What Makes Sammy Save? Not This Tax Break

'Americans must save more." Politicians, from George Bush to the most liberal Democrat, have made the phrase a rhetorical fixture. Economists, for their part, fret constantly that the notorious reluctance of Americans to save is denying U. S. business desperately needed cash for investment. So, not surprisingly, President Bush and a bipartisan group of senators, led by Finance Committee Chairman Lloyd Bentsen (D-Tex.), have come up with dueling tax plans intended to encourage people to enlarge their nest eggs. Both approaches would expand individual retirement accounts, the popular tax-deferred savings plans that were curtailed in 1986. They would provide billions in new tax breaks. Trouble is, there's no hard evidence that either would do much to expand the savings pool.

Bush's idea, which would cost the Treasury some $6.5 billion over the next five years, would allow individuals earning up to $60,000 a year to contribute as much as $ 2,500 annually to a Family Savings Account. Contributions would be subject to tax, but after seven years, savers could make tax-free withdrawals for any reason.

NET GAIN? Bentsen's plan is even more generous. Anyone could participate, regardless of income. Withdrawals would be allowed for college tuition, catastrophic medical expenses, and first-time home purchases, as well as retirement. The tax cut, costing at least $25 billion over five years, would let IRA participants take either an up-front tax deduction or avoid a tax on the money they earn.

Such largess would doubtless cause a lot of money to flow into IRAs. But fostering economic growth requires savings gains over and above any new borrowing. Shifting money from a taxable account to a tax-free one doesn't add a dime in net new savings. And if savers are borrowing to fund their IRAs, no extra money is available for investment.

Nobody really knows how much new personal saving was created by the massive expansion of IRAs in 1981. But we do know this much: The Treasury lost more than $30 billion in revenues from 1982 to 1986, as millions of taxpayers opened tax-deferred retirement accounts.

Despite the accounts' popularity, however, the national savings rate collapsed in the 1980s. From 1950 to 1980, government, business, and individuals saved an average of nearly 9% of net national product (gross national product less depreciation). They have averaged less than 4% since. Equally telling, the personal savings rate has had little visible connection to the fate of the tax incentives. In 1980, the year before IRAs were expanded, the personal savings rate was about 5.6%. By 1982, after the incentives were firmly in place, it actually dropped a bit, to 5.5%. In 1986, the last year of the generous tax breaks, personal savings ran at about 3.3%. It was exactly the same in 1988, after the new restrictions took hold (chart).

Strangely enough, as the personal savings rate was bobbing around randomly, Americans were stashing more of their money in bank accounts, mutual funds, and retirement plans. But they were also borrowing like mad. Two examples: Jane dutifully saves $5,000 a year for six years--but takes out a $30,000 home-equity loan to buy a BMW. John and his employer put aside nearly 16% of his income through the enforced saving of the Social Security payroll tax. But the government spends all of it. Net national savings generated in the process--zero.

While the question of national savings preoccupies economists, none of them really knows why the U. S. savings rate is so low. The ease with which consumers can borrow is certainly a factor. But do taxes have much to do with saving? Nobody knows. The real reason for the low savings rate is "still a big mystery," says Boston University economist Laurence J. Kotlikoff. The theorizing is "nothing more than informed speculation."

If that's the case, betting at least $25 billion that new tax breaks will encourage Americans to save more is another one of those Washington-style gambles. But if we're going to bet the ranch, the wager had better be a sure thing. So far, neither President Bush nor Bentsen has made the case that these savings plans will be winners.