Will Government-Funded Savings Accounts Really Boost Saving?
As we have noted often in this blog, Americans, on the whole, are lousy savers. In an effort to correct this deficiency and extend the benefits of saving to all Americans, several versions of government-funded savings accounts have been suggested over the years. The rationale behind all of these schemes is to provide a stake to those with no savings as an incentive for them to subsequently build their savings. As the thinking goes, if the government gives John a $500 or $1,000 savings account, he will add to that amount and grow his savings. In other words, once John has some savings, he will be motivated to acquire the habit of saving.
Opportunities abound for starting a savings account
A majority of Americans already receive chunks of money from the government in the form of federal income tax withholding refunds or tax refunds that result from electing the Earned Income Tax Credit and other tax breaks. These present an ideal opportunity to open a savings account, but often they are spent, or worse, used to leverage consumer debt.
A few years ago, the Bush administration gave every taxpaying American a tax rebate of several hundred dollars in an effort to stimulate economic growth. The current administration cut payroll taxes by 2% last year as part of their economic stimulus plan. This amounted to several hundred dollars of extra money over a year’s time for most folks. Yet, despite the tax cut, the savings rate went down . In both instances, the stimulus money could have easily been used to start a savings account. After all, it was extra money. However, as is always the case, the spenders spent it and the savers saved it.
Money follows values
For most people, lack of opportunity is not the reason they don’t save. The opportunities are abundant. They fail to save because they do not place a high value on saving. People tend to afford what they value most. Funding a savings account for someone who does not place a high value on saving will not change that person’s perception of saving as having low value. Most likely, the money in the savings account will be spent at the first opportunity.
Of course, the government can specify that the the money in the savings account only be used to fund education, the purchase of a first house, or retirement. This assumes that the beneficiary places a sufficient value on advanced education, homeownership, and retirement to be willing add to the initial amount. Eventually and inevitably, as with all government programs, there will be a clamor to lift restrictions on the withdrawal of money so that is available for any use whatsoever. Then it will be gone.
You can’t change a person’s behavior by doing for the him what he should do for himself. Giving a person a savings account will not make him a saver. Yes, there are many advantages to be gained from saving: increased opportunity, a degree of financial security, an optimism about the future that motivates positive action, and so forth, but a person will not save until he recognizes those advantages and wants them more than that which he can obtain by spending.
Unfortunately, the realization of the need for financial reserves usually comes about as a result of suffering the consequences of not having them. That is how it happened for me. Most folks have to hit a financial bottom before they value the benefits of saving enough to develop the habit of saving.
Government economic policy discourages saving in favor of spending
Currently, the government, in the form of the Federal Reserve and tax policy, discourages regular savings accounts. The Fed’s zero interest rate policy (ZIRP) has driven interest rates on traditional savings accounts and insured money market accounts to well below 1% at a time when headline inflation is running in excess of 3%. Taxing interest on every dollar of savings at the same marginal rate as earned income further reduces the real return on a savings account. Negative real returns on savings have led many people to believe that they are better off spending the money now than saving it and letting inflation erode its purchasing power. This is the precise outcome the government seeks from its policies in the hope it can achieve a short-term improvement in the economy.
Government-funded savings accounts will not convert spenders into savers, nor increase the rate of saving. They do nothing to alter the disincentives to save that have been put in place by the government. Therefore, government-funded savings accounts serve no purpose. Good intentions do not necessarily make good policy, and this one should be abandoned.
K.C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based Lifestyle, Double-Dome Publications, 224 pages
