Turning America into a nation of savers
The Reagan administration's economic hopes rest, to a large extent, on an ex-pected jump in Americans' saving rate.
That's what such incentives as the individual retirement accounts (IRAs), All-Savers certificates, and business tax breaks are all about -- swelling the US savings pool to finance economic growth.
There are few signs, as yet, that a revolution from spendthrift to miser -- from a credit-based to a savings-oriented society -- is sweeping the country. Instead, economists see something vastly more modest resulting from the savings inducements built into the President's economic legislation passed by Congress last fall.
They add, however, that even the anticipated modest pickup in savings by individuals and businesses, though well within the norms for savings rate swings in recent years, would be a significant help to the economy. The administration's hope is that rising savings will help head off a credit crunch threatened by big federal deficits.
Yet, if more far-reaching savings inducements were enacted, some economists think the United States could more dramatically follow the example of Japan, which in the 1960s spurred a dual surge in savings and economic output.
Indeed, early response this year to IRAs indicates that Americans are interested in saving -- provided they have sufficient incentive to do so. IRAs allow most Americans to place up to $2,000 in income each year into special accounts that are exempt from federal taxation. Such accounts have been available for several years, but new regulations which took effect this year opened them to far greater numbers of people.
David McKenzie, pension trust manager at The Boston Five savings bank, says that in the first six weeks of this year the bank's total number of IRA accounts has increased by 40 percent over the previous five years. He predicts that the number will grow by 150 to 200 percent during the first year.
A Business Week survey concluded that as much as $20 billion might flow into IRAs this year -- perhaps as much as $7 billion of it ''new savings.'' (Many new IRAs at the beginning of the year have come from ''old'' savings -- money already saved. As office payroll deduction plans for IRAs increase, the amount of new money tucked away should grow.) If the $7 billion ''new savings'' estimate holds up, IRAs alone would raise the national personal savings rate from 5.3 percent (1981) to 5.6 percent. And other increases may be expected.
The business magazine's survey found that Crocker National Bank of San Francisco took in half of the IRA business it had expected for the entire year in just the first three weeks of January. T. Rowe Price Marketing Inc., Baltimore manager of a major mutual fund family, reports 3,000 inquiries a day about IRA accounts.
As the April 15 income tax deadline approaches, officials at Boston's Shawmut Bank say they expect business to pick up further. The reason: at tax time, people will realize they can reduce their taxable income next year by opening an IRA.
Currently, here's what the American savings profile looks like: Personal savings as a percent of disposable income reached 6.1 percent in the last quarter of 1981, and averaged 5.3 percent for the year. Private forecasters, such as Data Resources Inc., see the rate averaging almost 6 percent this year, close to 7 percent in 1983, and just over 7 percent by 1984.
By historical standards, such rates are familiar. Americans were saving at an 8.6 percent clip in 1973 and '75, 8.1 percent in 1967, and as high as 25.2 percent in World War II.
''The historical norm is probably 6.5 to 7 percent,'' says Sandra Shaber, consumer trends expert at Chase Econometrics.
During the 1970s, US personal savings averaged 6.8 percent of disposable income. By comparison, West Germans saved 14.8 percent, Japanese 20.0 percent, and the Swiss 31.4 percent. Unlike the US, the Germany and Japan had to endure massive rebuilding after searing war and economic collapse.
However, the US does better than the numbers suggest. A fairer comparison would be in gross personal and business savings, says Harvard economist Dale Jorgenson.
''Over half of US savings is done through retained earnings by corporations, '' he says, ''that accrue to individuals through stock ownership -- in the increased value of their stock.'' During 1980, gross savings as a percentage of gross national product was 18.3 percent for the US, 23.1 percent for West Germany, and 30.7 percent for Japan.
In explaining the disparity between US and Japanese savers, Mr. Jorgenson says, ''Savings pressures in the US have been very constant since World War II. Japan's savings as a fraction of national income rose dramatically during the 1960s. Under a national growth policy, Japan stepped up its gross savings rate to almost half of its GNP by the early 1970s. It's fallen off a little from 1973 .''
West Germany's savings picture more closely resembles that of the US, Jorgenson says. Over the past 20 years, there has been a more modest increase in West Germany's savings rate than in Japan's. Whether West Germany will sustain its relatively high savings rate when personal income matches the US level -- it's 90 percent of that now -- remains to be seen, he says.
