Helping America to Save More

Remarks by Treasury Secretary Lawrence H. Summers

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Washington, DC

Thank you. I am glad to be here. This is a very important meeting of a very important group of associations. When de Tocqueville came to the U.S. in the 1800s, he stressed that one of the greatest strengths of America was that it was a nation of associations. It is a strength that we come together to solve common problems. It is in this spirit that you have gathered to consider steps for addressing the problem of inadequate national and personal savings.

I believe that you are addressing what is a central problem for the future of the American economy and the future of Americans. Lifting the rate of saving in our country is both a national and a personal imperative. In my remarks tonight I want to do fou things:

  • First, discuss why increasing saving is so crucial both for the American economy as a whole and for the economies of individual American families.
  • Second, discuss our approach to increasing saving based on improving financial literacy and promoting financial access. Recent economic research demonstrates that saving is like any other form of consumer behavior: it is governed by habit, is responsive to social signals, and it can be promoted.
  • Third, discuss the growing problem of borrowing, or negative saving.
  • And fourth, discuss specific legislation that goes beyond existing incentives to further promote savings among Americans who have not had the opportunity to avail themselves of existing incentives.

I. Increasing National Saving.

At the national level we have made real progress in addressing the problem of inadequate saving in recent years. The net national savings rate of our country has almost doubled in the last seven years to 7.4 percent. That increase is welcome. It is the reason why we have been able to enjoy an investment-led expansion with increased capital formation that has, in turn, boosted productivity to the point where it grew at a rate of 6 percent in the last quarter of 1999.

But that increase in national saving has been wholly a consequence of the increase in public saving as we have moved from an era of very substantial public deficits to an era of very substantial public surpluses.

That fiscal progress is essential to whatever else we do as a country. But even at 7.4 percent, our national savings rate is too low. Unless we remedy this situation, we will either have to reduce investment in our productive economy, or continue to live with a large current account deficit. The best way to avoid this dilemma is to increase personal saving - and yet the Commerce Department reported last week that our personal saving rate had fallen to 0.8 percent in February- the lowest level since the Great Depression.

It is critical to our economic health that we raise personal saving. And it is critical for families, because it influences their capacity to manage what is new in the New Economy: not least, the fact that people are living much longer than before. If both members of a couple in my age cohort reach 65, they will face even odds that at least one of them will reach the age of 90. And as people are retiring earlier and living longer, retirement spans for many individuals are approaching half or more of their working lives.

We are also all concerned with creating an inclusive prosperity in our country. And one crucial part of that is addressing not just income inequality but the far more pronounced pattern of wealth inequality. The top 1 percent of American households hold one-third of total household net worth, more than the bottom 90 percent of households combined. Crucial to addressing this problem will be encouraging more low-income Americans to save.

It is true that aggregate household wealth has risen to a record high in the U.S. Yet study after study and evaluation after evaluation concludes that a large proportion of Americans have inadequate savings. For example:

  • Half of American families on the brink of retirement had financial assets valued at less than $40,000 in 1998. And for those not as close to further from retirement, their financial assets were even lower.
  • Only half of American workers are currently participating in any kind of employer-provided pension plan, leaving and more than 75 million Americans and their spouses are not covered by such a plan.employer-sponsored pensions. Indeed, And more than 50 million Americans had no retirement saving whatsoever.
  • In spite of America's economic performance, the level of household debt rose by nearly 10 percent last year and personal bankruptcies have risen by 60 percent since 1994. Household debt service is now at its highest share of disposable income since the late 1980s.

How can public policy help address these weaknesses? Individuals save for many and varied reasons. But their decisions can be affected by a number of factors:

  • By individuals' knowledge about the financial system and their access to the benefits that the financial system can provide.
  • By the availability of preferred vehicles for savings.
  • And by their ability to manage personal debt.

Our approach comprises each of these three elements.

II. Changing financial behavior.

Saving in a way that makes for genuine wealth accumulation and will make a real difference to life in retirement is within the reach of almost every American family. An individual who saved $15 a week - today's price of two movie tickets - for the past ten years would have accumulated $22,000 by investing in the stock market. This rises to $120,000 if he had started 20 years ago and almost $400,000 if he started 30 years ago.

