Memo to Donald Regan: a simple way to bolster US savings rate

Surprisingly, the Reagan administration has overlooked a simple way to spread capitalism, increase savings and investment, and dilute future social security concerns. Sound like snake oil? It isn't.

At almost no cost, the White House could enlist millions of Americans into new Individual Retirement Account (IRA) payroll savings plans.

The benefits: (1) a chance to change the habits of many American wage earners who currently save little or nothing; (2) an increase in the United States personal savings rate (still the lowest of any Western industrial country); (3) additional capital for investment in innovation and retooling; and (4) an opportunity to provide more low- and middle-income Americans with a supplement to their social security pensions when they retire, and thus lower the anxiety level about social security.

The drawback: a temporary slice out of federal tax revenues. As more blue-collar and white-collar workers joined IRA programs via payroll withholding, they would shield part of their income from taxation -- paying taxes on it only after retirement, when they began to use the deferred income. But the resulting increase in the capital pool would help offset the borrowing demand caused by federal deficits.

Why bring this subject up now, as Washington scrapes up every bit of revenue possible to cut deficits?

First, because the one-time Merrill Lynch chairman, Treasury Secretary Donald T. Regan -- who knows more about selling savings and investment packages than almost anyone in America -- is becoming President Reagan's chief of staff.

Second, because the average American wage earner is in a better position to enlist in a modest IRA program than at any time in recent years. Personal income is up by the largest amount in more than a decade. Inflation-adjusted, after-tax income rose by 6.8 percent last year, according to a report released Friday. And that rise appears to be continuing.

In December, personal income rose at the rate of 0.8 percent (knocked down to 0.5 percent because of one-time-only adjustments that don't need to be discussed here). That is equal to an annualized rate of over 9 percent.

Economists generally believe that American consumers have run through much of the spending for big-ticket items that was pent up before the late-'82 recovery unleashed spending. Therefore, average Americans may find it possible to increase savings while still continuing moderate spending.

Such a save-spend balance, if sustained for several years, could contribute to the best kind of national economic growth -- with both capital formation from savings and demand from spending stimulating a solid expansion of new and old industry.

So what do Mr. Regan and President Reagan need to do? Jawbone.

Specifically, the President could speak to meetings of the National Association of Manufacturers or the Chamber of Commerce. He could urge companies that haven't established IRA (or the even better 401[K]) payroll withholding plans to do so. Once Reagan has given momentum to the idea, Commerce Secretary Malcolm Baldrige or Treasury Secretary-designate James Baker could continue the campaign with other business groups.

But isn't the IRA tax-shielding system such a good thing that most Americans are participating already?

No. Upper-income and upper-middle-income citizens certainly are. (But much of their contribution has consisted of moving $2,000 each year from already saved capital and putting it into the tax-shielded IRA program. Thus no new capital was added to the US investment pool.) Many wage-earning middle- and low-income citizens, however, simply don't have the $2,000 -- or even a smaller amount -- ready to turn into an IRA as income-tax time approaches each year.

That's why a campaign to get more companies to adopt payroll withholding IRA or 401[K] plans would make sense. Some big corporations already offer employees such plans in addition to their own pension programs. But a survey published last February by Greenwich Research Associates of Greenwich, Conn., which sampled about 1,000 large corporations, showed only 22 percent offered a payroll IRA plan to workers. Some 4 percent were considering a plan. (Thirty-nine percent offered a 401[K] plan; 35 percent were considering one.) The figures would be lower for thousands of small firms.

There are several strong arguments for raising that percentage. First, the employee who cannot accumulate enough for a sensible once-a-year IRA investment can usually afford a little extra withholding from each paycheck. Since the money is tax-deferred, the bite can be quite small. Second, any anguish caused by that withholding is usually assuaged when workers see how fast their savings build up with interest or dividends compounding. Third, most companies are equipped, in this age of computer-generated payrolls, to do the extra payroll accounting without batting an eye.

US presidents have long argued for the spread of ``people's capitalism'' -- with more ordinary citizens owning stock in America. The IRA/401[K] approach is one route to that goal. It tends to reinforce the habit of saving in a generation that was brought up on the virtues of living on credit in a high-inflation age.

Americans may not be ready to reach Luxembourg's savings rate (33 percent) or Japan's (25 percent). They have a better pension net and don't need to jump that high from their current 6 to 7 percent range. But most economists argue that some improvement is needed. For one thing, the resulting larger savings pool would help to cushion the impact of big federal deficits. That alone should send Regan and Reagan into action.

Earl W. Foell is editor in chief of The Christian Science Monitor.