FROM THE OFFICE OF PUBLIC AFFAIRS June 8, 2000LS-689 TREASURY SECRETARY LAWRENCE H. SUMMERS REMARKS TO THE NATIONAL TAX ASSOCIATION WASHINGTON, DC 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. I. The Importance of Raising National Saving Raising national savings is an especially important macroeconomic imperative today, for four reasons:
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:
II. The Imperative of Continuing to Pay Down Debt 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 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. III. The Critical Importance of Raising Personal Saving 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.
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:
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. First, by educating Americans about the importance of 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:
Second, by making our existing savings incentives more effective. 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:
Third, by targeting new saving incentives at low- and middle-income Americans. 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:
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.
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. |
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