To be sure, the last two or three decades have been an extraordinary period in our financial history. It must be a concern that individuals who believe such returns will persist in the future, will save too little. Still, this example points to the enormous potential of saving.

How can we help American families do what is so clearly in their interest and in the national interest? There has recently been a sea change in thinking on this question. Economists - of whom it is sometimes said that they know the price of everything and the value of nothing - have come to the recognition that a savings behavior is affected by much more than the financial incentives to save. Habit formation, social promotion campaigns and measures that influence people's tastes, will all have an enormous impact.


  • According to a recent survey, forty percent of employees who received educational savings material at work were inspired to either start saving or resume saving. Similar results were achieved among people who took personal finance courses in high school.
  • A separate study of a large university library system with multiple library installations found that saving behavior differed markedly across installations. Thuis, and other similar evidence, suggests that individuals are heavily influenced by the saving behavior of their co-workers.
  • The promotion of saving and savings vehicles through advertising and other means can be quite effective. This appears to have been the case between 1982 and 1986, when a high level of IRA promotional and marketing activity was accompanied by a high level of IRA contributions.
  • The payroll deduction feature of 401(k)s and other savings plans can also promote saving by making it a "habit" to set aside a relatively fixed amount of income on a regular basis.

All of this underlines the importance of the kind of work in which you are all engaged. But there are a number of ways that we can make further progress.

To that end, I am pleased to announce that Treasury is working with America's leading financial education groups to form a national coalition to spread financial literacy in America. The National Partners for Financial Empowerment will build on the strong foundations of hundreds of private and non-profit groups, bringing them together with Treasury and other agencies.

By leveraging existing expertise, the new coalition will bring greater focus and visibility to the hundreds of financial literacy projects already under way in America. In addition, NPFE will work together to:

  • Create an Internet website that will provide one-stop shopping for resources on financial literacy. The site will "hotlink" to the many existing websites and it may offer new content for consumers and organizations.
  • Set up a series of national conferences and other events involving experts in all relevant fields to examine issues related to personal financial management, saving for retirement, and the roles of employers, schools and other institutions in promoting financial education and access to financial services.
  • Launch a national campaign to raise awareness about the crucial importance of improving financial skills and saving.

Over the next two days, ASEC has offered to work with you to set priorities for the NPFE. I am grateful in advance to Dallas Salisbury, and to all of you, for your assistance in this important task. We believe the NPFE should adopt a basic set of messages to promote. We invite your input as to what these themes should be. But let me put forward a few suggestions.

To individuals, I would suggest:

  • Start saving early. The key to building wealth is to take advantage of the power of compound interest. As the example I gave before graphically illustrates, even small investments can generate substantial wealth for your retirement.
  • Do your homework. Being a savvy personal finance consumer takes time. The average American spends more than four hours per day watching television. Even a small portion of that time diverted into managing one's personal finances could yield big dividends. There are no short-cuts here: you need to shop for the best mortgage lender, search for the best credit card deals, and look for investment opportunities that make sense for you.
  • Manage your debt as carefully as your assets. Some forms of debt are extremely expensive, and reducing your dependence on these can be just as advantageous a making a high-yield investment. For example, an individual who ran up a credit card balance of $1,000 twenty years ago and never paid it off, would have spent $3,600 in interest costs that could have been avoided.
  • Teach your kids about money. When it comes to money, your kids will learn more from you than from anyone else: these are habits that will stick with them for a lifetime. By teaching your kids about money you will be building their financial independence. There are many programs that help our children better understand these principles. For example, Girl Scouts can earn a "Dollars and Sense" merit badge through participating in an educational program on financial planning, savings and money management.

To institutions, I would suggest:

