FROM THE OFFICE OF PUBLIC AFFAIRS

We come together at a special time: a celebration of five years of the Retirement Savings Education Campaign. I would like to join Secretary Herman in saluting the accomplishments of the RSEC and in recognizing the many organizations that have joined with us in the effort.

By almost any measure we are enjoying a record period of economic expansion. But now is not a time for complacency. There are few choices we can make today that are as important to securing the future prosperity of our country as increasing saving.

Increasing saving is both a macroeconomic and a microeconomic imperative: it is crucial to our overall economic health and to the financial security of individual Americans and their families. Let me divide my remarks on this topic into three parts:

• First, the importance of staying on the path of fiscal discipline.
• Second, the steps the Administration is taking to raise personal saving within existing law.
• And third, the need to target new savings incentives at legislation to middle and lower-income workers, who are largely left behind under our current system.

1. Maintaining Fiscal Discipline.

Raising national saving is an especially important macroeconomic imperative today for four main reasons: because now is not the time to deliver additional fiscal stimulus to the economy; because higher national saving would help reduce the U.S. current account deficit; because we should be preparing for the aging of America; and because we should preserve our fiscal flexibility.

If increasing national saving is the right objective, how do we accomplish it?

• First, we must increase the level of public saving by paying down the national debt as proposed in the Mid-Session Review of the budget.
• Second, we must raise the level of personal saving, by encouraging individual Americans to save more.

The current 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, we have nearly doubled our net national saving rate, to more than 7 percent last year. If, as the President has proposed, we use the Social Security and Medicare surpluses and a share of the projected on-budget surpluses for debt reduction, we will be on track to eliminating the net debt held by the public by 2012.

But improving the level of public saving will not alone be sufficient to enable us to meet the challenges that lie ahead. It is critical that we raise personal saving both for our nation's economic security and for the financial security for families and individuals in retirement. 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.

II. Using Behavioral Influences to Promote Personal Saving.

Saving enough to achieve a more secure 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 amount rises to $120,000 if he or she had started 20 years ago and almost $400,000 if he or she had started 30 years ago.

To be sure, the recent decades have been an extraordinary period in our financial history. Individuals who believe that such returns will necessarily persist in the future may save too little. Still, this example points to the enormous potential of saving and the power of compounding.

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 recognize that behavioral influences are at least as important in determining saving as financial incentives. Habit formation, social institutions, and the whole range of influences on people's tastes, all are capable of having an enormous impact.

Saving can become something that is as habitual as wearing a seatbelt or locking your door when you go out at night. But it only becomes a habit when it is taught, when it is facilitated, and when it is something that people want to emulate. For example, one recent study found that 40 percent of employees who received educational savings material at work were inspired either to start saving for the first time or to resume saving. Similar results were achieved among people who took personal finance courses in high school.

We are bringing this research to bear in our efforts to promote personal saving.

Recent surveys suggest that more than half of all Americans have little or no idea how much they need to save for retirement. We must ensure that all Americans understand the importance of financial planning and can take advantage of the savings incentives that are available.

In 1995 the Department of Labor, Treasury, and 65 other public and private organizations launched the RSEC, and pledged to raise awareness about the importance of saving for retirement. On April 4^th of this year we announced the launch of the National Partners for Financial Empowerment: a broad-based public-private coalition intended to further raise financial awareness and improve personal financial competency. The NPFE is already sponsoring a number of efforts to elevate the visibility of this topic:

• Next week I will be joining SEC Chairman Levitt in Cleveland in another of the Chairman's series of Investor Town Meetings. This Town Meeting in Cleveland will be to highlight a pilot project called Cleveland Saves, which is sponsored by the Consumer Federation of America to raise financial literacy in that city.
• The NPFE will soon be launching a public service announcement campaign. The first round of announcements will be distributed to more than 1,000 TV stations across the country.
• And I am pleased to announce that today we are launching the NPFE web site that will serve as a gateway for financial planning and saving resources for individuals, employers, and communities.

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.

Traditionally, an employee must opt in to a 401(k). Under a more novel approach known as automatic enrollment, an employee is presumed to participate unless the employee explicitly opts out. Not surprisingly, given the importance of such changes in the way choices are framed, 401(k) plans with automatic enrollment have significantly higher employee participation rates than plans without automatic enrollment.

