^{Democracy & Technology Blog} Savings: Ben Bernanke on Behavior

This morning Fed Chairman Ben Bernanke testified on the budget, trade, and savings gaps — the “triple deficits.” He believes the trade deficit is mostly caused by the savings deficit. Overseas consumers save a lot. Americans save very little — at least according to the conventional measures. Foreigners invest their savings in America. Americans buy lots of foreign goods. To the point of over-consumption, or spending “beyond our means,” say many economists and other preachy observers. Thus the trade deficit.
Bernanke deserves some credit for not hyperventilating about the trade gap. But he does think it’s a “problem.” Increasing American savings, Bernanke says, is the solution. Bernanke referred several times to new research in “behavioral economics,” a relatively new field that, among other things, looks at factors that affect consumer or business behavior beyond traditional incentives like taxes. Bernanke offered the example of 401(k)s savings accounts. He said that even though the tax incentives of 401(k)s are substantial, many employees do not take advantage of the opportunity. But, Bernanke said, research shows that if employers automatically enroll their employees in the 401(k) from the start and allow them to opt out, rather than opt in, the employees are much more likely to remain in the plan. Maybe this automatic 401(k) approach is one way to increase American savings.

After mentioning the possible positive effects of this more “behavioral” approach, Bernanke offered a mild critique of the traditional incentives to save, like tax-favored IRA accounts. Such accounts might just allow consumers to save less in other areas or other accounts if they know their IRA is the primary savings vehicle. But isn’t this true of Bernanke’s 401(k) approach as well? Of course it is.
Using Bernanke’s “behavioral” approach, we can see why the American savings rate has now dropped “below zero.” According to the traditional savings measures developed 75 years ago, Americans are now dis-saving. Sounds ominous, right? But Americans have really adjusted their saving and spending behavior according to dramatic changes in the American and global economies and in financial technologies. For example, the high-tech American service economy appears to be much less volatile in terms of unemployment and recessions than the old industrial economy. American platform companies, according to GaveKal Research, have outsourced the “high beta”–or high risk–manufacturing components of their businesses to other parts of the world. The residual knowledge work we’ve retained seems to be much more flexible and stable and thus resistant to unemployment and recession.
In addition, securitized assets, from equities to residential housing, have become the primary savings vehicles for American consumers, not bank accounts or cash under the mattress. These new forms of savings are not counted in the official “savings rate.” So Americans can be adding to their net worth at a rate of some 10% per year and yet are said to be dis-saving. Using the old methodology makes no sense.
Adding to the American household net worth of $54 trillion–more than the rest of the world combined–the lesser chance of unemployment and severe recession means a more stable future income stream. A stable job and good prospects for alternative employment is a huge asset in itself.
In the more volatile economies around the world, which resemble an older American economy, consumers must save more under the mattress for unemployment or medical disasters. In many parts of Asia, Africa, South American, and even Europe, property rights are less certain, or non-existent, and mortgages are not in widespread use. Thus real estate is not the savings vehicle it is in the U.S. Likewise, even in fast growing economies like China and India, financial markets are not as sophisticated and mature, and savings is thus plowed into U.S. treasuries by the governments. In the future, Chinese consumers will be able to buy Chinese equities in much larger quantities than today. The U.S. trade deficit will fall.
All this gets us back to saving in the U.S. and the related topic of Social Security. Although Americans save more than most commentators think they do, it would still be nice for Americans to save more. But how?
The idea of personal retirement accounts as a way to transform Social Security gained some steam during the Bush presidency, but with the Democrats controlling Congress it seems dead for now. That hasn’t stopped Democrats from taking the idea and turning it on its head, however. Reviving a plan from the Clinton Administration, some in Congress would like to create new savings accounts, in addition to Social Security–or “add-on accounts” as they are known. These accounts wouldn’t affect Social Security but would be a new sort of entitlement for low-income workers. Others have proposed numerous and varied savings accounts for new-born babies or children up to age 18 or workers of a certain age or income, all with varied subsidies and rules and acceptable uses.
These proposals would only add to an already exploding variety of savings accounts–IRAs (traditional and Roth), 401(k)s, Keogh plans, 529 and state-based education plans, and Health Savings Accounts (HSAs). In part, these plans are the result of the ugly legislative process. In part, they are constructive efforts to reduce tax exposure in a way that works around the complex tax code and the budget rules. And in part they are paternalistic efforts to make sure you can only use money for government approved purposes.
But regardless of the tax efficiency arguments (which I favor) and the paternalistic ones (which I don’t), this proliferation of specific savings vehicles at some point becomes ridiculous. How many accounts can the average family manage? How useful are these plans when families quickly outgrow the income thresholds and can no longer contribute to the savings vehicle they set up a few years ago? How will all these plans work when people change jobs and tax-status and home-states so often? And isn’t the administration of all these duplicative accounts pretty inefficient?
The answer is not to create additional special savings accounts, with new rules and rights and thresholds and bureaucracies. Instead, raise the existing Roth IRA contribution limit and income threshold. Or even better, reform the entire code to tax only consumption, not investment. Elimination of the capital gains and dividends taxes would be the ultimate Roth IRA. Invest as much after-tax income as you want without being penalized as your savings grow. Keep all your savings in a manageable account, or set of accounts, with the flexibility to use the funds for retirement, health care, education, emergency, or entrepreneurship. And even make Bernanke’s beloved behavior–automatic 401(k) participation–the default position for employees. That minor switch seems simple enough and is still voluntary.
Americans save more than we think. New efforts to encourage more saving should only be adopted if they are simple and boost economic growth.
-Bret Swanson