FROM THE OFFICE OF PUBLIC AFFAIRS

Good afternoon. I am glad to be here.

We come together at a moment of remarkable success for the American economy. But it is at moments such as this that we are most vulnerable to the dangers of complacency. Prosperity and credibility are attributes that are rented, not owned. If we as a nation are to prolong and sustain this period of economic strength, then we must take advantage of this opportunity to make the right choices for our future.

There are few choices that we can make as important to securing the future prosperity of our country as that of increasing national savings. This is the focus of my remarks today.

Raising national savings is an especially important macroeconomic imperative today, for four reasons:

• First, because with unemployment at its lowest level in a generation, now is not the time to deliver additional fiscal stimulus to the economy; instead, the priority for policy must be to increase the supply potential of the economy. Raising saving would "crowd in" private investment and help to extend this investment-led expansion.
• Second, because higher national saving would help to reduce, rather than exacerbate, the U.S. trade and current account deficits. Without a higher rate of national saving, we are faced with one of two outcomes: either the current account deficit will remain high, running the risk of fueling increased protectionist pressures; or we will fail to maximize our investment in the domestic economy precisely when the return to such investment is high.
• Third, because we should be preparing for the aging of America. Our country faces an unprecedented challenge with the retirement of the baby boom generation, beginning only about a decade from now. We should not jeopardize our ability to meet our obligations to the next generation of retirees. The best way to prepare the nation for this development is by increasing investment in productive assets. With a larger productive capacity, the economy will more easily be able to generate the government revenues required under current law.
• And fourth, because we should preserve our flexibility. Higher saving has the central virtue of providing us with options, not merely if our current economic strength continues as we hope, but also if it does not. Just as a prudent individual takes advantage of a period of unexpected good fortune to make stronger provision for his or her future, so too does a prudent nation.

If increasing our national saving is the right objective, then how do we go about accomplishing it? We can achieve this objective in two ways:

• First, we must increase the level of public saving, thereby sustaining and even accelerating our current course of paying down the national debt.
• Second, we must raise the level of personal saving, by encouraging American families and individuals to save more.

The American economy is enjoying a record period of economic expansion. This success is a reflection of the entrepreneurial drive of Americans, the development and implementation of new technology, and the dynamic and flexible character of the American economy.

But this expansion would not have been as impressive or as enduring if we had not chosen to pursue a tough and prudent fiscal strategy since 1993. By moving from budget deficits to budget surpluses, and seizing the opportunity to reduce the national debt, we have almost doubled our net national saving rate to 7.3 percent last year.

In 1992, the Federal budget posted a record deficit of $290 billion - almost 5 percent of our gross domestic product. Since then we have achieved not only a unified budget surplus - comprising both the operating budget and the Social Security budget - but also last year, for the first time since 1960, a small surplus in our on-budget account.

And this year, the on-budget surplus is on track to widen considerably. In other words, for the first time since 1960, Social Security surpluses are being translated, one-for-one, into government saving. This is a major step forward in our ongoing preparation for the retirement of the babyboom generation. If, as the President has proposed, we use both the Social Security surpluses and a share of the projected on-budget surpluses for debt reduction, we will be on track to eliminate the net debt held by the public by at least 2013.

Reducing national debt also brings direct benefits to American families, most notably by putting more disposable income into their pockets. In that sense, debt reduction acts like a tax cut in two ways:

First, by maintaining a downward pressure on interest rates, debt reduction reduces mortgage costs.

Every one percentage point fall in long-term interest rates reduces the cost of mortgages for American families by $250 billion over a decade. We estimate that, as a consequence of our new path of fiscal discipline, a typical American family with a mortgage of $100,000 would save around $2,000 a year on mortgage payments.

Second, debt reduction reduces the future tax burden on Americans.

In the same way that a purchase must be paid for, whether you pay cash or buy it on a credit card, government outlays must be paid for, whether through current taxes or future taxes. Therefore, when the government is running a deficit, the tax burden understates the true burden of funding government services. The virtuous circle of rising budget surpluses and declining levels of public debt has already lowered substantially the tax burden that American families will face in the future.

Consider:

• In 1983, when the Federal government incurred a budget deficit of $208 billion, the average American family was effectively saddled with future tax payments that were equal to 35 percent of the taxes they were paying at the time.
• When the Clinton Administration took office in 1993, the deferred tax amounted to 22 percent of taxes paid.
• In 2000, the $167 billion unified budget surplus we estimated in the February Budget would represent a 9-percent reduction in the future tax burden on American families. And with the brightening of the budgetary picture since February, that figure is all but certain to improve from there.

In other words, as a result of the improved fiscal positions we have achieved, the total income and payroll tax burden, including deferred taxes, on the typical American family has fallen by a third since 1983: from 32 percent to 21 percent of income, or the lowest since 1974.

The dramatic increase in the level of public saving since 1993 has not been matched by a similar growth in private saving. Indeed, at just 0.6 percent in the first quarter of 2000, the personal saving rate is lower than at any time since the Great Depression.

It is crucial to our economic health and to the security of individual Americans and families that we raise the level of personal saving.

• First, because raising personal saving will enable us to adjust to the fact that people are living much longer than before. If both members of a couple in my age cohort reach 65, they will face even odds that at least one of them will reach the age of 90. And as people are retiring earlier and living longer, retirement spans for many individuals are approaching half or more of their working lives.
• Second, because even in this era of budget surpluses, the national saving rate is still too low. It is not enough simply to continue to increase public saving; if we are to secure the future prosperity of the American economy, we must also raise personal saving.

