Saving Us From the Savings Crisis
That Americans do not save enough has been repeated so often it is now widely accepted, especially with baby boom retirements looming. Now, the Bureau of Labor Statistics has reported that our e personal savings rate was minus one percent for all of 2006.
That result, following a long train of other ominous-sounding data, has led many to conclude that Americans face a savings "crisis," so government must do something to fix the problem — they must help us or make us save more. Politicians then roll out claims that their pet proposals are the answer. However, the data and the proposed "solutions" are seriously flawed.
There are serious measurement shortcomings with saving statistics, which call into question the extent of a "real" savings problem. For instance, personal savings measures omit increases in the values of people's homes and the equities they own, including those in their pension accounts. Personal savings also ignores corporate saving (retained and reinvested earnings), which are ultimately personal saving, as stockholders own those corporations. The magnitude of these problems is indicated by the fact that the Federal Reserve not long ago found that household net worth increased by over $5 trillion while personal savings were officially negative.
To the extent there is a real savings crisis, net of measurement errors, the conclusion that the government must do more to fix it is also flawed. The best government solution would be to stop doing so much that discourages saving.
People have been led to substitute Social Security's vastly under-funded promise of retirement benefits for funds they would have saved for their retirement. And since promised benefits are far higher than current rates of taxation can sustain, they anticipate being "richer" in retirement than they will actually be, reducing saving even more. Those who save enough to provide well for their retirement also face paying income taxes on up to 85% of their Social Security benefits as a result.
Taxes on capital also reduce saving, by reducing the after-tax return on saving and investment. These include property taxes that, while relatively small percentages of the capital invested, are sizable fractions of the annual income generated. Then state and federal (and sometimes local) corporate taxes take further bites from that income, further reducing the after-tax return. The implicit "tax" imposed by regulatory burdens must also be borne, before earnings can go to investors.
Personal income taxes reduce saving even more. Investment income left after other taxes is taxed again if paid out as dividends. Further, earnings from saving and investment can trigger additional tax burdens by triggering phase-outs of deductions and exemptions that are allowed.
If investment earnings are retained and reinvested, increasing asset values, they are taxed as capital gains upon sale. And even increases in asset values that only reflect inflation are taxed as if they were real increases in wealth.
Other government policies also reduce saving. Medicare coverage reduces a major reason to save, and current earners, who must cover three quarters of its cost, are left with less to save. Medicaid coverage of nursing home costs only after other assets are virtually exhausted reduces another motive to save. Unemployment benefits, along with food stamps and other means-tested benefits reduce the need to set aside a nest egg, "just in case." Estate taxes (phasing out by 2010, but returning in full force in 2011), also reduce successful savers' ability to pass on assets as bequests, undermining another major motive to save.
Each of these government policies acts as a disincentive to save. Together, they punish it heavily, reducing it to the point that many do not have any appreciable savings. But fixing that saving problem doesn't require more government programs to help us or force us to save more; it only requires that the government to stop undermining our incentives to save in all the ways it does now.
Comments (11)
Bill
You missed the biggest reason that the US population is not saving. That being the budget deficit. This deficit is counted into their computations and is the majority of the real problem. Without the deficit sucking AT LEAST 300bil out of the pool of potiential savings the US would be a lot wealthier.
The actual deficit is much much greater than the reported amount as they try to hide future deficits from the current budget. The economy of course does see these and reacts to them.
Published: February 2, 2007 3:56 PM
Mark Brabson
I might also have to do with the Fed pumping out endless supplies of fiat money and credit. Without all that credit, people would actually have to SAVE to get the things they want, rather than instant gratification. Until the Federal Reserve and fiat money is abolished, forget about real savings taking place.
Published: February 2, 2007 4:00 PM
Person
People have been led to substitute Social Security's vastly under-funded promise of retirement benefits for funds they would have saved for their retirement. And since promised benefits are far higher than current rates of taxation can sustain, they anticipate being "richer" in retirement than they will actually be, reducing saving even more.
This is a simplification. People are, of course, capable of thinking about the future, and I doubt people are just idly walking into such a trap. The real problem is this: even if I *do* recognize that SS won't be there, what can I do? If I save, and everyone else doesn't, future voters can and will just vote to loot the savings I accumulated to cover the lack of SS. Needless to say, I don't think a personal stash of gold bars is counted in their savings!
(Of course, I'd do everything possible to avoid taking SS in the first place, as that would simply perpetuate the victimization of future generations.)
Published: February 2, 2007 4:16 PM
Henry Miller
My generation (35 and under) honestly believes are are more likely to be abducted by aliens than see a social security check.
As baby boomers age, they will start dieing off. At some point my generation and kids will outnumber them, and we will so resent what their bad planing did to our retirement (they retire at 65 with minimal savings, while we have to wait to 80, even if we did save?) that we will kill the system. It is somewhat a long shot, but don't be surprised.
Most of us have enough physics to know that travel between stars is unlikely - for anything. Aliens might not have moral objections to abducting me, but even if they happen to live in the nearest solar system to earth, they cannot get to earth.
Published: February 2, 2007 7:39 PM
P.M.Lawrence
There is a catch with merely abolishing the present system, not with the "abolishing" part but with the "merely" part.
The thing is, the time lags involved create something that behaves like an asset. That was why the system was introduced, as much as anything - there was an immediate freeing up of funds, apparently a free lunch. That corresponded to not doing the funding that was needed.
Anyhow, unravelling all that means that earlier "gain" and similar smaller ones from later expansions of the system - long since used up by earlier governments - needs to be put back in, or else someone has to end up a really big loser somewhere. (It would be the people just coming up to cashing in when the system was abolished - just as there was once a generation that cashed in without paying in.)
I looked at the whole issue in an Australian context, and I even wrote an article about it (if I've got that link wrong, just look around on that page). The unpublished sequel is relevant as well.
Published: February 2, 2007 11:15 PM
Steve Hogan
I find it amusing that a collection of people who have given us tens of trillions of dollars in debt deem themselves worthy of telling the rest of us that we need to save more. Most Americans are too stupid to see the irony in this cruel joke.
Published: February 2, 2007 11:28 PM
Bill
Mark, you are correct that fiat money has a lot to do with it as well. The fiat money always losing value gives consumers AN INCENTIVE to cash it in now before it becomes less valuable in the future.
Published: February 3, 2007 12:56 AM
Frank
Even at the currently elevated interest rates saving makes less sense than borrowing. If rates on savings were currently at 9% there would be much less borrowing and more incentive to save. As long as the inflationists continue to expand the money supply to drive rates below natural levels the savings rate will decline.
Published: February 3, 2007 8:55 AM
Bill
And the best part of all this is:
The people who are crying wolf on this "Savings Crisis" are the one recommending solutions from the same folks that caused the problem in the first place.
Published: February 3, 2007 10:42 AM
David C
Henry Miller said, "My generation (35 and under) honestly believes are are more likely to be abducted by aliens than see a social security check."
Oh Henry, don't be so cynical. I have no doubt that you'll be getting at least $10000 per month in social security. I also have no doubt that that will afford you a nice big large icecream bar! So be proactive about your retirement, start writing thankyou notes to Uncle Sam right now. :)
Published: February 3, 2007 12:34 PM
Alien Abductor
Uh, Henry, could you please give me your address?
Published: February 5, 2007 10:15 AM