Wall Street Journal
What the Bush Victory
Means for Consumers
November 3, 2004
Here’s a look at President Bush’s proposals for health care, taxes and Social Security and college savings, and what they may mean for you.
Insurance: Consumers should prepare to handle more of the decisions – and potentially more of the financial burden – of health costs.
Mr. Bush has been a strong proponent of “health savings accounts,” introduced during his first term as a way for consumers to set aside tax-deductible funds for future medical expenses. To benefit from an HSA, a consumer must have a high-deductible health insurance policy, which means a lower premium but paying some health-care costs upfront. The idea is that those upfront costs will encourage consumers to spend more wisely, and competitive market forces will keep prices down and bring quality up.
Mr. Bush has called for tax breaks to encourage low-income families and individuals to open HSAs, and small-business owners to contribute to them. Mr. Bush’s continued push on HSAs is likely to mean that more employers will offer HSA-eligible health plans. He’s also likely to continue to back the formations of associations that could help small businesses bring down their health-care costs, but such efforts didn’t make much headway in Mr. Bush’s first term.
Seniors: For seniors, Mr. Bush’s victory means that last year’s Medicare changes are more likely to stay intact. Medicare is scheduled in 2006 to roll out a new prescription-drug benefit for seniors. In the past year, the federal government also increased funding for the Medicare Advantage program, which allows seniors to get their insurance through private plans. Prior to that boost, insurers had been backing away from Medicare Advantage, formerly known as Medicare + Choice, arguing the program was underfunded.
Prescription drugs: During Mr. Bush’s first term, his administration didn’t support legalizing the importation of less-expensive prescription drugs from Canada and other countries. During the presidential debates, he made comments suggesting he was warming to the idea.
Medical-malpractice suits: Mr. Bush has pushed for federal legislation capping medical malpractice “pain and suffering” damages to $250,000. But in his first term, with Republicans controlling both houses of Congress, such legislation failed to pass.
Income taxes: Taxpayers can expect Mr. Bush to push to make income-tax cuts enacted during recent years permanent. That would leave the top marginal tax rate at 35%.
Capital gains and dividend taxes: Mr. Bush would also like to make permanent the capital-gains and dividend-tax breaks he signed into law last year. At present, the top rate on most types of dividends is 15%, down from as high as 39.6%. As for capital gains, the top rate on gains from selling stocks and other securities held longer than one year typically is 15%, down from 20% previously.
Estate taxes: Mr. Bush has vowed to eliminate the so-called death tax in part to help simplify the tax code and provide relief to farmers and small-business owners.
Social Security: Mr. Bush has ruled out “changes in benefits for current retirees and near-retirees.” But for younger workers, his plans call for permitting them to direct a portion of their Social Security payroll deduction into private accounts and control how that money is invested.
Savings in these private accounts could be passed on to workers’ families. Bush’s plan would allow workers to divert somewhere between 2% to 4% into private accounts.
Left unanswered, according to Wall Street Journal columnist David Wessel, is how Mr. Bush would finance the transition costs to a new system of private accounts. If $100 billion a year were moved into private accounts today, the government would need to find another $100 billion to pay current retirees.
Another possibility, Mr. Wessel says, is that Mr. Bush would push to lower the inflation rate used to calculate Social Security benefits.
President Bush has said he would make Social Security one of his main second-term objectives. A change to this entitlement program would be no small feat, but now that the Republicans have retained control of Congress, look for momentum to gain behind these ideas.
Savings Accounts: Mr. Bush has proposed expanding the existing tax-advantaged retirement accounts program with “Retirement Savings Accounts” and “Lifetime Savings Accounts.” Each account would have a maximum annual contribution limit of $5,000. Savers wouldn’t be able to deduct contributions on their income-tax return, but earnings would accumulate tax-free.
With lifetime savings accounts, or LSAs, there wouldn’t be age limits or income restrictions on contributions. You could use the money for anything at any time, from a new home to education bills. With retirement savings accounts, or RSAs, there also wouldn’t be age limits for contributions. But you couldn’t contribute more than your “compensation,” the Treasury says. There wouldn’t be any tax on distributions you take after you turn 58 years old, or in case of death or disability.
Mr. Bush also has advocated “employer retirement savings accounts” or ERSAs. These would combine the existing array of retirement plans, such as 401(k) accounts, into one plan.
These proposals ended up sidelined in Mr. Bush’s first term. But they may fare better in his second term with Republicans maintaining control of Congress.
529 Plans: Mr. Bush says he wants to make permanent the 2001 federal tax cuts that gave a significant boost to college-savings accounts known as 529 plans. The changes made withdrawals on earnings in the plans free from federal taxes, as long as the money is used for educational purposes. The changes also made earnings on investments in prepaid-tuition plans offered by private colleges tax exempt. Mr. Bush would like to extend these tax benefits, which are due to expire in 2010.
Pell Grants: Mr. Bush says that an additional million students have had access to Pell Grants – the government’s primary source of aid for students from low-income families – since he took office in 2000. The maximum Pell Grant has hovered at $4,050 per year for the last two years, as appropriations have not kept up with a surge in demand for the awards. The College Board, a not-for-profit association of 4,500 educational organizations, says that from 2003 to 2004, Pell Grants funded 5.1 million students averaging $2,466 a student. Because the number of Pell recipients increased by 7%, the average grant fell 1% using 2003 dollars.
Mr. Bush has not proposed raising the maximum grant above $4,050, but under his proposed “State Scholar” program he would give Pell recipients an additional $1,000 in the first year of college to low-income students who take specific college-preparatory courses in high school. Separately, Mr. Bush has proposed that, starting in 2006,a new fund would provide $100 million in grants to low-income students who agree to study math or science. The administration says that under this plan, approximately 20,000 low-income undergraduate students would receive up to $5,000 each.
– Sarah Rubenstein, Dexter Webb, Alexandra Kaptik and Elizabeth Weinstein