Crucial to addressing this problem will be encouraging more low- and middle-income Americans to save. It is true that aggregate household wealth has risen to a record high in the United States. Yet, study after study concludes that a large proportion of Americans have inadequate savings. For example:

• Half of American families on the brink of retirement had financial assets valued at less than $40,000 in 1998. And for those not as close to retirement, financial assets were even lower.
• Only half of American workers are currently participating in any kind of employer-provided pension plan, leaving more than 73 million American workers and their spouses not covered by such a plan. Indeed, more than 50 million Americans have no retirement savings whatsoever.

Encouraging more saving by low- and moderate-income Americans is not only about fairness but also about effectiveness. Policies that help those families to save are also likely to increase national saving. In contrast, additional inducements to higher income people to save may result primarily in a reshuffling of their saving from forms that are less-preferred under the tax system to forms that are more-preferred, with little or no effect on their total saving.

How can we most effectively help American families do what is so clearly in their interest and in the national interest? There has recently been a sea change in thinking on this question. Economists have come to the recognition that saving behavior is affected by much more than financial incentives. Habit formation, the ease of saving, and a range of actions that influence people's tastes, all have an enormous impact.

Awareness of these behavioral influences has shaped our approach to this problem. Let me highlight three of the steps the Administration is taking to raise personal saving.

Earlier this year, I announced the launch of the National Partners for Financial Empowerment - a broad-based coalition effort intended to help raise the level of financial awareness and improve the practice of personal finance across America. Our strategy is to build on the creative and energetic efforts of the hundreds of private and non-profit groups already at work on this important problem.

By leveraging existing expertise, the new coalition has already brought greater focus and visibility to this issue. A number of encouraging efforts are underway:

• In Cleveland, the Consumer Federation of America is pilot-testing an innovative community-wide program called "Cleveland Saves," that will seek to offer Clevelanders the guidance and motivation they will need to meet an identified savings objective. With the help of prominent business, sports, government, religious, and community leaders, the effort aims to spread financial literacy among all Clevelanders. Eventually, CFA hopes to replicate this effort in other cities.
• The Investment Company Institute Education Foundation and the National Urban League recently announced that they are joining forces to sponsor "Investing for Success," a national campaign in the African-American community to promote greater awareness about investing. The partnership will work with ICI member firms and NUL affiliates to develop pilot "Investing for Success" programs in five cities, which will include investor education seminars, educational materials and a website.
• In May, the American Express Foundation announced the first recipients of grants from the American Express Economic Independence Fund, a new pilot grant program designed to support the delivery of financial literacy education to underserved segments of society. The Fund will be jointly administered with the National Endowment for Financial Education -- also an NPFE partner. The objective of the Fund is to increase individuals' personal financial knowledge and improve their skills and self-confidence with money.

Studies show that individuals are much more likely to save when saving is made simple and easy. That is one reason why 401(k) plans have become America's most popular savings vehicle: much like a Christmas Club, 401(k) payroll deduction is convenient and regular, and the money goes into savings before there is an opportunity to spend it.

We are taking further steps to make it easier for employees to save:

• We recently issued a ruling allowing automatic enrollment in 401(k) plans for current employees, building on an earlier ruling that allowed automatic enrollment for new hires. The new ruling permits employers to enroll current employees in a 401 (k) plan without those employees having to take the initiative to do so themselves although, of course, employees are provided with the choice of opting out.
• In our FY2001 budget we have proposed to allow automatic payroll contributions into IRAs. That option would make contributing to an IRA as simple as regular payroll contributions to a 401(k)-type plan, and we know from research that automatic contributions through payroll deduction are an effective way of helping people follow through on their savings plans.

At the moment the tax system offers the greatest incentives to those who need them the least. Two thirds of pension tax expenditures go to families in the top 20 percent of the income distribution while just 12 percent goes to families in the bottom 60 percent. Indeed, for many of the poorest Americans, who pay no Federal income tax, 401(k) and IRA tax incentives are worth nothing.

Our proposed Retirement Savings Accounts, or RSAs, would offer a powerful new saving incentive for people who receive little or no tax incentive under existing law. The President's proposal builds on the successful model of Individual Development Accounts, extending generous credits to all low and moderate-income working families to encourage them to save and build wealth.

Participants' contributions to retirement accounts sponsored by employers or offered by financial institutions would qualify for a progressive tax credit. To provide incentives where they are most needed, the highest credit rates would apply to the lowest-income workers. RSAs would be available to 55 million Americans who are not contributing to a 401(k) or IRA plan.

The RSA proposal takes advantage of the existing payroll deduction mechanism of 401(k) plans, and the positive peer effects that are associated with such plans. And the RSA proposal provides a target level of savings for workers who now typically are not saving for retirement at all.

Contributions to RSAs would accumulate tax-free. If a family consistently took advantage of RSAs, they could accumulate substantial assets to help maintain a healthy income in retirement.

For example:

• A 25-year-old worker eligible for the maximum RSA benefit every year could make after-tax contributions of less than $1,000 every year and yet accumulate a quarter of a million dollars by age 65 in retirement savings.
• This accumulation could be enough to provide an annuity of $24,000 per year - an extra $2,000 per month in retirement income.

The goal of increasing retirement security for low and moderate-income Americans is surely one on which we can all agree. I urge Congress to enact RSAs.

4. Conclusion

Let me conclude where I began. We are fortunate to be living in an era of record economic growth. Common sense and economic logic both dictate that all of us --governments, businesses and individuals-- should take advantage of periods of economic strength to lay the groundwork for less fortunate moments in the future. Increasing national saving is perhaps the most important way to lay that groundwork - to increase supply rather than demand, to enhance the prospect of a healthy adjustment in our trade deficit, and to prepare for the challenge of the aging of our population. By continuing on the course of debt reduction and by stimulating greater personal saving through the tax code and other approaches, we can raise national saving and confront these challenges directly. Thank you.