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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.

Paul Burnham of CBO's Tax Analysis Division wrote the paper under the direction of Roberton Williams and G. Thomas Woodward. Within CBO, Paul Cullinan, Robert Dennis, Douglas Hamilton, Arlene Holen, Benjamin Page, John Sabelhaus, John Sturrock, and David Weiner provided useful comments and assistance. In addition, Julia Coronado, Michael Boskin, Alan Auerbach, William Gale, and Peter Orszag provided valuable criticism and suggestions.

John Skeen and John McMurray edited the manuscript, with assistance from Allan Keaton. Denise Williams prepared early drafts of text. Lenny Skutnik produced the printed copies, and Annette Kalicki prepared the electronic versions for CBO's World Wide Web site.

Douglas Holtz-Eakin
Director
May 2004