The U.S. economic recovery has, by many metrics, been gaining steam over the last few months. The most recent job numbers were stellar, consumer confidence is as high as it’s been since the financial crisis, and the real estate upswing continues. Yet there is another side to this story. Consider that while more Americans are debt free than they were in 2000, those who do carry debt have 40% more than they did back then, according to the Census Bureau. This is in large part because debt carried by vulnerable groups, like seniors and students, has burgeoned.
These topics were very much on the front burner at the Aspen Institute summit on financial security, which I attended last week. The conversation was an unusual one in economic terms, because it focused on consumer saving, rather than spending. We live in a consumption economy, after all. Most of the time, when we hear that retail sales and consumer spending are up, we cheer – because 70% of our GDP growth is determined by what you and I buy.
But over long periods of time, low savings rates are ultimately associated with lower national investment and lower growth. Consumer spending today may bolster the economy in the short term, but it can actually cut into growth over the long haul if it depletes funds available for investment in the economy. Individuals’ savings, deposited in banks or poured into asset markets, gets funneled back into the economy via loans and capital purchases that allow companies to grow and expand and hopefully to hire better skilled workers, ultimately increasing GDP growth. “While increasing savings might dampen consumption in the short term, it can increase future consumption through the higher incomes it generates,” according to a report entitled “Savings in America,” co-authored by the Urban Institute and the Goldman Sachs Institute.
A lack of savings can also inhibit growth-stimulating risk taking. Urban Institute senior fellow Gene Steuerle believes one key reason for the declining number of jobs being created by new businesses is that people have exhausted their personal savings (which are used by most entrepreneurs, in lieu of loans, to fund small business).
Right now, our savings rate in the lowest since the Great Depression, and growth is also sluggish. Together, these factors might argue for a higher national savings rate. The problem is that the U.S. tax code is set up to reward spending over savings. It dramatically favors debt over equity, as evidenced, for example, by Apple issuing bonds to raise money for investment rather than repatriate overseas funds; and the fact that the majority of benefits from, say, the home mortgage tax deduction flow to middle and higher income people who are buying McMansions — after all, the larger the house, the bigger the tax savings.
But even the well-to-do may have to sell their homes to fund retirement. Historically low savings rates, combined with the end of traditional pensions, mean that many Americans not only have no emergency fund, they have no long term retirement plan. A 2012 study by the EBRI found that a third of American aged 45 to 54 had saved nothing for retirement. And many who have saved will end up dipping into 401(k)s to send children to school or care for aged parents.
All this has spurred a number of policy makers to start pushing a variety of new ideas that are designed to spur saving rather than spending. The state of California, for example, has passed a bill creating the California Secure Choice retirement savings program, which would establish automatic retirement accounts for the 60% of workers in the private sector who don’t have access to a company sponsored retirement plan. Other states are looking into child savings accounts, modeled on a British program which gives every child $500 at birth. (Children with savings accounts in their own name are six to 10 times more likely to attend college.)
Meanwhile, Steuerle and many other policy wonks are pushing for a rethink of the tax code that would help support low-income savings, rather than higher income spending. “Savings is non-ideological, and non-partisan,” says California state senator Kevin de Leon, who sponsored the state’s retirement bill. “To me, this is a national security issue.”
As the bifurcated recovery gains steam, and a larger group of Americans feel left behind, he may well be proven right.