OTHER THAN MY HOUSE AND MY 401K, I'M BROKE:

Asking Big Spenders to Be Big Savers, Too (DANIEL GROSS, 10/17/04, NY Times)

The Bush proposals are a grab-bag. Some, like creating "voluntary personal accounts for younger workers" as part of Social Security, would radically rearrange longstanding government policies. But most involve tweaking the tax code to reward savings: allowing couples to sock away up to $30,000 a year in a "lifetime savings" account for college tuition, home down payments or new cars, and not pay taxes on the account's earnings; letting them do the same with up to $15,000 more a year for retirement; and expanding health savings accounts - which President Bush touted in Wednesday's debate - to let families pay more of their medical bills using untaxed income.

A single thread runs through them: The more money Americans set aside to finance their retirement, their health care, and so on, the smaller the burden will be on employers and the government to pay for these things.

There are sound economic reasons for the Bush administration, or any administration, to encourage thrift. Greater savings leads to greater capital investment, which spurs economic growth, and robust growth would take much of the pain out of dealing with thorny problems like long-term budget deficits and insolvent entitlement programs. There are also drawbacks: critics say that many of the proposals would make deficits worse by draining away tax revenue, and it is far from clear how the privatized Social Security accounts could be paid for without cutting benefits.

But the real obstacles to forging a society in which people save more and spend less may be more fundamental questions of culture and psychology. Do Americans really want to become a nation of scrimpers, squirreling away spare cash to avoid taxes in the short term and amass assets in the long term? Or do we want to remain a "bon temps" society that lives for today and deals with consequences later?

Americans certainly like to own things, and to invest. Some 53 million households representing 91.2 million people - 47 percent of all Americans - owned stocks or mutual funds as of July 2003, according to the Investment Company Institute.

But they don't save much. Decades of relentless urgings to borrow more and spend more, from the onslaught of junk-mail credit card pitches to the devotion of whole magazines to goods rather than words, have turned Americans into voracious consuming machines. In 1981, Americans saved a net 8.5 percent of national income, according to the Bureau of Economic Analysis, and as recently as 1998 the figure was 6.5 percent; by 2003, the net savings rate had fallen to just 1.2 percent.

In other words, we spend almost all the money we make - and many of us spend much, much more. In the past 23 years, as interest rates have broadly fallen, Americans have embraced credit enthusiastically. Why worry about stretching to buy that house when you can always refinance at a lower rate next year?

Of course if you treat mutual funds (which most of us own through our 401ks and IRAs) and our hhouses as spending and don't count them towards savings these numbers look artificially bad. But it is the very success of those private retirement accounts that suggests other types of accounts--especially HSAs--have a good chance of succeeding. Making them mandatory would, of course, render the question moot.

Posted by Orrin Judd at October 16, 2004 9:19 PM