FROM THE OFFICE OF PUBLIC AFFAIRS

Good evening. I am delighted to be here. Let me begin by thanking the Cleveland Plain Dealer for their work in helping to publicize this event, and especially for the series they have been running since Sunday about personal finance.

I also want to thank Cleveland Saves for co-hosting this event. And let me acknowledge the presence of Sandy Pianalto and Stacy Conner of the Federal Reserve Bank of Cleveland, which has been a vital partner in the efforts to launch Cleveland Saves.

Finally, I would like to recognize Chairman Arthur Levitt, who has demonstrated his commitment to investor education by conducting 37 of these town meetings around the country. It is my pleasure to team up with him today for the first time.

This evening I would like to focus on one topic: saving. Let me begin by focusing on why you should view boosting your personal saving as a critical priority for you, your families and for all Americans. Then I would like to share with you some of key guideposts on the way to a financially secure retirement.

1. Higher Personal Saving is the Key to our Security.

Increasing the level of national saving must be our overriding goal. Higher national saving helps us to reduce our current account and trade deficits; it helps us prepare for the aging of America; it provides us with the fiscal flexibility to respond to unforeseen events; and it enables us to prolong the economic expansion by increasing the level of investment in the economy.

National saving reflects both public and private saving. That is why the debate going on in Washington about the use of budget surpluses is so important to the future health of the economy.

But boosting government saving will not on its own be enough. It is critical that we also increase the level of personal saving. And increasing personal saving is also a vital objective for the financial security of individuals and their families.

Perhaps the most compelling reason why individuals should save more is because they are living much longer than before. I am 45 years old. If both members of a couple in my pension plan reach 65, they will face close to a 50-50 chance that at least one of them will reach the age of 90.

When I was studying economics it was often assumed that a typical person would work for 40 years and then live in retirement for 10 years - a ratio of four working years to each year in retirement. Today, with the trend toward greater longevity and earlier retirement, the ratio for some is approaching 2 to 1. Clearly, greater financial preparation is required than in earlier times.

Yet recent surveys suggest that more than half of all Americans have little or no idea how much they need to save for retirement. And, in spite of the fact that Social Security is only intended to provide a foundation for retirement income, roughly two-thirds of Americans rely on Social Security as their main source of income and almost a fifth as their sole source of post-retirement income.

How can we encourage Americans to do what is so clearly in their own and the national interest?

People used to think that savings habits were determined solely by the rate of return. An extensive body of research has taught us that saving behavior is also influenced by habit, social institutions, a whole range of influences on people's taste, and exposure to media and publicity. Somebody once told me that when Laverne and Shirley visited the library on one of their shows, the next week we recorded the biggest library attendance ever. Whether that story is strictly true, it points up that promotion can make a very big difference.

The evidence clearly shows that people can and do change their behavior if the message they receive is persistent and clear: they wear seatbelts when they are travelling, they go for all kinds of medical tests on a regular basis, and they settle on designated drivers.

By the same token, behavior can also be influenced in the wrong direction. A recent survey showed that a large fraction of Americans thought that saving was a selfish act: good for them but bad for the economy because by saving they were not creating jobs for other people. That may have been a plausible notion in the 1930s and possibly during the 1940s. But by the 1980s and 1990s, this view was exactly wrong. And yet these attitudes - that credit and borrowing are good for the economy - persist to a very substantial extent today.

That is why Cleveland Saves, which is in pilot-test this summer, is such an important experiment. The objective of the project is nothing less than to change the savings and personal finance culture of Cleveland. With the help of major political and business figures, religious leaders, and community leaders in Cleveland, the project aims to create a model that can be replicated in other metropolitan areas of America.

And that is why last April, I launched the National Partners for Financial Empowerment (NPFE) to help improve personal finance skills, including money management, saving, investing and credit in the United States today:

• In this regard, I am pleased to say that we launched the website for the NPFE last week. This could not have happened without the enormous assistance of the American Financial Services Association Education Foundation. Among other functions, this site is intended to serve as a portal to information on the Internet that will help you run your personal finances successfully and perhaps organize others to do so. I hope you will visit the site at www.npfe.org and tell us what you think.
• I am also pleased to say that the NPFE is working with four of its members - the American Savings Education Council, the Employee Benefit Research Institute, the Social Security Administration, and U.S. Savings Bonds - to launch a national PSA campaign to raise awareness of the importance of saving for retirement. Thanks to the support of the American Savings Education Council, these PSAs will be distributed to TV stations around the country. Let me take a minute to show you two that were produced by ASEC.

Willingness to learn, teach yourself, and seek good advice about how better to manage your finances are indispensable assets in the modern world - no matter how little or how much you earn. As the Rev. Jesse Jackson has said: "It is not how much money you make that is important - it is how much you keep. Income is what you earn, wealth is what you keep."

