Monday, June 27, 2005
Christophe Vorlet
June 26, 2005
Maybe Saving Money Is Just for Chumps
By DANIEL AKST
ON a recent tour of Europe, Treasury Secretary John W. Snow talked about the need for Americans to save more. Alan Greenspan, the Federal Reserve chairman, recently told Congress that "our household saving rate remains negligible." From time to time, various economists, pundits and others in the financial peanut gallery chime in on this theme as well. If there's one thing Americans have to do more of, everyone seems to agree, it's save.
But why should we? What if there are good reasons for the seemingly low savings rate? If there really is such a thing as the wisdom of crowds, maybe it makes sense to consider whether most Americans know something that all the worrywarts don't.
I think they do. I think they've noticed that, given the way society is organized and the way the securities markets have been acting lately, saving doesn't make a lot of sense.
First, how can anybody take savings exhortations seriously from a government that seems to revel in fiscal profligacy? Secretary Snow is part of an administration whose policies have plunged the federal budget deep into the red with tax cuts, an expensive prescription plan for older Americans and a costly war in Iraq.
The government's shortfalls are seriously undermining national savings, and they strongly imply higher taxes down the road. Somebody will have to cover all those deficits, and a climbing ratio of retirees to workers will mean increased levies to pay for Social Security and health care for the elderly.
Higher taxes tomorrow make saving less appealing by reducing future after-tax investment returns. That is especially the case for tax-deferred retirement savings: why defer taxes if they're going only higher?
Retirement savers may also worry that when the great waves of baby-boomer retirees hit the Social Security system without adequate private savings, the prudent will be taxed even more to cover the costs of the imprudent. That's another reason not to save.
Maybe parents have noticed that the same reasoning can be applied to saving for college - a process that is unlikely to help get financial aid. Why show up on campus with your piggy bank full if the bursar is likely to expropriate the money?
Taxpayers have had decades to notice that the income tax system, which penalizes working and saving by taxing the earnings from each, is yet another good reason not to save.
In a rational world, we would have a progressive consumption tax that would penalize high levels of spending instead of earning and saving. As it stands now, the system encourages gigantic homes and commensurately large mortgages, because mortgage interest is tax deductible.
Potential savers have certainly noticed, too, that there is no good place to invest their money. Returns are dismal across the board. That makes saving less attractive - and requires extra risk to achieve any given level of reward.
There is also the problem of purchasing power. Signs that inflation may be reviving suggest that your money may be worth less later than it is now. And sooner or later, the dollar will fall against the yuan, making much of what we buy - from China, anyway - cost more.
Given all this, perhaps what we have here is not truly a failure to save. Perhaps it's something closer to rational profligacy.
Under the circumstances, is it any wonder that our main savings vehicle is our homes - or that home prices are soaring? In the long run, houses outperform inflation, provide tax-advantaged financing and capital gains, tend not to implode like Enron and, at the very least, provide a comfortable place to live.
The funny thing is that while society discourages saving, Americans probably save more than the numbers suggest. The government's system of measuring personal saving fails to capture changing asset values, mishandles pensions and has other shortcomings that cause it to understate actual savings, at least in the opinion of some economists.
EVERYONE needs a rainy-day fund, of course. But if we really want society to save more, we have to stop penalizing thrift, stop taxing earned income and stop the federal deficits.
Until that happens, consider the bright side. If Americans started saving seriously, they would have to cut back on consumer spending. That would kick the last prop out from under the global economy. Instead, we're gamely fighting world poverty, one purchase at a time.
Daniel Akst is a journalist and novelist who writes often about business. E-mail: culmoney@nytimes.com
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