National Saving: Answers to Key Questions (01-JUN-01,
GAO-01-591SP).
This report is designed to present information about national
saving--as measured in the National Income and Product
Accounts--and its implications for economic growth and retirement
security. GAO addresses the following questions: (1) what is
personal saving, how is it related to national saving, and what
are the implications of low personal saving for Americans'
retirement security? (2) what is national saving and how does
current saving in the United States compare to historical trends
and saving in other countries? (3) how does national saving
affect the economy and how would higher saving affect the
long-term outlook? (4) how does federal fiscal policy affect
national saving, what federal policies have been aimed at
increasing private saving, and how would Social Security and
Medicare reform affect national saving? and (5) what are the key
issues in evaluating national saving?
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-01-591SP
ACCNO: A01135
TITLE: National Saving: Answers to Key Questions
DATE: 06/01/2001
SUBJECT: Budget surplus
Financial analysis
Fiscal policies
National income accounts
Retirement benefits
Retirement pensions
Social security benefits
Economic growth
Medicare Program
National Income Account
Social Security Program
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GAO-01-591SP
June 2001 NATIONAL SAVING Answers to Key Questions
GAO- 01- 591SP
Preface 5 Summary of Major
9 Sections
Personal Saving and Retirement Security 9 National Saving Overview 11
National Saving and the Economy 12 National Saving and the Government 13
Section 1 18
Personal Saving and Q1.1. What is the Personal Saving Rate and What Does it
Mean? 18 Q1.2. Why Measure Personal Saving? 20
Retirement Security Q1.3. How Has the Personal Saving Rate Changed Over
Time? 21
Q1.4. Why Do People Save? 22 Q1.5. Why Has the Personal Saving Rate
Declined? 25 Q1.6. What Is the Relationship Between Personal Saving and
Wealth? 27 Q1.7. If Household Wealth Has Increased, Does It Matter if the
Personal Saving Rate Has Declined? 31
Q1.8. How Do Social Security and Personal Saving Compare as Sources of
Retirement Income? 34 Q1.9. What Are the Implications of a Growing Elderly
Population for
Retirement Security? 39 Section 2
47 National Saving
Q2.1. What Is National Saving and How Is It Measured? 47 Q2.2. How Has U. S.
National Saving Changed Over Time- Both Overview
Overall and by Component? 49 Q2.3. How Does U. S. National Saving Compare to
Other Major
Industrialized Nations? 53 Q2.4. What Are Other Ways of Defining Saving and
Investment? 55
Section 3 58
National Saving and Q3.1. How Does National Saving Contribute to Investment
and
Ultimately Economic Growth? 58 the Economy
Q3.2. Has the Relatively Low National Saving Rate Affected Investment and
Economic Growth? What Factors Have Fostered Economic Growth in Recent Years?
62 Q3.3. To What Extent Has the United States Supplemented Its
Saving and Investment by Borrowing Saving From Abroad? How Does Such
Borrowing Affect the Economy? 65 Q3.4. What Is the Current Long- Term
Economic Outlook for
U. S. National Saving and Investment? How Would the Long- Term Economic
Outlook Change With Higher Levels of National Saving? 70 Section 4
77 National Saving and
Q4.1. How Has Federal Fiscal Policy Affected U. S. National Saving? 77 Q4.2.
