NCPA - National Center for Policy Analysis

Reduced Saving Means Fewer Jobs and Growth

November 26, 2014

Various studies have claimed Americans' retirement savings are in trouble, with some estimates suggesting that up to 84 percent of American shave insufficient savings targets. Veronique de Rugy of the Mercatus Center says that those figures are somewhat overblown. Still, she says the United States does have a saving problem:

  • In 1975, Americans had a personal savings rate of 17 percent. In 2005, it fell to a low of 2.2 percent. While that rate has increased somewhat, de Rugy says it is unlikely to continue to increase.
  • With less saving, there is less capital, which slows economic growth and investment.
  • Recent studies suggest that older businesses are increasingly dominating the American market -- a problem, because it is the young and new firms that create new jobs. This has been attributed to the fall in the personal savings rate.

What to do about this? The answer is not making Social Security even bigger, says de Rugy. While some have suggested strengthening the program, it is unsustainable and underfunded by trillions of dollars. Moreover, she notes that the existence of the program disincentivizes saving; by one count, $100 in Social Security wealth reduces private saving by $40.

Instead, de Rugy suggests that the government do the following:

  • Get rid of policies that penalize savings or artificially encourage consumption.
  • Replace the tax system with a consumption-based tax.
  • Get rid of the Federal Reserve's zero-interest rate policy -- it only discourages saving.
  • Reform housing policies that encourage Americans to spend and take on debt.

Source: Veronique de Rugy, "Why Don't Americans Save Their Money?" Reason Magazine, December 2014.

 

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