To give Americans a more emphatic push away from credit to a savings mentality would require eliminating or drastically reducing the big tax breaks that reward borrowing -- such as mortgage interest and consumer installment credit deductions, says economist M. Carey Leahey of Data Resources Inc.
Politically, this would be hard to do. Yale economist William Fellner says, ''It's conceivable to set limits to the deductibility of mortgage interest.'' But he points out that if you set limits -- and rather high limits would be likely if such a measure was to gain wide political acceptance -- less money would be available in savings to help stave off a deficit-caused credit crunch.
Jorgenson points to Japan's savings technique as a possible model for US policymakers.
''Japan did it by a policy of subsidizing savings by tax incentives. The growth rate of the economy increased while savings increased -- a form of 'bootstrap' operation, where savings were plowed into economic growth, increasing earnings, and still more savings.
''There's no reason we couldn't do that in this country, if we eliminated all taxes on property income. The Japanese can save 15 to 20 percent of their income in IRAs.''
Still, most of the immediate interest in American savings habits has to do with finessing the federal budget deficits looming ahead. ''If we don't succeed in getting really rid of these deficits by, say, '84 or '85,'' says Mr. Fellner, ''these are going to divert savings from investment, because they are going to direct savings to financing the deficit.
''The net harm from this depends on whether, in the meantime, we can get the savings rate up to neutralize this adverse effect.''
Ironically, the anticipated rise in personal savings expected after the July 1 tax cut this year, also bears a risk, says Chase Econometrics' Ms. Shaber: ''While we assume the increase in the savings rate will only be modest, come the July tax cut, there is a risk of a steep increase in savings and thus a retrenchment in consumer spending, which would certainly choke off much of the economic recovery.''
The savings incentives in the Economic Recovery Act passed by Congress get modestly approving reviews outside the administration.
Amitai Etzioni, an economic idea man for President Carter, credits the steps with ''helping create a savings atmosphere.''
''Over the last generation, the public debt has tripled, while the private debt has increased 18-fold,'' Mr. Etzioni says. The Reagan steps are ''calling in a bit'' the credit binge of recent decades, he says. ''But if they go on to create huge deficits in which the federal government is going to use 60 percent to 90 percent of the savings a society has, all this achievement is going to be wasted.''
Dennis Jacobe, economist for the United States League of Savings Associations , says ''a marginal step'' forward has been taken with the tax law changes.
''There are some good new opportunities for savers, but other factors in the economy overwhelm the gains,'' Mr. Jacobe says. ''Some new net funds have gone into savings, but most of the effect of the All-Savers and IRAs has been to shift money from other forms of savings.''
Jacobe says expectations are too high. ''You're trying to get people who are used to an inflationary environment and to consuming, to change to make thrift a virtue again,'' he says.
Deposits in the All-Savers certificates introduced last fall (on which interest is tax deductible) have reached a plateau at $38 billion to $40 billion , says Lloyd Atkinson, a Congressional Budget Office fiscal analyst. ''It's far less than was predicted by people at Treasury,'' he says. ''We don't know yet the impact on savings rate from the IRAs which take effect this year. But there's evidence people are just shifting around assets. . . .''
The savings incentives from the tax cut may also be less than advertised. ''For most people, with taxable income from $18,000 to $45,000, the reduction in the marginal tax rates just offsets the increase in marginal tax rates that come about from bracket creep,'' Mr. Atkinson says.
Still, economists generally expect improvement in savings. Some of the last quarter's gain was due to the recession. People held off from big-ticket purchases like autos.
High interest rates also boost savings. ''One study -- cited by the administration -- shows that a rate increase, say from 6 percent to 6.6 percent, means personal savings would go up 0.4 percent,'' says Leahey.
Business savings also should rise. ''Increasing depreciation deductions -- most lifetimes for assets have been cut in half -- means businesses have more internal funds for investment,'' Leahey says.
The administration says a sharp increase in personal and business savings will neutralize the financing requirements of the federal deficit -- but most outside people think it will only make them somewhat less severe.
''It would take an increase in the savings rate to at least 10 percent to completely offset the deficit increase,'' Leahey says. ''No one can see that.''