Why Do Government and Private Saving Tend to Move in the Government
Opposite Directions? 81 Q4.3. What Is the Long- Term Outlook for Federal
Government Saving/ Dissaving? 82
Q4.4. How Does Saving Affect Future Budgetary Flexibility? 87 Q4.5. What are
the Implications of Current Fiscal Policy Choices for Future Living
Standards? 90
Q4.6. How Does Government Investment Affect National Saving and Economic
Growth? 93 Q4.7. What Policies of the Federal Government Have Been Aimed at
Encouraging Nonfederal Saving and Investment? 95
Q4.8. Given That Experts Disagree About Whether Retirement Saving Tax
Incentives Are Effective In Increasing Personal Saving Overall, How Do These
Tax Incentives Affect National Saving? 99 Q4.9. What Is the Federal
Government Doing to Educate the Public
About Why Saving Matters? 104 Q4.10. How Would Social Security Reform Affect
National Saving? 106 Q4.11. How Would Establishing Individual Accounts
Affect National Saving? 112
Q4.12. How Would Medicare Reform Affect National Saving? 114 Section 5
119 National Saving and
Q5.1. What Are Key Issues in Evaluating National Saving? 119 Current Policy
Issues
Appendixes Appendix I: Objectives, Scope, and Methodolog 122 Appendix II:
The Economic Model and Key Assumptions 127 Appendix III: Glossary 135
Appendix IV: Bibliography 142 Appendix V: Related GAO Products 153
Tables Table 4. 1: Selected Federal Income Tax Provisions That Influence
Personal Saving 97
Table 4. 2: Change in Government and National Saving Resulting From a $4,000
Tax- Deductible IRA Contribution Under Alternative Personal Saving
Assumptions 100 Table II. 1: Key Assumptions of the Economic Model 132
Figure S. 1: Personal Saving Rate (1960- 2000) 10 Figure S. 2: Net National
Saving as a Share of GDP (1960- 2000) 12 Figure 1.1: Personal Saving Rate
(1960- 2000) 22 Figure 1.2: Comparison of the Personal Saving Rate and the
Wealth- Income Ratio (1960- 2000) 28 Figure 1.3: Family Net Worth by Income
Level in 1998 33 Figure 1.4: Share of Elderly Households? Income by Source
of
Income, 1998 35 Figure 1.5: Pensions, Income from Accumulated Assets, and
Earnings
Determine Who Had Highest Retirement Incomes, 1998 37 Figure 1.6: Aged
Population Nearly Doubles From Today as a Share
of Total U. S. Population (1960- 2075) 40 Figure 1.7: Relatively Fewer
Workers Will Support More Retirees
(1960- 2075) 41 Figure 1.8: Social Security Trust Fund Faces Insolvency in
2038
(2000- 2050) 42 Figure 1.9: Medicare?s Hospital Insurance Trust Fund Faces
Insolvency in 2029 (2000- 2050) 44 Figure 1.10: Social Security and Medicare
HI Cost and Income as a
Percentage of Taxable Payroll (2000- 2075) 45 Figure 2.1: Gross National
Saving as a Share of GDP (1960- 2000) 50 Figure 2.2: Composition of Net
National Saving (1960- 2000) 51 Figure 2.3: International Trends in Gross
National Saving (1960- 1997) 54 Figure 3.1: Overview of Saving, Investment,
Output, and Income
Flows 59 Figure 3.2: National Saving, Domestic Investment, and Net Foreign
Investment (1960- 2000) 66 Figure 3.3: Net U. S. Holdings of Foreign Assets
and Net Income From
Abroad (1977- 1999) 68 Figure 3.4: Gross National Saving as a Share of GDP
Under the Save
the Social Security Surpluses Simulation (1990- 2075) 72 Figure 3.5: GDP Per
Capita Under Alternative Gross National
Saving Rates (2000- 2075) 73 Figure 4.1: The Effect of Federal Surpluses and
Deficits on Net National Saving (1990- 2000) 80
Figure 4.2: Unified Surpluses and Deficits as a Share of GDP Under
Alternative Fiscal Policy Simulations (2000- 2075) 86
Figure 4.3: Composition of Federal Spending as a Share of GDP Under the Save
the Social Security Surpluses Simulation 89 Figure 4.4: GDP Per Capita Under
Alternative Fiscal Policy Simulations (1960- 2075) 91
Figure 4.5: Medicare HI and SMI Spending as a Share of GDP (2000- 2075) 116
Text Box 2. 1: Gross Domestic Product and Gross National Product 48 Text Box
4. 1: How do the NIPA and federal unified budget concepts of federal
surpluses and deficits differ? 78
Text Box 4. 2: Government Saving When Reducing Publicly Held Federal Debt is
Not an Option 84 Text Box 4. 3: Individual Development Accounts for Low-
Income
Savers 102
Abbreviations
BEA Bureau of Economic Analysis BLS Bureau of Labor Statistics CBO
Congressional Budget Office FFA Flow of Funds Accounts GDP Gross domestic
product GNP Gross national product HI Hospital Insurance IRA Individual
Retirement Account NIPA National Income and Product Accounts OASDI Old- Age,
Survivors, and Disability Insurance OECD Organization for Economic
Cooperation and Development R& D Research and development SAVER ?Savings are
Vital for Everyone's Retirement? Act of 1997 SMI Supplementary Medical
Insurance
Preface The term ?saving? is used both when people discuss their own
finances and when policymakers and economists discuss ?national saving.? For
people and for the nation, saving means forgoing consumption today so they
can enjoy a better standard of living in the future. National saving- the
portion of a nation?s current income not consumed- is the sum of saving by
households, businesses, and all levels of government. National saving
represents resources available for investment to replace old factories and
equipment and to buy more and better capital goods. Higher saving and
investment in a nation?s capital stock contribute to increased productivity
and stronger economic growth over the long term. Saving today increases a
nation?s capacity to produce goods and services in the future and,
therefore, helps to increase the standard of living for future generations.
