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.

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