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Savings in America

Building Opportunities for All

Suzanne Nora Johnson, Lisa Mensah, C. Eugene Steuerle
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Document date: August 04, 2006
Released online: August 04, 2006

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Note: This report is available in its entirety in the Portable Document Format (PDF).

The text below is a portion of the complete document.

Section I: Executive Summary
The State of the Nation's Savings

Savings policy in the United States is at a critical juncture. The U.S. personal saving rate has declined from 10.8 percent in 1984 to zero in 2005.1 The national saving rate, which includes government and business savings, is the lowest among the G-20 countries and has decreased significantly in recent decades. These low levels of saving generally suggest lower growth rates of income and standards of living in the future.

Raising the rate of personal saving is a significant challenge, given that the lower-income half of all Americans has an average net worth of only $23,000 while the bottom quarter has an average net worth that is negative.2 However, allowing current patterns to continue places many in unnecessarily precarious circumstances. Seventy-six million baby boomers in the United States are fast approaching retirement, and the vast majority has yet to acquire the amount of savings to carry them through what could be two or more decades of retirement. As such, the difficult reality of America's savings issue is likely to become more pronounced in the next few years.

The Goal of Boosting Savings

Increasing savings can foster economic opportunity through enhanced investment, both at the national and household levels. More investment should act as a catalyst for gains in real wages and economic growth. Such growth can aid in the correction of America's current account deficit and lessen reliance on overseas investment. An increase in household assets should also provide families with more educational and related economic opportunities, which has become especially important in our increasingly knowledge-based economies. Increased savings also should improve the economic security of families by providing greater opportunities for homeownership, retirement income and greater protection against unanticipated needs and financial insecurity.

While raising the net national saving rate will likely require an across-the-board increase by U.S. households at all income levels, business and government, the potential contribution of low- and moderate-income Americans should not be discounted. Even relatively modest increases in annual personal saving by these households would help move the country more toward a savings society.

Lack of Universal Savings Policy

Increasing economic opportunity and security for the country and for individual households requires a savings policy that works for all Americans. Saving goals include getting an education, owning a home, obtaining access to capital, establishing a business and creating jobs, and saving for retirement. These goals apply to U.S. households at all levels of income, but most experts agree that existing savings policies provide very limited subsidies for low-and moderateincome Americans. Estimates from both the Joint Committee on Taxation and the Office of Management and Budget show that the vast majority of housing and saving tax subsidies—often more than 90 percent, depending on the particular subsidy—accrue to those households making over $50,000 annually. These federal subsidies—largely for retirement savings and homeownership—have grown to approximately $300 billion in 2005.

Paths for Reform

This paper considers barriers in current policies that confront households trying to save more. These include the complexity of laws affecting retirement and saving plans, and the exclusion of many households from using incentives that are worth the most to those facing the highest tax rates. It also discusses the effect of asset tests in welfare and education policies and other institutional barriers that discourage saving, especially for low- and moderate-income families.

Without advocating any particular savings policy or reform, this paper discusses several proposed policies to build assets for all Americans. These include new initiatives such as universal children's accounts and enhanced Individual Development Accounts (IDAs). The paper also explores improvements to existing programs such as matched subsidies for retirement savings, and an enhanced, refundable tax credit for low-income savers. Although many of these ideas have not been fully developed and are open to debate on their merits, we believe they form an important part of the discussion about how to boost savings in the United States.


As U.S. policymakers grapple with new solutions to solve the savings situation, it is time for a broader conversation about how to make savings policies more effective and create a savings society for all Americans. Assets are like ladders that are used to bring opportunity and security within greater reach. Creating a nation of savers can be accomplished via partnerships among the financial community, the government, and individuals. Successful collaboration may provide greater opportunity for all Americans to save throughout the lifecycle, creating funds for major events such as attending college, starting a family, buying a home, building a business, preparing for emergencies, and retiring comfortably.

Notes from this section of the report

1 Personal saving as a percentage of disposable personal income. Bureau of Economic Analysis.

2 Survey of Consumer Finances, 1989-2004 surveys, Federal Reserve Board.

Note: This report is available in its entirety in the Portable Document Format (PDF).

Topics/Tags: | Economy/Taxes | Housing | Retirement and Older Americans

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