  • Employers should work to change the norms of personal financial behavior in their workplaces. When saving is made simple and easy, participation rates surge. That is one reason 401(k) plans have become America's most popular savings vehicle: much like a Christmas Club, 401(k) payroll deduction is convenient and regular, and the money goes into savings before there is an opportunity to spend it. We are taking further steps to make it easier for employees to save, and we urge employers to help their employees to take advantage of these changes. Notably:
  • We recently issued a ruling allowing automatic enrollment in 401(k) plans for current employees, building on an earlier ruling that allowed automatic enrollment for new hires. The new ruling permits employers to enroll current employees without those employees having to take the initiative to do so themselves although, of course, employees are provided with the choice of opting out.
  • In addition, in our FY2001 budget we have proposed to offer the benefits of automatic payroll deduction to workers whose employers do not sponsor a retirement plan. We would encourage these employers to offer their employees the convenience of being able to make direct deposit payroll contributions to IRAs.
  • All high school students should receive a financial education. We cannot continue to graduate high school seniors who are not equipped to enter the financial marketplace. Though personal financial education must begin in the home, it must continue in the schools. I am pleased to highlight that Chase Manhattan Bank will be donating $1 million per year to Jumpstart to help spread financial literacy to our young people. As Chase knows, greater financial awareness makes good business sense.
  • Media should elevate the message. The media should give the same kind of prominence to issues of financial empowerment that they give to other important national social campaigns. Unless the media gets involved, we will be unable to reach a national audience.
  • And government must do its part. Governments employ a sizable fraction of the work force, and should undertake the same kinds of efforts we are asking of private employers. A broad array of local, state, and federal agencies are already addressing financial literacy in the population at large. We must pursue and strengthen those efforts.

Making it easier for employees to contribute to a pension is important. Let me add that we in government have worked to promote savings in another way, by offering savers other types of safe investment. Indexed bonds have proved immensely popular since they were launched in 1997 because they offer immunity against the uncertainties of inflation. Building on that program, we introduced indexed savings bonds in 1998; these bonds are available in small denominations, through payroll deduction, and are currently providing investors a real return of 3.4 percent that is exempt from state and local taxes and deferrable from Federal taxes as a result we are extending the range of choice in index bonds and making it easier to buy them.

  • The recent launch of the index savings bond, the Series I Savings Bond, has proved an instant success. Sales have more than tripled in the last 12 months to volumes of over $100 million a month.
  • Last November we launched Savings Bond Connection, an on-line site for purchasing U.S. Savings Bonds, 24 hours a day. This has proved an instant success both for the I Bond and non-index Savings Bonds. We have sold an average of $1 million bonds online each week.

Promoting financial access for the poor

The ability to save for one's retirement is only one of the many benefits of having a bank account - benefits that most of us tend to take for granted. But today, in the age of the Internet, derivatives, and embedded options, between 10 and 20 percent of American households still lack that basic passport to the broader economy.

If it was an important national challenge half a century ago to ensure that essentially every American had access to electricity, to running water, and to a telephone - in new economy, ensuring access to a basic bank account must also be a national priority. One recent survey in Chicago found that 44 percent of recipients of the EITC used a check cashing service to cash their refund check. And estimates suggest that the costs over a lifetime for low- and middle-income families of paying fees for every check or bill payment could be more than $15,000.

Having a bank account would save these families precious resources. It would also give them the capacity to save on their own account. Let me highlight three measures the Administration is taking to promote more universal financial access in America today:

  • First, we asked Congress to provide $30 million for our "First Accounts" initiative this year. This program would build on the success of Electronic Transfer Accounts by extending the benefits of low-cost bank accounts to those who do not receive Federal checks. It would also expand access to ATMs in secure environments and finance financial literacy efforts.
  • Second, I am pleased to announce that Treasury's CDFI Fund will provide an additional incentive for banks to provide innovative services to the unbanked. This fall, the Fund will describe how banks can use the Bank Enterprise Award Program to support the provision of new low-cost accounts.
  • Third, Treasury is releasing today a study on check cashers and other alternative institutions. This study provides evidence of growth in this sector. Banking regulators can help focus depository institutions' attention to these market opportunities by publishing best practices for retail banking services in low-income communities under the Community Reinvestment Act service test.

III. Widening the Circle of Tax-Preferred Saving

Saving, like insurance, is sold not bought. This means encouraging better savings habits, making it easier to save through payroll deduction, and motivating Americans to take advantage of existing savings incentives. But we must do more.

At the moment our tax savings system offers the greatest incentives to those who need them the least. Two thirds of pension tax expenditures go to families in the top 20 percent of the income distribution while just 12 percent goes to families in the bottom 60 percent. Indeed, for many of the poorest Americans, who pay no Federal income tax, 401(k) and IRA tax incentives are worth nothing.

Let me highlight two of the steps the Administration is taking to address these problems:

First, providing tax incentives for saving to low-income Americans.

