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.