FROM THE OFFICE OF PUBLIC AFFAIRS April 4, 2000LS-524 Thank you. I am glad to be here. This is a very important meeting of a very important group of associations. When de Tocqueville came to the U.S. in the 1800s, he stressed that one of the greatest strengths of America was that it was a nation of associations. It is a strength that we come together to solve common problems. It is in this spirit that you have gathered to consider steps for addressing the problem of inadequate national and personal savings. I believe that you are addressing what is a central problem for the future of the American economy and the future of Americans. Lifting the rate of saving in our country is both a national and a personal imperative. In my remarks tonight I want to do fou things:
I. Increasing National Saving. At the national level we have made real progress in addressing the problem of inadequate saving in recent years. The net national savings rate of our country has almost doubled in the last seven years to 7.4 percent. That increase is welcome. It is the reason why we have been able to enjoy an investment-led expansion with increased capital formation that has, in turn, boosted productivity to the point where it grew at a rate of 6 percent in the last quarter of 1999. But that increase in national saving has been wholly a consequence of the increase in public saving as we have moved from an era of very substantial public deficits to an era of very substantial public surpluses. That fiscal progress is essential to whatever else we do as a country. But even at 7.4 percent, our national savings rate is too low. Unless we remedy this situation, we will either have to reduce investment in our productive economy, or continue to live with a large current account deficit. The best way to avoid this dilemma is to increase personal saving - and yet the Commerce Department reported last week that our personal saving rate had fallen to 0.8 percent in February- the lowest level since the Great Depression. It is critical to our economic health that we raise personal saving. And it is critical for families, because it influences their capacity to manage what is new in the New Economy: not least, 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. We are also all concerned with creating an inclusive prosperity in our country. And one crucial part of that is addressing not just income inequality but the far more pronounced pattern of wealth inequality. The top 1 percent of American households hold one-third of total household net worth, more than the bottom 90 percent of households combined. Crucial to addressing this problem will be encouraging more low-income Americans to save. It is true that aggregate household wealth has risen to a record high in the U.S. Yet study after study and evaluation after evaluation concludes that a large proportion of Americans have inadequate savings. For example:
How can public policy help address these weaknesses? Individuals save for many and varied reasons. But their decisions can be affected by a number of factors:
Our approach comprises each of these three elements. II. Changing financial behavior. Saving in a way that makes for genuine wealth accumulation and will make a real difference to life in retirement is within the reach of almost every American family. An individual who saved $15 a week - today's price of two movie tickets - for the past ten years would have accumulated $22,000 by investing in the stock market. This rises to $120,000 if he had started 20 years ago and almost $400,000 if he started 30 years ago. To be sure, the last two or three decades have been an extraordinary period in our financial history. It must be a concern that individuals who believe such returns will persist in the future, will save too little. Still, this example points to the enormous potential of saving. How can we 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 - of whom it is sometimes said that they know the price of everything and the value of nothing - have come to the recognition that a savings behavior is affected by much more than the financial incentives to save. Habit formation, social promotion campaigns and measures that influence people's tastes, will all have an enormous impact. Consider:
All of this underlines the importance of the kind of work in which you are all engaged. But there are a number of ways that we can make further progress. To that end, I am pleased to announce that Treasury is working with America's leading financial education groups to form a national coalition to spread financial literacy in America. The National Partners for Financial Empowerment will build on the strong foundations of hundreds of private and non-profit groups, bringing them together with Treasury and other agencies. By leveraging existing expertise, the new coalition will bring greater focus and visibility to the hundreds of financial literacy projects already under way in America. In addition, NPFE will work together to:
Over the next two days, ASEC has offered to work with you to set priorities for the NPFE. I am grateful in advance to Dallas Salisbury, and to all of you, for your assistance in this important task. We believe the NPFE should adopt a basic set of messages to promote. We invite your input as to what these themes should be. But let me put forward a few suggestions. To individuals, I would suggest:
To institutions, I would suggest:
Making it easier for employees to contribute to a pension is important. Let me add that we in government have worked to promote savings in another way, by offering savers other types of safe investment. Indexed bonds have proved immensely popular since they were launched in 1997 because they offer immunity against the uncertainties of inflation. Building on that program, we introduced indexed savings bonds in 1998; these bonds are available in small denominations, through payroll deduction, and are currently providing investors a real return of 3.4 percent that is exempt from state and local taxes and deferrable from Federal taxes as a result we are extending the range of choice in index bonds and making it easier to buy them.
Promoting financial access for the poor The ability to save for one's retirement is only one of the many benefits of having a bank account - benefits that most of us tend to take for granted. But today, in the age of the Internet, derivatives, and embedded options, between 10 and 20 percent of American households still lack that basic passport to the broader economy. If it was an important national challenge half a century ago to ensure that essentially every American had access to electricity, to running water, and to a telephone - in new economy, ensuring access to a basic bank account must also be a national priority. One recent survey in Chicago found that 44 percent of recipients of the EITC used a check cashing service to cash their refund check. And estimates suggest that the costs over a lifetime for low- and middle-income families of paying fees for every check or bill payment could be more than $15,000. Having a bank account would save these families precious resources. It would also give them the capacity to save on their own account. Let me highlight three measures the Administration is taking to promote more universal financial access in America today:
III. Widening the Circle of Tax-Preferred Saving Saving, like insurance, is sold not bought. This means encouraging better savings habits, making it easier to save through payroll deduction, and motivating Americans to take advantage of existing savings incentives. But we must do more. At the moment our tax savings 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. Let me highlight two of the steps the Administration is taking to address these problems: First, providing tax incentives for saving to low-income Americans. 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 matches to all low and moderate-income families to encourage them to save and build wealth. Participants' contributions would be matched directly by financial institutions or employer-sponsored 401(k) plans, and those organizations would in turn receive tax benefits equal to the matching amounts. To provide incentives where they are most needed, the highest match rates would apply to the lowest-income workers. The tax credit would be available to 55 million Americans who are not contributing to a 401(k) or IRA plan. In developing the RSA proposal, we have tried to draw on the behavioral factors that affect saving. For example, RSAs would send a powerful signal about the importance the federal government attaches to saving for retirement, and would be heavily marketed by employers and private financial institutions. 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:
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. Second, enhancing tax incentives for small business pension plans. Only 18 percent of workers at organizations with fewer than 25 workers have access to retirement plans compared to about half of all employees. The budget contains two proposals to encourage small businesses to offer pension plans:
In addition to these proposals, we would enable employees to move their pension savings from one type of employer plan to another. We commend those provisions in the Portman-Cardin and Graham-Grassley bills that would also facilitate portability of pensions. IV. Encouraging responsible borrowing. We need to promote knowledge about the importance of saving. And we need new tools to persuade more people to save. But at the same time, we must not overlook the problems of dissaving: individuals should be as aware of the potential dangers of borrowing as they of the real benefits of saving. In short, while personal saving is too low, individual borrowing is too high. Inappropriate use of credit can do great damage to people's finances. This is partly caused by lack of awareness on the part of the borrower. Accordingly:
Combating predatory lending. But high debt is also a function of the spread of predatory lending practices in our low-income communities. Predatory lenders exploit unsophisticated borrowers to charge extortionate rates of interest on loans and mortgages. We are taking two steps to combat this abuse:
V. Conclusion. Let me return to where I began. Raising the level of national savings is a central priority of this Administration. It is not only critical for the future performance of our economy. It is also essential for the well-being of individuals throughout their lives and in their retirement. We look forward to working with Congress, the private sector, and local communities in promoting a secure retirement for the baby boom generation and for all Americans. Thank you. |
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