I received an interesting email the other day in reference to my harping on the need for America to start saving again. The sender argued that there is no incentive to save with interest rates so low. Of course, CDs aren’t the only way to invest one’s savings. Long-term savings can be invested in a well balanced mutual fund with expectations of earning on average somewhere between 6% and 8% per year, even with the type of down months we’ve had lately. But if one wants an interest rate incentive, then just pay off consumer debt. Talk about a rate of return! Reducing credit card debt can yield a return that is anywhere from 10% to 22%.

It has also been argued that low/moderate income households have limited abilities to save, struggling to just make ends meet. There is certainly truth to this and it may well be the case that the steep decline in the national savings rate (now negative) is in part due to the widening income gap between moderate income households struggling for economic survival and those that have gained the most from the new global and technological economy of the past two decades.

But, the financial difficulty associated with increasing personal savings is only part of the story. The bottom line is that we are hooked on consumption, bombarded on all sides by the allurements of new gadgets we are told we can’t live without. We’ve become a “live for today” society. We see this clearly in the attitudes of today’s younger generation. They want to have all that their parents have right now. A couple of months ago, I had an interesting experience talking to my youngest son. He’s 29 and supporting a family with 2 children. He too is having difficulty making ends meet. In Denver $60,000 a year just doesn’t go far these days. Discouraged, he asked what life was like when I was 29. I told him I had just started as an assistant professor making $16,000 per year. He asked what that was equivalent to in 2007 dollars. I said, “Less than $60,000". Instantaneously, he felt much better about his economic circumstances. The younger generation has to realize that they can’t have it all right now, but that a course of provident living can assure them of better times ahead. The baby boom generation has to realize that paper wealth they’ve accumulated over the years is ever so fragile and that get rich quick speculation is not savings.

While the responsibility to live more prudently and to save more should be up to each American individually, there are government policies that could be more encouraging towards savings. Here’s just one suggestion. Tie any medical care reform to savings. For example, rather than completely overhaul the medical insurance system, offer the uninsured irrevocable medical insurance (provided by competitive private sector providers of insurance) whose premiums, co-pays, and deductibles are dependent upon one’s income. This would give today’s uninsured the clout in the medical marketplace of major insurance companies at an affordable price. The higher one’s income (up to some limit) the higher the premiums they would be required to pay and the greater the co-pays and deductibles. Such a schedule would be set in such way, however, that in no circumstances would lower income households be “better off” than those with somewhat greater income. In other words, no matter what government does in terms of transfer payments (welfare type programs), there should always be an incentive to individuals to work hard and better themselves. Of course, this means that many moderate income households would still face rather substantial health costs in terms of co-pays and deductibles. To soften this possibility, we should offer to all Americans a health and education savings plan in which they could tuck away up to $5,000 per year of their income that would be totally tax free and could be spent on either health care or education for themselves or their children. Unlike an IRA, these dollars could be spent immediately to cover either health or education expenses. Unlike current tax deductible health accounts, if the money isn’t spent it isn’t loss. Instead it just rolls over to the next year. If each year medical and education expenses (M & E) are less than the amount contributed, the dollars simply accumulate, available at any time to help cover catastrophic health events, assisted living care in one’s old age, or as supplemental income in retirement at age 65. In other words, the money is theirs, either for health and education during their working years or retirement after 65.

Such a plan (or any similar type policy) would promote savings and investment in human capital and would provide incentives for us to take control of our own medical expenses by shopping for the most cost-effective health care. Each dollar we save in health costs is a dollar available for education or retirement. Never would these dollars be taxed, even when ultimately used for M & E expenses or for retirement. Savings go up, national health costs go down (because the power of pooled health insurance will be able to constrain costs and because the consumer himself will have ample incentive to keep costs down), and the upcoming generation will have greater family wealth to tap into in order to obtain the education necessary to make the future more bright.

There are many other things that we can both do and stop doing to encourage savings. This is just one suggestion. But, to assume that we are stuck forever as over-consumers up to our necks in debt is a very unfortunate belief to hold; one that surely has self-fulfilling implications.

Dr. Barton Smith
Director, Institute for Regional Forecasting