With those wise words in mind, let me offer five possible keys to ensuring a financially secure retirement.

How many of you automatically divert a percentage of your income into a savings account every month?

Many financial advisers recommend that before you do anything else with your paycheck you regularly put at least a small amount of money into a separate account that is clearly walled off from the rest of your finances. The returns to such saving can be tremendous.

If you had been able to find $100 to save a week since 1990, by 2000 you would have accumulated $150,000 by investing in the stock market. 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 magic of compounding.

And even for small sums, the returns can be tremendous. For example, 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.

Of course, finding the additional amount of money to save can be hard work. But if you scrutinize your spending, there is bound to be some item that you do not need. The pamphlet that you may have received as an invitation to this meeting contains a number of practical ideas.

Managing your personal finances well requires initiative and it takes time. In this era of information technology consumers have access to an unprecedented amount of information. In that spirit, let me recommend four websites that you can use as tools in your endeavors:

• For information on retirement saving go to the Social Security Administration site.
• To make use of a mutual fund calculator or a range of other investment tools look at the SEC site.
• To find out about how to purchase savings bonds or to get an EasySaver application go to the government savings bonds website.
• And for a portal to these and many other sites about personal finance visit the NPFE website.

Even in the era of the New Economy, old-fashioned shopping can save you a large amount of money. To cite just two examples:

• Insurance policies that are designed to fill the gaps in Medicare coverage are highly standardized. In principle, different providers of this insurance should be offering very nearly the same product. Yet, on a typical Medigap plan offered for residents of the Cleveland area, premium rates differ by as much as 80 percent.
• Insurance companies also offer immediate annuity contracts. And like Medigap policies, these are standardized products. Yet a recent study [Poterba et. al., American Economic Review] found that monthly payouts from annuities differed by as much as 20 percent.

Social Security is on sound footing for at least the next three and a half decades. But it will not provide enough for your total retirement needs. For most workers, Social Security will replace only between a third and a half of their pre-retirement income. Most of us will have to supplement our Social Security benefits with other forms of income.

Increasingly, retirement income on top of Social Security is becoming a matter of personal responsibility. This is something that you need to take care of, because no one else will.

How many of you are fortunate enough to be working for an employer that matches your contributions into a retirement savings plan like a 401(k)?

The surprising fact is that about a third of American workers leave money on the table by not participating in these kinds of plans even when their employers provide a match. Some people say they cannot afford to participate in their employer's saving plan. I take the view that, over the longer term, they cannot afford not to participate.

Depending on your income and whether your employer sponsors a retirement plan, you may be eligible to contribute to a tax-deductible IRA. If you qualify, you can contribute up to $2,000 per person each year. Balances in an IRA accumulate with no income tax due until you withdraw the money. If your employer offers a plan, but you want to do more, you may want to consider setting up a Roth IRA.

In addition, as part of your overall savings program, you may want to consider investing in Savings Bonds. Unlike almost any other investment available, the Series I bonds offer both the full backing of the U.S. Treasury and the guarantee of a return that will always beat inflation. Currently, I bonds are paying 3.6 percent over inflation, for a total return of 7.5 percent.

There is nothing wrong with informed borrowing, and a certain amount of debt can be part of a sensible financial plan. For example, most Americans purchase their homes with a mortgage. But the American appetite for debt goes far beyond a prudent home mortgage. If you are routinely making the minimum payment on your credit cards, or if your monthly payments on non-mortgage credit take 20 percent or more of your income, you are courting trouble.

Think of your credit card as a high-yield risk-free investment opportunity because paying down the balance on a credit card with an 18-percent borrowing rate adds just as much to your net worth as would investing in an asset yielding 18 percent. Even at the best of times, it is hard to find an asset that you know will yield 18 percent.

Fifth, teach your children and grandchildren about money.

Being financially savvy is not only important to your future, but to your children's future as well. How many of you are teaching your children or grandchildren about personal finances?

When it comes to money, your kids will learn more from you than from anyone else: these are habits that will stick with them for a lifetime. By teaching them about money you will be building their financial independence.

There are many programs that help our children better understand basic financial principles.

• For example, Girls Scouts can earn a "Dollars and Sense" merit badge through participating in an education program on saving and money management.
• Junior Achievement is developing an exciting new way of delivering personal finance instruction in our schools, called JA Personal Finance. This program seeks to increase financial literacy by giving young people the opportunity to participate in a number of "real world" activities on the Internet, such as creating a personal budget and learning to invest.

Let me conclude where I began. Saving is one of those rare issues where the individual and the national interest coincide exactly. By increasing your personal savings, not only will you be able to improve your standard of living in retirement, send your children or grandchildren to college, and provide a cushion against an unexpected event in your life, but you will also be making a very real contribution to the future prosperity of the American economy.

Now Chairman Levitt and I would be delighted to answer your questions. Thank you.