NCPA - National Center for Policy Analysis


March 18, 2005

Americans save so little for their retirement years that it may be time for a mandatory savings program, says economist Robert Frank.

Frank argues that Americans save little because they compete to consume goods that appear to improve their social station in life, such as homes in good school districts, leaving them little left over for savings.

Unfortunately, those who are unable or refuse to save miss out on the power of compound interest. For example, consider two individuals with an annual income of $50,000 a year for 35 years with no pay increases -- but one is a "high spender," the other a "high saver":

  • High spender saves nothing and at age 21 makes a $9,000 credit card purchase that he pays 20 percent (or $1,800) a year in interest until he retires; at retirement, he will have no money for retirement.
  • High save: saves 20 percent of total income (including the 5 percent interest income on savings) each year; at retirement, he has a savings account balance of $564,811.

Frank says that one way to improve savings levels is to require all families to put about 12 percent of their income into savings accounts, depending on their level of income growth.

Source: Robert H. Frank, "Americans Save So Little, but What Can Be Done to Change That?" New York Times, March 17, 2005.

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