We have issued two important rulings during the last two years that promote expanded adoption of automatic enrollment - the first making clear that automatic enrollment in 401(k) plans can be applied to new hires, and the second making clear that it can be applied to employees already on the payrolls.

In light of the favorable early experience with these rulings and strong interest from the pension community, we are now taking several additional steps to broaden the applicability of the concept of automatic enrollment

• First, today I am pleased to announce that the IRS is issuing two new rulings extending the concept of automatic enrollment to 403(b) retirement plans, which serve millions of employees of public schools and other educational and charitable organizations, and to so-called 457 plans, which serve millions of State and local government employees.
• Second, the IRS yesterday announced that it will allow automatic enrollment to be offered as an option in its standardized 401(k) plans. These "off-the-shelf" plans are most commonly used by small businesses, and small business is where we have the greatest challenge and the greatest opportunity to increase retirement savings. Like the 401(k) rulings, this guidance allows interested employers to create a "positive presumption" in favor of saving.
• Third, Treasury and IRS yesterday issued another ruling clarifying that employers may automatically roll over a departing employee's balance to an IRA set up for that employee, unless the employee explicitly directs otherwise. This ruling is designed to reduce the leakage from retirement plans that would inevitably be associated with a highly mobile workforce.

So that there can be no mistaking our positions on these critical issues, Secretary Herman and I are releasing a joint statement today making clear that automatic enrollment in retirement saving plans and automatic rollover of accumulated balances are fully consistent with the policy of both our Departments. We urge all employers to carefully consider adopting automatic enrollment.

3. Targeting New Savings Incentives at Those Who Need Them Most.

We should all be able to agree on the need to raise personal savings through methods such as those I have just described. But inevitably, disagreements will arise about the broad direction of tax policy. Let me just record two issues in tax policy that have a direct bearing on national saving.

First, it is critically important that we continue to pay down the debt held by the public. Debt reduction is the most effective form of tax cut because it cuts the burden of future interest and principal payments and also because it makes a direct contribution to the pool of funds available for private investment, and thereby helps hold down interest rates. In addition, every one percentage point fall in long-term interest rates reduces the cost of mortgages for American families by $250 billion over a decade.

In this regard, it is particularly important that we pay attention to the near and long-term consequences of tax cuts. Highly back-loaded tax cuts offer prospects of substantial benefits at little apparent cost. But they are more dangerous to the economy than large tax cuts phased-in quickly. They are more dangerous because their cost is not fully apparent and because their cost will be borne as the baby boom generation starts to retire in an economic environment about which we cannot be absolutely certain because it is so far into the future.

Second, as we approach the question of tax incentives for saving, there is a strong argument for much greater focus on the needs of the 75 million American who do not participate in a retirement pension plan and have little or no other retirement savings. Targeting incentives at low and middle-income employees is right for the reason of both because it is fairness and it is also right for the reason of because it is effectiveness. Common sense dictates that savings incentives will be most effective in raising overall personal saving if the target population has no saving and thus no ability to reduce the flow of saving to non-preferred vehicles.

In particular, as we work to strengthen the pension system, we have serious reservations about provisions that would weaken protections for low and middle income employees by undermining "top-heavy" and anti-discrimination safeguards or otherwise leading to benefit reductions. It is my hope that as savings policy is addressed this year, these issues will be considered in a serious way.

Two-thirds of our existing pension tax expenditures on pensions goes to families in the top 20 percent of the income distribution while only 12 percent goes to families in the bottom 60 percent. Indeed, for the tens of millions of Americans who pay no Federal income tax, 401(k) and IRA tax incentives are worth nothing.

Our proposed Retirement Savings Accounts, or RSAs, would extend credits to all low and moderate-income working families to encourage them to save and build wealth. Participants' contributions to employer plans and IRAs would qualify for a progressive tax credit and accumulate tax free. To provide incentives where they are most needed, the highest credit rates would apply to the lowest-income workers.

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

We are a fortunate country and this is as fortunate a time as any in our history to be an American. But this is not a time to rest on our laurels. New prosperity must be built on old virtues. If we are to lay the groundwork for our nation's future growth and improve the financial security of all of our families, then we must redouble our efforts to raise personal saving, the goal with which we began our partnership five years ago. Thank you.