WASHINGTON – Americans have always been voracious consumers but indifferent savers, and their rate of savings during the past few months has plunged to just about zero.
Alarmed by the astounding decline in personal savings, leaders of both major parties in Congress are proposing tax breaks and other incentives to entice American workers to set aside more of their disposable income and invest for their retirement.
This push for retirement savings comes just as Congress struggles to preserve Social Security, a successful program with shaky long-term financing that celebrated its 70th birthday this month.
Also, more companies are curtailing traditional pension plans, leaving millions of Americans with the burden of finding a way to finance their retirement.
Facing these realities, financial planners say they find it difficult to persuade many of their clients to curb spending on cars and real estate, to quit running up so much debt and to provide themselves a cushion for emergencies, much less save for retirement.
“Savings has always been a problem in the United States, and in the last couple of years I have seen people consuming more at higher levels, often by taking money out of their homes,” said Mari Adam, a financial planner in Boca Raton, Fla. “It’s a trap a lot of consumers are falling into.”
Adam said Social Security might not be the most lucrative way to invest for retirement, but many Americans make such poor choices that they will need some kind of automatic government-provided safety net.
“I’m afraid people will get themselves into trouble, then come to the taxpayers to bail them out,” she said. “A lot of people would be willing to save if the government does a good job of encouraging it, but many will not save, and you are not going to change them.”
Consumers are spending so much and saving so little that the savings rate reported by the Commerce Department in June, using the latest available numbers, was down to 0.0 percent of disposable income.
Over the decades, the savings rate has tumbled from 11.4 percent in June 1975 to 9.5 percent in June 1985 to 4.4 percent in June 1995.
The latest zero figure might be revised, but it reflects a downward trend that has deepened since the boom in housing prices and the popularity of home-equity loans, which make borrowing quick and easy.
The result is lots of deficit spending, some of it invested but much of it spent on extra cars and luxury goods.
Since its inception 70 years ago, Social Security has never been intended to fully finance a worker’s retirement. It was designed to be a social safety net to protect the poor and, for most others, to supplement pensions and personal savings.
In more recent years, Uncle Sam has provided a variety of tax-deferred vehicles to encourage saving, notably Individual Retirement Accounts and employer-based 401(k) plans.
They have proved to be quite popular, but planners have found that most workers still do not make full use of these tools, and many never use them. Some workers earn too much to qualify, and many others earn so little they cannot take advantage.
The congressional debate over Social Security’s financing, which is expected to fall short by 2041, has prompted leaders of both major parties to propose retirement packages.
House Ways and Means Chairman Bill Thomas, R-Calif., is expected to unveil legislation next month that would address pensions and savings as well as changes to Social Security. The Republican strategy is to add enough popular measures so that Democrats feel compelled to engage in the debate rather than block GOP plans for Social Security.
Thomas has been mum about the specifics, but the package could include tax breaks for people who invest in annuities, which provide monthly payments over many years to stretch out savings. It may also include measures to encourage businesses to provide automated 401(k) deductions, which put a portion of pay into investment accounts unless workers take action to opt out.
House Democratic leaders last month proposed their alternative, dubbed AmeriSave. It would match, dollar for dollar, the first $1,000 contributed to an IRA, 401(k) or similar plan. It also would give tax credits to small businesses that set up retirement accounts.
None of these measures will work if consumers ignore them and spend rather than save. Planning ahead and getting people into the saving habit, even in small amounts, is the biggest challenge, financial planners say.
“People have horribly unrealistic expectations about how much they need to maintain a standard of living,” said Harold Evensky, a financial planner in Coral Gables, Fla. “It’s going to be a real problem as time goes on and inflation continues to grow.
“People typically have short horizons when planning. It’s more the head in the sand. People simply haven’t thought about it. The first thing is to get in touch with reality.”
Comments are no longer available on this story