NCPA - National Center for Policy Analysis

Complexity Cuts Savings Rate

January 4, 2002

While we frequently bemoan the low American savings rate, some observers believe they have an explanation: the once-simple savings concept is now so incomprehensible it can only be understood by accountants. There are seven types of Individual Retirement Accounts (IRAs) and nearly as many employer-sponsored retirement plans such as 401(k)s.

As the choices grow, the national savings rate keeps falling.

  • Each of the many retirement plans has its own eligibility rules and contribution limits.
  • For example, some require savers' knowing their "adjusted gross income" - and if they guess wrong they either have to take money out and pay taxes on it or get hit with a penalty.
  • Education savings plans all have different requirements - after savers figure out what a "qualified education expense is," and that differs from plan to plan.
  • Then there are the bizarre payout rules, which allow withdrawal or borrowing from some accounts at some times, but not from others.

As a result, the savings rate continues to plummet.

  • The savings rate - which stood at 7.8 percent in 1990 - is now down to just 1 percent.
  • That's about one-third of Japan's rate and lower than most other developed countries.

The cause, observers believe, is Congress's creation of a thicket of savings choices designed to please a variety of special interests, and the cure would be to simply let workers decide how much they want to save, up to some uniform limit. Then, let them make their on investment decisions and allow them to keep it all in one easy-to-manage account.

Source: Editorial, "Key Reason USA Does Save: Too Much of a Hassle," USA Today, January 4, 2002.

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