Our proposed Retirement Savings Accounts, or RSAs, would offer a powerful new saving incentive for people who receive little or no tax incentive under existing law. The President's proposal builds on the successful model of Individual Development Accounts, extending generous matches to all low and moderate-income families to encourage them to save and build wealth.

Participants' contributions would be matched directly by financial institutions or employer-sponsored 401(k) plans, and those organizations would in turn receive tax benefits equal to the matching amounts. To provide incentives where they are most needed, the highest match rates would apply to the lowest-income workers. The tax credit would be available to 55 million Americans who are not contributing to a 401(k) or IRA plan.

In developing the RSA proposal, we have tried to draw on the behavioral factors that affect saving. For example, RSAs would send a powerful signal about the importance the federal government attaches to saving for retirement, and would be heavily marketed by employers and private financial institutions. The RSA proposal takes advantage of the existing payroll deduction mechanism of 401(k) plans, and the positive peer effects that are associated with such plans. And the RSA proposal provides a target level of savings for workers who now typically are not saving for retirement at all.

Contributions to RSAs would accumulate tax-free. If a family consistently took advantage of RSAs, they could accumulate substantial assets to help maintain a healthy income in retirement. For example:

  • A 25-year-old worker making $1,000 annual voluntary contributions and eligible for the maximum match every year would be saving $2,100 a year. As a result he or she could accumulate over a quarter of a million dollars by age 65 in retirement savings.
  • This accumulation could be enough to provide an annuity of over $24,000 per year - an extra $2,000 per month in retirement income.

The goal of increasing retirement security for low and moderate-income Americans is surely one on which we can all agree. I urge Congress to enact RSAs.

Second, enhancing tax incentives for small business pension plans.

Only 18 percent of workers at organizations with fewer than 25 workers have access to retirement plans compared to about half of all employees.

The budget contains two proposals to encourage small businesses to offer pension plans:

  • First, we propose to reduce the costs entailed in setting up new retirement plans by offering a three-year credit covering 50 percent of administrative and retirement educational expenses for small employers adopting qualified retirement plans.
  • Second, we would encourage adoption of retirement plans that provide employer contributions for lower and moderate-income employees by offering small business employers a tax credit for 50 percent of those contributions.

In addition to these proposals, we would enable employees to move their pension savings from one type of employer plan to another. We commend those provisions in the Portman-Cardin and Graham-Grassley bills that would also facilitate portability of pensions.

IV. Encouraging responsible borrowing.

We need to promote knowledge about the importance of saving. And we need new tools to persuade more people to save. But at the same time, we must not overlook the problems of dissaving: individuals should be as aware of the potential dangers of borrowing as they of the real benefits of saving. In short, while personal saving is too low, individual borrowing is too high.

Inappropriate use of credit can do great damage to people's finances. This is partly caused by lack of awareness on the part of the borrower. Accordingly:

  • Lenders should be required to disclose sufficient information to enable borrowers to manage their finances well. For example, the Senate bankruptcy bill would require lenders to clearly display teaser rates and the consequences of making only minimum payments. The President has consistently supported balanced bankruptcy reform in which lenders as well as borrowers are required to modify their behavior.

Combating predatory lending.

But high debt is also a function of the spread of predatory lending practices in our low-income communities. Predatory lenders exploit unsophisticated borrowers to charge extortionate rates of interest on loans and mortgages. We are taking two steps to combat this abuse:

  • I am pleased to announce that the Treasury's Office of Thrift Supervision will publish tomorrow the first formal action by a federal banking regulator to address recent evidence that existing regulations may not adequately guard against predatory lending practices. OTS's Advance Notice of Proposed Rulemaking will gather data about predatory practices and potential responses.
  • Second, I believe that we and the banking regulators should take a careful look at the growth in payday loans, in which lenders extend short-term credit at fees equivalent to annual interest rates of hundreds of percent. We strongly back the recent action of the Federal Reserve to promote increased transparency through clarification that the Truth in Lending Act applies to payday loans.

V. Conclusion.

Let me return to where I began. Raising the level of national savings is a central priority of this Administration. It is not only critical for the future performance of our economy. It is also essential for the well-being of individuals throughout their lives and in their retirement. We look forward to working with Congress, the private sector, and local communities in promoting a secure retirement for the baby boom generation and for all Americans. Thank you.