US report emphasises saving to spur recovery

By boosting retirement savings, people will be less likely to fall into poverty in old age, making them less reliant on government-funded programs. Photo / 123RF

In the throes of the Great Recession, lawmakers worked to pull the US out of the downturn by introducing stimulus intended to boost spending and lift demand for goods and services. Now some economic experts say it's time for Americans to do just the opposite.

It's saving, not spending, that will solidify the recovery and make the country less vulnerable to another downturn, says a report released on Tuesday morning by the consulting firm Oxford Economics.

The report was sponsored by retirement-focused groups such as AARP and the American Society of Pension Professionals & Actuaries and financial firms such as Bank of America Merrill Lynch, Natixis Global Asset Management and Putnam Investments.

Many Americans, after reducing the debt loads that burdened them during the downturn, may be ready to start saving and eventually, to become investors, says Adrian Cooper, chief executive of Oxford Economics.

"In the context of a healthy economy, now is the time to start thinking about the ways to encourage saving on a longer-term basis," Cooper says.

The thinking is that by boosting savings, specifically retirement savings, people will be less likely to fall into poverty in old age, making them less reliant on government-funded programs such as Medicaid.

They might also have more money to pass on to their children or to invest in the market, reducing the need for American companies to rely on foreign capital.

The writers contend that raising the savings rate could add $7 trillion to the US economy over the next 25 years.

"The impact on the economy of savings is much larger than anyone would expect," says Robert Reynolds, president and chief executive of Putnam Investments.

Still, Americans aren't saving, even though many say they understand the importance of saving, especially after a recession.

In a survey that Wells Fargo released this month, about 80 per cent of millennials polled said the recession taught them the importance of saving to weather economic downturns but only slightly more than half said they are saving for retirement. Of those who are saving, almost half were setting aside only 1 per cent to 5 per cent of their income.

The report from Oxford Economics says that American households, on average, sock away 3.8 per cent of their income. Of course, many families are struggling to save at a time when salaries and wages are flat and there are 3.5 million people looking for work who have been jobless for six months or longer.

Researchers suggest the situation can be improved if employers and lawmakers make it easier for people to save. Employers might boost participation in retirement savings plans if they automated the process, the report says.

That includes automatically enrolling people and giving them the ability to opt-out, instead of leaving it to them to opt-into a plan. It also includes automatically escalating their saving rates each year.

"What we see is that folks who are automatically enrolled, they don't opt out more frequently than those who are not automatically enrolled," says Gary Koenig of the AARP Public Policy Institute.

Companies may get more workers to sign up for 401(k) plans if they nudge them through emails or offer incentives to save, such as a matching contribution.

But to meaningfully boost the savings rate, researchers say, employers and lawmakers need to increase access to retirement savings accounts. And lawmakers can broaden access to tax-advantaged saving vehicles by encouraging - or requiring - more employers to offer plans.

- Washington Post