Columnist E.J. Dionne: Clinton’s USA good for middle class

Tuesday, April 20, 1999 | 11:06 a.m.

BEFORE THE idea gets lost in partisan politics, it's worth looking at what President Clinton's Universal Savings Accounts could do for middle- and lower-income earners.

You'll hear less in the coming months about what these retirement accounts might accomplish than you will about the politics of the proposal and the battles between Democrats and the Republicans on Social Security. That's a shame. This is one of the better ideas Clinton has put forward.

To begin with, it addresses a real problem: People of moderate incomes can't save enough. A family earning $1 million or $10 million a year finds it hard to spend every penny, so it saves a lot. A family earning $40,000 a year finds it hard not to spend every penny. The rich family saves not because it's more virtuous, but because it has a good deal of spare cash.

Clinton's plan would concentrate almost all its benefits on families earning less than $100,000 a year and provide them with a big incentive to save. A family earning $40,000 a year would get a $600 tax credit. If it put $700 into a USA, the government would add another $700 to the account. That turns into an annual nest egg of $2,000 a year. Assuming a 5 percent annual rate of return, that family would have a little over $250,000 in retirement savings after 40 years. The federal contribution would be smaller for people with higher incomes.

The case in favor of tax cuts for the wealthy, especially on capital gains, rests on the argument that our national savings rate is too low. In fact, it hovers close to zero. Clinton takes the same argument and turns it to progressive purposes. His accounts would increase savings, too, but mostly by those who now have little money in the bank.

Critics of the idea see it as a redistributionist scheme. That's exactly what it is. It takes a small percentage of the federal budget and uses it to help low- and middle-income people.

Doing so would simply offset a different form of redistribution, the tax breaks that now help the wealthiest Americans accumulate savings and pensions. As Clinton said in announcing the program last week, "Only one-third of the tax benefits for pensions and retirement savings go to families who earn less than $100,000, even though they represent the vast majority of working people in the United States today." And only seven percent of "existing tax benefits for retirement go to families with incomes of $50,000 a year or less." Isn't it time they got a break? The president's accounts are a classic case of Clintonian political cleverness, but this time with a principled purpose. Many Republicans and some Democrats want to turn part of Social Security over to private investment accounts. Clinton has rejected this idea and pledged to preserve the existing Soci al Security system. His position is popular with the Democratic Party base.

The strongest argument the privatizers have is that something must be done to help middle-income people save. The problem with most privatization proposals is that they threaten to cut Social Security benefits in the long term to the least well-off Americans -- in the name of increasing their savings. For many in the middle and the bottom, privatization is a bad trade.

What Clinton has done is to answer the savings argument with his USA account without dismantling Security Security. His USA proposal gets many die-hard Social Security supporters to endorse savings incentives, even as it wins grudging praise from some of the privatizers.

Roger Hickey, co-director of the liberal Campaign for America's Future and a strong privatization opponent, calls the plan "a very smart move" that "gives a very progressive slant to how you do a tax cut."

This idea deserves more than the political burial it may get. It has a long-term chance only if middle-income Americans add up the numbers and decide they have a right to a small piece of the national wealth they help create.