Saving. In the U.S., it is a lost art. According the Bureau of Economic Analysis, the U.S. household saving rate has steadily tracked downward over the past 30 years, to just 3.8 percent today. Across older households aged 40 and above, those on a low income are particularly vulnerable to under-saving, with those in the bottom income quartile needing to save about 21 percent more of their pre-tax income, on average, to ensure financial security in retirement. Unless they can boost their saving, many households will have to choose between working beyond the official retirement age or accepting a lower standard of living in old age — or running out of money altogether. That’s not just a problem, it’s a crisis.
Yet the consequences of this savings chasm, and the close connection between higher levels of domestic investment and faster economic growth, are neither widely known nor fully appreciated. To raise awareness of the importance of household saving to the future prosperity of the American people, a diverse group of retirement associations, financial service firms, civic groups and business leaders representing more than 80 million Americans came together several months ago to launch a groundbreaking economic research project.
Does greater household saving really benefit the U.S. economy? If so, by how much? To answer these questions, we asked the economists at Oxford Economics, a leader in global forecasting and quantitative analysis, to apply their macroeconomic model to analyze and project the level of national and household savings over the next 25 years, and to estimate what would be needed to drive healthy and sustainable economic growth. Their findings represent a national wake-up call.
Left on the current path, the savings rate will fall to an extremely low 3 percent in the next two decades, whereas 4-9 percent would be needed for healthy growth. Increasing the savings rate to the middle of that range would enable higher investment without an unsustainable rise in net foreign borrowing. This would speed up the pace of investment and growth significantly. The economy as a whole would gain a discounted $7 trillion cumulatively over the next 25 years, equivalent to roughly half of U.S. gross domestic product today, and GDP per capita would be $3,500 higher in today’s prices.
Moreover, an uptick in U.S. savings rates would make us less dependent on foreign capital, lessening exposure to volatility in the dollar, and better insulated from the kind of international capital shocks that can lead to financial panic.
To achieve those laudable results, changes need to be made. We know that the most powerful factors encouraging greater saving are the opportunity to save for retirement through payroll deductions at work — and the willingness of employers to offer these plans. Yet, the existing U.S. savings framework remains a complex interplay between government policies, individual household decision-making, and employers’ decisions about whether to offer savings plans and payroll deductions. With so much at stake, we can’t afford to leave it to chance.
First, workplace payroll saving plans should be recognized as a prime driver of retirement savings for working Americans. These plans work well for those who have them, and work best when made fully “automatic,”requiring workers to opt out rather than opt in.
Second, with much of the workforce still not covered by workplace plans, employers must be supported so that they will provide a plan for their employees. While 401(k)s and similar plans have become widespread among larger employers, small firms are currently much less likely to offer them because of the costs involved. Extending the opportunity to save at work through payroll deduction would get millions more workers to save. At the same time, it’s critically important that lawmakers and regulators don’t make the rules governing workplace plans more onerous and off-putting.
Third, our research on saving demonstrates that efforts to curb or cut back the saving opportunities in our tax code are mistaken. We need more household savings, not less. Existing savings vehicles should be preserved, improved, and extended to maximize saving, both in aggregate and among the groups currently least able to save. Matching contributions and other tools to support saving by low-income Americans, such as refundable tax credits, would help. Our society ultimately benefits when people save and become more self-sufficient over their lifetimes.
The evidence we’ve seen is resoundingly clear: Saving fuels investment, economic growth, and personal prosperity. Yet Congress has failed to recognize the need to address this issue despite the clear risks to our economic future. Solving it won’t be easy, but we hope that our research and the formation of our group sends a signal to Washington that disparate voices can still come together around a common cause for change, rather than simply continue with a status quo that might look penny-wise, but will ultimately prove pound foolish.
Gov. Tim Pawlenty is the president and CEO of Financial Services Roundtable; Bob Reynolds is the president and CEO of Putnam; Mark Casady is the chairman and CEO of LPL Financial; Brian Graff is the executive director and CEO of the American Society of Pension Professionals & Actuaries; Craig Bromley is the president of John Hancock Financial; Lisa Mensah is the executive director of the Initiative on Financial Security, The Aspen Institute; and John Hailer is the president and CEO of Natixis.