Thrift's Back - Maybe, But More Is Sought

The American piggy bank is getting fatter. And President Clinton and Congress would like to encourage even more savings by legislating new tax breaks.

National savings have risen from 15.2 percent of gross national product in 1994 to 17.3 percent of GNP in the third quarter of 1996, the Commerce Department estimates.

Personal savings alone climbed from a 47-year low of 3.8 percent of disposable income (after taxes) in 1994 to 4.7 percent in 1995 and 5.3 percent in the third quarter of 1996.

But wait a minute, says Mark Lasky, an economist at DRI/McGraw-Hill, a Lexington, Mass., consulting firm. Why aren't consumers using these new savings to pay off their costly debts, now near record levels as a percentage of disposable income?

The answer, says Mr. Lasky, is that the Commerce statistics are wrong. Commerce numbers measuring the economy include what is termed a "statistical discrepancy" between total output and total income earned from producing that output. That discrepancy was close to $100 billion in the third quarter, an unusually large unexplained amount. If the government had perfect data, there would be no such discrepancy; Commerce would either find more output or less income. Either way, the personal savings rate would come down, Lasky says, from the 5.3 percent Commerce calculated for the third quarter of 1996 to more like 4.3 percent.

This is more than a tempest in a statistical teapot, Lasky says. If savings are high, then there is plenty of room for consumption to grow in the next year. If low, "the economy is vulnerable if the stock market turns down or consumers decide to start paying down their credit-card balances," he notes.

Robert Parker, chief statistician at Commerce's Bureau of Economic Analysis, says Lasky's calculation is "in the realm of reason." More-accurate savings numbers are scheduled for July publication. But even if personal savings are flat, rising corporate profits and falling government deficits could still leave national savings at an improved 16.1 percent, Mr. Parker guesses.

For years, many economists and politicians have lamented the low savings rate in the United States. It leaves individuals with insufficient retirement savings and the nation with inadequate funds for modernizing and expanding output, they argue.

But no agreement has been reached on what will hike savings.

Republicans are proposing cutting taxes on capital gains.

A bad idea, says Charles Schultze, who was President Carter's top economic adviser. The effective overall tax rate on capital gains is already low, at 10 to 14 percent, he says. Capital gains on financial assets, real estate, and other assets often escape taxes when these assets are passed on to heirs. Home sellers can escape capital gains of $125,000 once in a lifetime. Further, capital gains are taxed only when realized - say when a stock is sold.

Charles Davenport, a tax expert at Rutgers University, in Newark, N.J., notes that the capital-gains tax regime was changed several times between 1921 and 1986, but no correlation has been found with savings or investment. Indeed, savings went down after the big Reagan tax cuts in the early 1980s, he says.

In any case, if tax cuts are not offset by government spending cuts, the federal deficit rises and national savings are unchanged.

The effect on savings of individual retirement accounts (IRAs) and other tax-advantaged pension schemes, such as 401(k) plans, is controversial. Some economists say the money in these plans - a cumulative $1.3 trillion in 1996 - has just been moved there from other assets. Others, such as Jonathon Skinner at Dartmouth College, Hanover, N.H., see some net additions to savings.

Congress forgets, Professor Skinner says, that though tax revenues decline for five years because of money going into tax-deferred plans, they later recover as taxable net withdrawals begin. And the government then taxes withdrawals that in many cases have grown mightily through investment in stocks.

A bipartisan bill introduced in the Senate Wednesday would expand IRA tax advantages greatly, including for some not now eligible. If it passes and raises the savings rate one percentage point, it would boost savings $80 billion annually, Skinner notes.

There may be an easy way to boost savings. In a study for the National Bureau of Economic Research in Cambridge, Mass., a group of economists found that firms holding numerous financial education seminars for employees boost 401(k) participation and contributions sizably. The seminars shrink financial illiteracy.