How to Save the Postal Service and Boost the Savings Rate

We’re still debating the economic and regulatory lessons from the traumatic global credit crunch and Great Recession. Should Fannie Mae and Freddie Mac be shut down or overhauled? Should regulators insist banks rely much more on equity financing? Is quantitative easing an indispensable option for future monetary policy? The list is long and the arguments contentious, but in one area there seems to be little disagreement: The downturn powerfully showed that Americans weren’t saving enough. Too many people learned the hard way that their household margin of safety was too narrow for comfort.

Today the evidence is overwhelming that people still aren’t saving enough. Yes, the personal savings rate has averaged 5 percent in the first half of 2014, a clear improvement from the 2.6 percent rate for the same period in 2005. Yet it’s still a low number compared with the average savings rate of 8.6 percent in the 1980s and 9.6 percent in the ’70s. The Federal Reserve’s recently released Report on the Economic Well-Being of U.S. Households in 2013 (PDF) found that 57.9 percent of those surveyed didn’t have a rainy-day fund to cover three months’ worth of expenses.

Among households earning $25,000 or less, that figure swelled to 77.8 percent, and for households making $25,000 to $49,999 it was 64.2 percent. These results echo a 2011 National Bureau of Economic Research study (PDF), which showed about half of households surveyed reporting they couldn’t come up with $2,000 within 30 days in a pinch, even if they turned to relatives for help. A 2011 Federal Deposit Insurance Corp. survey (PDF) put 29.3 percent of households without a savings account.

Put somewhat differently, more than a quarter of American households (PDF)—68 million adults—aren’t included in the mainstream financial system or exist on its fringes. Many in this state are working- and middle-class families, young people, immigrants, rural residents, and low-income families. The U.S. today looks like 19th century Europe, with large numbers unable to access banking services, says Sheldon Garon, a professor at Princeton University and the author of Beyond Our Means: Why America Spends While the World Saves. Just mull that thought over for a moment.

The good news is that both European and Japanese history demonstrate that it isn’t hard to boost financial inclusion and savings rates. Europe managed to bring basic banking services to most of its population in a relatively short period of time starting in the late 1800s, thanks to the adoption of postal banking systems, which turned national post office networks into savings banks as well. For example, in Germany, Switzerland, France, and other modern industrial nations, by 1910 “most households had at least one savings account in the post office or not-for-profit savings banks,” says Garon. (It’s intriguing to note that while Europe and Japan worked at democratizing savings, the U.S. emphasized the democratization of credit.)

It’s high time for the U.S. to emulate the century-plus experience of postal banking elsewhere in the developed world. America’s vast number of post offices offers an opportunity to make savings convenient and low-cost to the unbanked and underbanked, a far better alternative than the current ubiquity of payday lenders and other high-fee, high-rate creditors in lower-income markets. Better yet, the U.S. can take advantage of the long experience of other countries to design a state-of-the-art postal banking service.

Did you know that we once had a postal banking system? The service started in 1911. “The legislation aimed to get money out of hiding, attract the savings of immigrants accustomed to saving at Post Offices in their native countries, provide safe depositories for people who had lost confidence in banks, and furnish more convenient depositories for working people,” notes the U.S. Postal Service website (PDF).

Bank lobbyists, however, made sure the postal savings system was deeply handicapped. Garon notes that the its real rate of interest on deposits was a little more than 1 percent, compared with 3 percent or 4 percent for banks; most rural post offices were barred from offering the service; and depositors at one post office couldn’t make withdrawals at another. The postal banking system faded into obscurity well before it was shut down in 1966.

The USPS Office of Inspector General revived the idea in a white paper published in late January 2014. “While banks are closing branches all over the country, mostly in low-income areas like rural communities and inner cities, the physical postal network is ubiquitous,” notes the report, titled Providing Non-Bank Financial Services for the Underserved (PDF). “The Postal Service also is among the most trusted companies in America, and trust is a critical element for implementing financial services.”

The Pew Trust held a one-day conference in July to discuss the issue, leading to a post on its website titled “Should the Post Office Offer Financial Services?” My one-word response after watching the conference’s webcast: Yes.

The USPS continues to defy predictions of its imminent bankruptcy. The mail carriers’ latest quarterly filings show a net loss of $2 billion, up from $740 million over the same period last year. But operating revenue improved by $327 million, to $16.5 billion, compared with a year earlier. The loss largely reflects a congressional mandate to make contributions of about $5 billion into a future retiree health-care fund (a highly unusual requirement) and a change in the accounting for workers’ compensation liabilities. At the moment, Congress seems determined to keep the Postal Service in a state of financial stress, requiring it to offer universal service (the right idea) while saddling it with costly requirements (bad public policy and bad for business).

The USPS needs the chance to grow and, at the same time, fulfill its public purpose mission. How about allowing it to offer basic banking services, especially savings accounts, throughout its network? Let’s boost the personal savings rate among the less well-off before the next downturn hits.

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