October 3, 2011


America's Savings Imperative (Stephen S. Roach, October 1, 2011, American)

Creative saving policies must be given much greater emphasis if the American consumer--and the U.S. economy--is to escape the clutches of a lingering balance sheet recession. Sure, there is a timing problem--families should not be urged into an immediate diversion of income into saving that might exacerbate an already weakened recovery. Lagged implementation of savings incentives is a more prudent course of action in today's shaky economic climate. Timing issues aside, American consumers must turn their attentions to the longer-term benefits of increased saving. Five specific proposals come to mind:

•    First, an expansion of existing IRA and 401(k) programs. There is no need to re-invent the wheel. These are well-established defined-contribution saving vehicles that collectively held $7.8 trillion in assets at the end of 2010, or approximately 45 percent of total retirement assets in the United States, according to the Investment Company Institute. Currently, for those under the age of 50, annual contribution limits for IRA plans (totaling $4.7 trillion) are set at $5,000 per person whereas limits for 401(k) plans ($3.1 trillion) are $16,500. In both cases, increasing contribution limits is the least the government can do in a world where saving returns are severely distorted by unconventional monetary easing.

•    Second, targeted saving incentives for low-and middle-income workers. Currently, around 50 percent of all American workers (approximately 78 million people) have no retirement plan whatsoever. Making the existing Saver's Credit, enacted in 2001, refundable for some 45 million low- and middle-income tax filers who do not have any federal tax liability would be an important step in repairing this hole in America's social safety net.

•    Third, automating the saving process. Administrative complexities often frustrate individuals and impede saving flows. This can be addressed by offering direct deposit options for splitting paychecks into checking and saving accounts such as IRAs. This is consistent with a proposal recently offered by the Obama administration. Further automation could be implemented by allowing a portion of tax refunds to be directly deposited into IRA or 401(k) plans. With more than 109 million Americans (or 77 percent of all taxpayers) receiving tax refunds totaling over $325 billion in 2010, this automation option has especially strong potential.

•    Fourth, tax reform--specifically, moving away from an income-based personal tax structure toward a consumption-based tax, such as a value-added tax (VAT) or a national sales tax. This would change the relative price of saving versus consumption--providing families with much greater incentives to forgo current consumption in favor of saving and future consumption. Exemptions for low-income individuals would have to be built into any such proposal.

•    Fifth, a normalization of monetary policy. Like the case in Japan, the Fed's zero-interest-rate policy penalizes savers and represses personal income. Moreover, easy money tempts individuals to stretch for return by moving back into riskier assets such as equity and residential property. Yet this is precisely the same madness that distorted household balances sheets in the years before the Great Recession. The sooner the U.S. central bank restores some semblance of normalcy to monetary policy, the greater the chance that saving incentives will be grounded in expectations of more normalized returns on more secure financial assets.

...the other problem is that last bit--raising the interest rate into the teeth of global deflation is usurious and you shouldn't have your money in a savings account, l;ike the Japanese do, it should be in riskier investments, as in your 401k, and  in a home.

Posted by at October 3, 2011 6:24 AM

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