The savings decline — and what to do about it

Its hard to believe that just under 40 years ago, if your take-home pay was $100 a week (about average), you saved $17 of it — just socked it away, a full 17 percent.

Such was the record-high savings rate of recent decades, according to a Federal Reserve Bank of St. Louis study.

After that, we must have grown careless of the future. Or, apologists would say, “couldnt afford to save.”

By September 2005, the same Fed study found, our savings rate fell to 2.2 percent. Out of $100, we put away $2.20.

The national ability to defer gratification has gone up a bit since then, but its still low. And these are averages. Some families always piled up nest eggs above the norm; others, even high earners, havent been able to rub two nickels together.

In normal times, saved money makes money.

So, are there some public-policy steps that could help more people get in on this not-so-secret secret?

One is obvious, according to economist Veronique de Rugy: breaking the Federal Reserves zero interest rate logjam.

Its avowed purpose is benign: to keep stimulating the economy. But when savings accounts pay just a fraction of 1 percent, or not much more in a time certificate, its a “large disincentive to defer consumption,” says Rugy, a research fellow at George Mason University. Thats a fancy way to say the money might as well be spent. Inflation will cannibalize the interest.

Heres a guess, however, that average savers arent going to go out and spend it. Theyre not like that. Theyll sit there and suffer the shrunken incomes or risk some of their rainy-day funds in the stock market, at least buying dividend-yielding shares and mutual funds. Just such a tidal flow of thrift helped lift the stock market to all-time highs.

To liberals whod make up for needy folks laggard savings by beefing up Social Security payments, Rugy cautions that Social Security faces a long-range shortfall of $10 trillion, though its not in imminent danger of “running out.”

Still, to raise payroll taxes on todays workers to fund higher benefits for retirees isnt a zero-sum game to the economy. Every $100 into the Social Security pot crowds out an estimated $40 in private saving. And personal savings are exactly where business starters and job creators turn first for capital.

Rugy would replace the income tax altogether in favor of a levy on consumption — a national sales tax. More controversially, she would “eliminate efforts to buoy home ownership.” Tax breaks such as the mortgage interest deduction “encourage people to take on more personal debt” for an investment with a generally “weak return.”

As to the income tax, it not only fails to spur, it actually penalizes thrift, taking a slice for the government out of ordinary peoples interest and dividends, modest amounts that really should be left in private hands. Now that is destructive public policy, youd have to think.

Jack Markowitz is a weekly columnist for Trib Total Media. Email [email protected].