Since the 1970s, combined saving by households and business has declined.
For much of that time, the federal government did not contribute to saving;
instead it was a borrower, its deficits absorbing a share of the saving pool
available for investment. For the nation as a whole, saving has rebounded
somewhat from its low point in the early 1990s but remains relatively low by
U. S. historical standards. In fiscal year 1998, the federal government
began to contribute to the pool of saving by running its first surplus since
1969. Federal budget surpluses now are projected for at least the next
decade. But even with the advent of federal government saving in the late
1990s, national saving available for new investment remains relatively low,
in large part because personal saving has dramatically declined. The U. S.
has been able to invest more than it saves by borrowing from abroad, but
economists question whether this is a viable strategy for the long term.
Personal saving plays a dual role, ensuring both individuals? retirement
security and the nation?s economic security. While Social Security provides
a foundation for retirement income, saving through pensions and by
individuals on their own behalf contribute substantially to retirement
income. Even as more people are accumulating balances through employer-
sponsored 401( k) saving plans and individual retirement accounts, personal
saving- which does not reflect gains on existing assets- has declined. The
personal saving rate has plunged, with American households spending
virtually all of their current income. Although
aggregate household wealth has risen in part as a result of the stock market
boom over the 1990s, many individual households have accumulated little, if
any, wealth. America faces a demographic tidal wave that poses significant
challenges for individuals? retirement security and our economy as a whole.
More
people are living longer in retirement, and there will be relatively fewer
workers supporting each retiree in the future. Without meaningful reform,
the Social Security and Medicare programs face long- term financing
problems. Although public attention usually focuses on the dates by which
the trust funds are projected to become insolvent, the effects associated
with financing cash deficits for these programs will be felt sooner as the
baby boom generation begins to retire. As the population ages, spending for
Social Security and federal health programs will leave increasingly less
room for spending on other national priorities. Increasing national saving
is an important way to bolster retirement security for current workers and
to allow future workers to more easily bear the costs of financing federal
retirement and health programs while maintaining their standard of living.
As we have reported in the past, the surest way for the federal government
to affect national saving is through federal fiscal policy, particularly in
what it chooses to do with the budget surpluses projected over the next
decade. Policymakers appear to have
agreed to save the Social Security surpluses, and the fiscal policy debate
has centered on what to do with the balance of the anticipated surpluses. To
the extent that they are used to reduce federal debt held by the public,
surpluses represent an opportunity to increase national saving. In addition,
how surpluses are used has long- term implications for future economic
growth. Policy debates surrounding Social Security and Medicare reform also
have implications for all levels of saving- government, personal, and,
ultimately, national. This report is designed to present information about
national saving- as measured in the National Income and Product Accounts-
and its implications for economic growth and retirement security in a
concise and easily understandable manner. In general, this report is based
on widely accepted economic principles, and we identify those areas where
many
economists do not agree. Although many excellent studies and books have been
written on national saving and long- term economic growth, these discussions
tend to be complex and technical. Also, most discussion of the decline in
personal saving focuses on the adequacy of individuals? retirement saving
rather than on the significance of personal saving for the economy as a
whole. For example, one point that is sometimes overlooked is that low
personal saving has consequences for U. S. reliance on foreign borrowing,
long- term economic growth, and standards of living for future generations.
This report addresses the following questions: (1) What is personal saving,
how is it related to national saving, and what are the implications of low
personal saving for Americans? retirement security? (2) What is national
saving and how does current saving in the United States compare to
historical trends and saving in other countries? (3) How does national
saving affect the economy and how would higher saving affect the longterm
outlook? (4) How does federal fiscal policy affect national saving, what
federal policies have been aimed at increasing private saving, and how would
Social Security and Medicare reform affect national saving? And, (5) what
are key issues in evaluating national saving? For a quick
overview of the topics discussed in this report, see the summary section.
