Saving and Investment

Heritage Study: Government Discourage Savings (SUMMARY) (TEXT)

Savings are the key to capital formation, which is necessary to raise wages and stimulate long-term economic growth. The United States has one of the lowest savings rates in the world; but the differential is somewhat overstated by comparisons based only on personal savings rates, says Heritage Foundation economist Daniel J. Mitchell.

  • The gross savings rate in the U.S., which includes the reinvested earnings of companies, is above 15 percent of national income, compared to personal savings, which is near 4 percent of income (see figure).

  • Moreover, measuring the percentage of income saved in a given time period -- the "flow" of savings -- ignores changes in the existing "stock" of savings.

  • The value of stores of wealth, such as stocks, bonds and residential housing equity, have increased rapidly in recent years, and these are just as economically important as adding savings from annual income (see figure).

Nonetheless, America's savings rate is lower than it should be, says Mitchell. A major reason for the low savings rate is the multiple layers of taxation on capital -- which reduce the incentives to save and invest and create a bias toward consumption. Also, government programs eliminate or reduce many of the traditional reasons households save -- such as "precautionary" savings for major medical expenses or unemployment and for retirement.

For instance, every dollar of perceived Social Security benefit reduces private savings by 60 cents, says economist Martin Feldstein. And privatizing Social Security would boost the U.S. savings rate by 2.6 percent of gross domestic product by 2010, according to one recent study.

Source: Daniel J. Mitchell, "How Government Policies Discourage Savings," Backgrounder No. 1185, June 2, 1998, Heritage Foundation, 214 Massachusetts Avenue, N.E., Washington, D.C. 20002, (202) 546-4400.

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