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How to Increase America’s Saving Rate

Once upon a time, US policymakers believed that more consumer spending was better than higher saving. But even though officials have come to realize that a high level of saving means more investment and faster growth, legislation to encourage more personal saving has failed to reverse a sharply downward trend.

CAMBRIDGE – The United States needs new policies to raise the household saving rate. From 1960 to 1980, the household saving rate ranged between 10-13% of after-tax income, providing funds for investment in plant and equipment. Since then, levels of household saving have declined sharply. The comparable average saving rate in the past decade averaged only 5.5% and is now just 3.4%.

The cause for the decline is unclear. One plausible explanation is that working-age households may no longer feel the need to provide for their retirement years because of their greater confidence in the Social Security retirement program. Although Social Security was created in the 1930s, there was widespread fear in the 1960s and 1970s that the program would not survive politically because of conservative opposition. But when the Social Security program was about to run out of funds in 1982, a very conservative president, Ronald Reagan, rescued it. After that, it was reasonable to assume that Social Security benefits would continue to be available. Saving for health care in old age was also not necessary, thanks to the Medicare and Medicaid programs.

Whatever the cause of the current low household saving rate, it is a serious problem that requires political action. Fortunately, attitudes in the US Congress have been changing over time. In the early post-World War II years, when the Great Depression was still in recent memory, a Keynesian fear of economic slumps caused politicians to favor a decline in the saving rate. A lower saving rate, it was believed, would mean more consumer spending and therefore stronger demand and higher employment. But as policymakers came to realize that a high level of saving would actually mean more investment and faster growth, Congress passed legislation to encourage more personal saving.

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