For easy access to definitions of key terms, we include a glossary at the
end of this report. Terms contained in the glossary appear in bold type in
the text the first time they are used in the major sections. For readers who
are interested in more detailed information on the topics covered here, we
also include a bibliography.
This report was prepared under the direction of Paul L. Posner, Managing
Director of Federal Budget Analysis, and Susan J. Irving, Director of
Federal Budget Analysis, who may be reached at (202) 512- 9573 if there are
any questions. Paul L. Posner Susan J. Irving Managing Director
Director Federal Budget Analysis
Federal Budget Analysis Strategic Issues Strategic Issues
Summary of Major Sections Personal Saving and The personal saving rate- as
measured in the National Income and Product Retirement Security
Accounts (NIPA)- reflects how much households in aggregate are saving from
their current disposable income. In evaluating personal saving, it is
important to distinguish between saving as a way for an individual household
to finance future consumption and saving as a way to finance
the nation?s capital formation. Strange as it may seem to the typical
household, capital gains on its existing assets do not contribute to saving
as measured in NIPA. That is because capital gains reflect a revaluation of
the nation?s existing capital stock and do not provide resources for
financing
investment that adds to the capital stock. Whereas employer contributions to
pension funds as well as pension funds? interest and dividend income are
part of personal income and contribute to personal saving, increases in the
market value of assets held by pension funds, for example, are not counted
as personal income and saving. Although an individual household can tap its
wealth by selling assets to finance consumption or accumulate other assets,
the sale of an existing asset merely transfers ownership; it does not
generate new economic output.
The personal saving rate has largely declined since the 1980s, plummeting in
recent years to levels not seen since the Great Depression, as shown in
figure S. 1. A low personal saving rate raises questions about whether
households have adequate resources to sustain their rate of spending. A
negative saving rate means that, in aggregate, households are spending more
than their current income by drawing down past saving, selling existing
assets, or borrowing.
Figure S. 1: Personal Saving Rate (1960- 2000)
Percent of disposable personal income 12
10 8 6 4 2 0 -2
1960 1965 1970 1975 1980 1985 1990 1995 2000
Source: Bureau of Economic Analysis, Department of Commerce.
Economists use several theories to explain what motivates people to save.
Despite a great deal of study, economists have found no single reason that
convincingly explains the decline in the personal saving rate. One possible
explanation is that surging household wealth in recent years contributed to
the virtual disappearance of personal saving. Since the mid 1990s, aggregate
household wealth has swelled relative to disposable personal income, largely
due to increases in the market value of households? existing assets (see
figure 1.2). Yet, despite the stock market boom of the 1990s, many
households have accumulated little, if any, wealth (see figure 1.3), and
half of American households did not own stocks as of 1998.
While Social Security provides a foundation for retirement income, Social
Security benefits replace only about 40 percent of pre- retirement income
for the average worker. As a result, Social Security benefits must be
supplemented by private pensions, accumulated assets, or other resources in
order for individuals to maintain a reasonable standard of living in
retirement compared to their final working years. Pensions, income from
accumulated assets, and earnings from continued employment largely determine
which households will have the highest retirement income (see figures 1.4
and 1.5). Pensions are not a universal source of retirement income, and more
than half of those working in 1998 lacked a pension plan.
While most families say they recognize the need to save for retirement,
fewer than half of those surveyed in early 2001 had tried to calculate how
much they need to save. Over the next 75 years, the elderly population will
nearly double as a share of the total U. S. population (see figure 1.6). As
more people live longer, there will be relatively fewer workers supporting
each retiree unless retirement patterns change. While today there are 3.4
workers for each Social Security beneficiary, by 2030, there will be only
about 2 workers paying taxes to support each beneficiary (see figure 1. 7).
Both Social Security and Medicare face long- term financing problems, and
the Social Security and Medicare?s Hospital Insurance trust funds eventually
will be exhausted as the baby boomers draw their benefits (see figures 1. 8
and 1.9). Absent reform, Social Security and Medicare costs would constitute
a
substantial drain on the earnings of future workers (see figure 1.10).
