduce a refundable tax credit of 2 percent of taxable payroll income for investment in personal retirement accounts (PRAs). At retire- ment, the accumulated balances could be annuitized or withdrawn in a series of payments by the accountholders. Social Security benefits would be reduced by 75 cents for each dollar withdrawn from the accounts. Thus, retirees would keep 25 percent of their PRA savings on top of the Social Security benefit that they would receive under current law. The proposed tax credit for investments in PRAs would cost roughly $800 billion over the next 10 years. The reduction in Social Security spending under the proposal would be small in the same period-totaling less than $10 billion-because workers who retire by 2008 will not have accumulated much in their PRAs. Beyond the 10-year projection period, budgetary pressures arising from the retirement of the

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