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To Save Or Not To Save

Economic Trends

To Save or Not to Save

Uncle Sam sends the wrong message

Why is the personal savings rate in the U.S. so low? Conventional wisdom says it's because many people earn just enough to get by. But a new study by Steven F. Venti of Dartmouth College and David A. Wise of Harvard University calls that idea into question. They found lots of people who earn high incomes but save extremely little, as well as people with low lifetime incomes who still manage to save quite a bit.

Using data from the government's ongoing Health & Retirement Study, Venti and Wise split up the population of people nearing retirement into 10 groups, or deciles, based on their lifetime incomes. The fifth-lowest income decile, for instance, had median lifetime income of about $740,000 in 1992 dollars. Of the people in that group, savings varied from $443,000 for good savers to just $12,500 for bad savers (chart). Here, good savers means families whose savings were higher than all but 10% of the families in the income group. Bad savers means families whose savings were lower than all but 10% of the families in the group.

Venti and Wise found little difference when they took into account chance events--both positive ones such as inheritances and negative ones such as poor health. Some families saved more because they picked higher-yielding investments. But the authors found that effect to be minor compared with the choice to save or not to save.

Venti and Wise argue that when the government taxes wealth, it is penalizing thrift. Among the policies they dislike are high estate taxes, the requirement that people spend down their assets before they qualify for Medicaid, and the taxing away of Social Security benefits for retirees whose incomes are high because of dividends and capital gains. Aside from being unfair, they say, these policies send young people a signal that it's not worthwhile to save.By Peter CoyReturn to top

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A Cap on Bank Deposit Rates?

Economists and bankers square off

Joseph E. Stiglitz, who recently resigned as chief economist of the World Bank, is rocking a lot of boats. First, he harshly criticized the International Monetary Fund's handling of the Asian and Russian financial crises. Now he's calling for renewed regulation of bank-deposit rates.

In the latest issue of The American Economic Review, Thomas F. Hellmann, Kevin C. Murdock, and Stiglitz argue that bank failures have risen when regulators removed ceilings on deposit rates. Without ceilings, they say, banks that want to gamble can lure funds with extra-high deposit rates and then loan them to unsound borrowers.

The authors--Hellmann and Murdock are Stanford University professors and former graduate students of Stiglitz'--argue that it's a mistake to depend solely on capital requirements to discipline banks. Capital requirements limit how much lending a bank can do for each dollar of the owners' equity. They tend to lower the franchise value of a bank because owners can't make as many loans as they'd like. Lowering a bank's franchise value actually encourages risky behavior because the owners feel they have little to lose by rolling the dice.

The last time the U.S. had deposit-rate ceilings was under Regulation Q, which was ended by Congress in 1982. Ceilings were never adjusted for inflation, so when inflation rose, banks were stuck paying negative real rates. This time, the authors say, deposit-rate ceilings should be at or just above equilibrium market rates.

Bankers are dubious. James H. Chessen, chief economist at the American Bankers Assn., says regulators should focus instead on making sure that banks have good systems for managing risk.By Peter CoyReturn to top

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