South-Western College Publishing - Economics  
A Proposal to Save
Subject Aggregate Expenditures
Topic 1) Productivity and Growth, 2) Output, Income, and the Price Level, and 3) Fiscal Policy
Key Words Savings Rate, Investment, Budget Surplus, Economic Growth
News Story

Household saving in the United States is significantly below the rate in other countries and has declined in recent years. One- third of all families have no savings and another third have less than $3,000 in savings. It is estimated that only 40 percent of baby boomers will have enough savings to support their living standard at retirement. Reduced savings not only affect individual families, but the nation as a whole. Economic growth is dependent upon investment, which is tied to savings. In order to stimulate savings, Senators Coverdell and Torricelli have proposed a number of tax breaks.

In 1992 the U.S. personal savings rate was 5.7 percent, compared with savings rates of over 15 percent in Japan and over 10 percent in Germany. Since 1992 the savings rate has plummeted to the point where it recently became negative. If present trends continue, some economists predict negative savings rates in the future. Retirement savings are also a problem, because more than 50 million workers have no pension plans other than Social Security.

Senators Coverdell and Torricelli have proposed a number of tax breaks that they argue "would encourage saving and investment while putting Americans on the path to retirement security." The Senators' proposals provide a tax exemption for the first $500 in interest and dividend income. They also propose eliminating taxes on the first $5,000 in capital gains. The third part of their proposal is to increase the threshold between the 15 and 28 percent tax brackets. This would provide tax relief to many middle-class families. The Senators argue that the projected budget surplus is sufficiently large to both provide tax relief and preserve Social Security.

(Updated March 1, 1999)

1. How is the personal savings rate defined?
2. Why is it considered important to increase the savings rate in the United States?
3. How would tax reductions stimulate savings?
Source Paul D. Coverdell and Robert G. Torricelli, "To Build Savings, Cut Taxes", The New York Times, February 8, 1999

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