This article originally appeared on LinkedIn.
One of the more underappreciated financial activities could be the most powerful tool in moving the dial on our nation's economic growth: saving.
To quantify the impact of saving on economic growth, we collaborated with a diverse group of retirement associations, civic groups, financial leaders, and other financial services firms, and asked the economists at Oxford Economics to determine whether U.S. household saving really benefits the economy.
The study, "Another Penny Saved," found that if Americans improved the current savings rate of 3.8% by just a few percentage points, we could boost the country's GDP by half of its present value.
If the household savings rate increased to the range of 5%-9% over the next 25 years:
- We would add $7 trillion to the U.S. GDP.
- The per capita GDP would be $3,500 higher.
- The U.S. could reduce its dependence on foreign capital, promoting greater stability in the markets.
Saving under pressure
The challenge is that our saving behavior has been on a downward trend for the past 30 years. Today, the U.S. savings rate of about 3.8% is a pale comparison with the 10.7% of 1984. In policy proposals that could exacerbate this trend, incentives to save have been targeted for reduction or elimination as Congress struggles to get its spending under control since the Great Recession.
Encourage a driver of economic growth
Clearly, household saving, including retirements savings, is an important contributor to economic growth. Policies that encourage and preserve savings incentives and opportunities simply make sense.
- Payroll deduction savings plans like the 401(k) are the most effective way to encourage people to save and improve their ability to generate enough income in the future for a dignified retirement. Research has found that savers participating in 401(k) plans are better prepared for retirement.
- We need to expand the adoption of employer-sponsored retirement savings plans and advance ideas like the auto IRA, which would ensure that all workers have access to a payroll deduction savings plan.
- The design of 401(k) plans, including auto enrollment and auto escalation, helps raise participation rates and guides savers to consistent participation. The retirement industry needs to adopt full-auto features as best practices to try to help all investors reach their goals.
- Policies that encourage saving should be preserved. Tax incentives for retirement savings, for example, are a known driver of saving behavior. Our leadership needs to remember that tax deferral does not mean tax-exempt - workers pay taxes on deferred compensation when they withdraw money in retirement.
- Programs that encourage employers to offer plans to employees to save must be expanded. Regulators and policymakers can structure resources to make it easier for small businesses to offer a plan. Additionally, tax credits and programs that encourage matching contributions can be targeted to help low-income workers who may be less likely to save.
The retirement savings crisis garners global headlines, but at its core, the issue is about saving in general. Not only is it a struggle for many to save for retirement, more than 75% of Americans do not have enough saved to cover six months of expenses in case of an emergency.
The importance of savings to capital markets is notable. Oxford's research found that households' retirement savings total nearly 59% of the capital provided by non-financial sectors to the U.S. stock and bond markets. The Oxford study demonstrates that savings contribute to our economic prosperity and can grow our GDP. On a national policy level, that's data that cannot be overlooked.
More importantly, saving is critical on an individual level. The further Americans drift from healthy levels of saving, the greater the possibility they could fall into poverty, either during retirement or in their working years. I believe we must take preventative steps here, by encouraging and preserving saving.