25 Aug Personal and Family Savings Policy Brief
Introduction to the Issue
Personal and family savings enhance American economic prosperity by supplying the investment capital that is necessary to ensure long-term economic growth and job creation, while reducing dependence on more volatile sources of capital such as lending by foreign central banks. Equally important, savings are essential in achieving milestones across the entire lifecycle of individuals and families, from seeking higher education, to homeownership, retirement and the accumulation and transfer of wealth to the next generation. Savings enables entrepreneurship and other forms of investing for the future. A broad culture of personal and family savings and the public policies to support it are vital foundations of an Opportunity Economy and the health of the American Dream.
Despite its essential role in the economy, personal savings has been declining over the past two decades, reaching a negative rate at the end of 2005, the lowest since the Great Depression. Moreover, such negative savings have been most pronounced in the bottom half of the income spectrum, risking the emergence of a two-tiered system in which wealthy and upper middle class Americans benefit from savings and investment, while working class and poor Americans largely do not. The share of U.S. personal savings held by the top 20% of earners rose from 51% to 55% in the 1990s, where it remains today1. Only 32% of American families hold savings representing even 3 months of their incomes2. Only 30% of households in the bottom income quintile reported any savings at all3. Our public policies on savings are not succeeding in offsetting those trends and in some ways exacerbate them. Every American should have access to suitable savings mechanisms throughout his lifecycle regardless of his income level, but current approaches fall short in 4 ways:
- Incentives reinforce two-tiered system – more than 90% of federal subsidies in the form of retirement savings and homeownership (about $300 billion in 2005) accrue to households earning over $50,000 per year4, mainly benefiting those who already have assets. Savings incentives, in particular, tend to be based on tax deductions which benefit highest earners most, and which do not benefit the more than two-thirds of Americans who do not itemize their taxes5.
- Programs are not universal and flexible for a changing workforce – 401(k) plans benefit mainly full-time workers in larger companies. Nearly 80 % of small companies with fewer than 50 employees do not offer a pension plan. Contingent workers, freelancers and contractors cannot take advantage of these incentives due to long vesting periods and a lack of portability. Eighty-five percent of working Americans without access to pension savings are either low-income earners, young and mobile workers, part-time employees, or employed by small firms.
- Savings options and instruments are too complex – benefiting from many available savings plans often requires expert consultation that is unaffordable to a majority of the population, and general levels of financial literacy are low. Research has shown that having savings automatically allocated into accounts (unless requested otherwise) can double savings rates, but most plans do not take advantage of that insight.
- Low- to mid-income households face stronger incentives not to save – since many Supplemental Security Income (SSI)6 programs set very low asset limits that are generally not inflation-indexed nor frequently raised, many low-income individuals are implicitly taxed on their savings. Moreover, despite some individual retirement arrangements (IRA) incentives for low income workers, the lump sum contributions necessary to establish an IRA outside of work is simply not feasible for many working Americans.
Read the full policy brief here: