June 20, 1995
"Penny Saved is Just About America's Rate"
San Jose Mercury News
By Timothy Taylor
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THE DISPUTES over reducing the budget deficit, moving toward a consumption tax, expanding Individual Retirement Accounts, and finding a long-term fix for Social Security have many obvious differences, but they also have one central goal in common. They all intend to address America's disturbingly low rate of national saving.

By global standards, America has been a low-saving nation for decades. In a typical recent year, gross domestic savings in the United States were 15 percent of gross domestic product. By contrast, Japan saved 34 percent of its GDP, and Germany was close behind at 28 percent, according to World Bank figures.

Even some poorer nations have a higher savings rate than the United States. India saves 22 percent of GDP; Nigeria, 23 percent; Brazil, 21 percent. U.S. savings lag behind the average global savings of 22 percent of GDP.

A nation's domestic savings rate matters because, even in an increasingly global economy, it remains true that the amount a country has available to invest is closely connected to the capital that is available through its domestic savings.

Given the enormous size of the U.S. economy, it might seem that the nation could get by with a somewhat lower savings rate. After all, gross private savings in the United States provides a pool of roughly $1 trillion. About one-fifth of this is saved by households; the rest is earned, saved, and re-invested by business. But even a trillion dollars doesn't go as far as you might think.

About $700 billion is needed each year just to replace existing capital equipment that wears out. The federal government borrows another $200 billion to finance its budget deficits. Roughly $100 billion is invested each year in building residential real estate.

This means that America could easily use up all of its domestic savings without putting a penny into net new investment in plant and equipment.

The solution, such as it is, has been to let foreigners do our saving. We run a trade deficit, importing more than we export. Foreign investors then take the extra dollars they earned by selling in America and invest them back in the U.S economy. This foreign investment provides an extra $100 billion or so each year, which is roughly the amount of U.S. investment in new plant and equipment.

While the American standard of living remains the highest in the world, the lead has been slipping. Saving more, investing more, and relying less on foreign capital are all necessary steps toward staying ahead.

Reducing the federal budget deficit would free up capital for private industry, and both President Clinton and the Republicans are now on record as favoring gradual movement toward a balanced budget. However, their plans are all relatively gentle in the next few years. It remains to be seen whether the severe spending cuts that are planned for the early 21st century will ever take place.

Enacting a consumption tax or expanding Individual Retirement Accounts would reduce the tax on income that is saved. But there is reason to doubt how large an effect such policies would have.

The U.S. savings rate has been low through times of high and low tax rates, high and low interest rates, and varying incentives for saving. Special tax breaks like IRAs certainly entice people to transfer money into those accounts, but there is only weak and uncertain evidence that they increase overall savings.

Americans are simply not in the habit of saving. Most people have to lock themselves into saving; for example, by using automatic payroll deductions, so they never actually see the money. I expect that within the next few years, proposals will arise to require that all Americans save a minimum amount.

Such proposals are now being kicked around in academic circles. They might require everyone to save a certain minimum amount in a tax-free account, which could be invested only in a government-approved mutual fund. The government could help the poor make the minimum contribution.

If you saved more in the account (up to some limit), you would be allowed to withdraw the extra for a limited set of purposes like a house down-payment, college tuition, or major medical expenses. Late in life, you would be expected to draw down this account as a main source of retirement income, partly replacing Social Security.

Such a plan would guarantee an increase in savings. It would appeal to those who want to tax consumption rather than savings, and to those who support expanded IRAs. It would be a step toward funding the nation's retirement system in a sustainable manner through savings, rather than the Social Security approach of having current workers send tax dollars to retirees in care of the federal government.

Any proposal for mandatory savings is sure to be controversial, and many principles and details of such a plan remain to be argued out. But without an element of compulsion, America does not seem likely to change its low-saving ways.

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