Anticipating potential benefit cuts, people could choose to save more now,
work longer to delay retirement, or experience a lower standard of living in
retirement. With an aging population and a slowly growing workforce, saving
more today and increasing the nation?s future economic capacity is
critical to ensuring retirement security in the 21st century. National
Saving
In the NIPA, national saving is the sum of saving by households, businesses,
Overview
and all levels of government. Gross national saving- which reflects
resources available both to replace old, worn out capital goods and to
expand the capital stock- has rebounded as a share of gross domestic product
(GDP) from its low in the 1990s but remains below the level of the 1960s
(see figure 2. 1). Depreciation as a share of GDP has increased slightly
over the past 4 decades, and net national saving- which excludes
depreciation- remains well below the 1960s average, as shown in figure S. 2.
Through much of the 1980s and early 1990s, federal deficits absorbed funds
saved by households and businesses and reduced overall national saving
available to finance private investment (see figure 2.2). Even as federal
surpluses have contributed to national saving in recent years, personal
saving has steadily declined as a share of GDP, and personal
dissaving in 2000 absorbed resources that otherwise would have been
available for investment. Although gross national saving in 2000 was low by
U. S. historical standards, U. S. gross national saving has generally been
lower than other major industrialized countries over the past 4 decades (see
figure 2.3).
Figure S. 2: Net National Saving as a Share of GDP (1960- 2000) Percent of
GDP 14
12 10
8 6 4 2 0 1960 1965 1970 1975 1980 1985 1990 1995 2000
Source: GAO analysis of NIPA data from the Bureau of Economic Analysis,
Department of Commerce.
National saving represents resources available for investment in the
nation?s stock of capital goods, such as plant, equipment, and housing. The
nation?s human capital and knowledge- forms of intangible capital- are not
part of the NIPA definitions of saving and investment. Also, NIPA focuses on
the incomes arising from current production of goods and services and, thus,
does not count revaluation of existing assets in national saving. Changes in
the market value of existing tangible and financial
assets, such as land and stocks, reflect expectations about the productive
potential of the underlying capital, but fluctuations in asset values may
not represent real, permanent changes in the nation?s productive capacity.
National Saving and National saving together with borrowing from abroad
provides the
the Economy resources for investment that can boost productivity and lead to
higher
economic growth and future living standards (see figure 3.1). Investment in
new capital is an important way to raise the productivity of the slowly
growing workforce as the population ages. Greater economic growth from
saving more now would make it easier for future workers to achieve a rising
standard of living for themselves while also paying for the government?s
commitments to the elderly. Economic growth also depends on education to
enhance the knowledge and skills of the nation?s work
force- the nation?s human capital- as well as research and development to
spur technological advances.
Even though national saving remains relatively low by U. S. historical
standards, economic growth in recent years has been high because more and
better investments were made. Each dollar saved bought more
investment goods, and a greater share of saving was invested in highly
productive information technology. Also, the United States was able to
invest more than it saved by borrowing from abroad (see figure 3.2).
Persistent U. S. current account deficits have translated into a rising
level of indebtedness to other countries, i. e., net U. S. holdings of
foreign assets (see figure 3.3). Many other nations currently financing
investment in the United States also will face aging populations and
declining national saving, so relying on foreign savers to finance a large
share of U. S. domestic
investment is not a viable strategy for the long run. Current saving and
investment decisions have profound implications for the nation?s level of
well- being in the future. Our simulations using a longterm economic growth
model show that, even assuming the United States could maintain national
saving constant at its 2000 share of GDP, future incomes would fall short of
the rise in living standards enjoyed by prior
generations whose income generally doubled every 35 years (see figures 3.4
and 3. 5). Saving more would improve the nation?s long- term economic
outlook, but this requires consuming less now.
National Saving and Federal fiscal policy affects the amount of federal
government saving and
the Government this in turn directly affects national saving. From the 1970s
through the mid 1990s, federal deficits absorbed a large share of private
saving and reduced
the amount of national saving available for investment (see figure 4.1).
Borrowing to finance these deficits added to the federal debt held by the
public. In recent years, federal surpluses added to national saving and
increased funds available for investment. So far, the federal government has
used surplus funds to reduce its debt held by the public. Accumulating
nonfederal financial assets, such as stocks, could be another way that
government saving could translate into resources available for investment,
but this idea is controversial. An additional dollar of government saving
and debt reduction does not automatically increase national saving and
investment by a dollar because changes in saving by households and
businesses will tend to offset some of the change in government saving.
While attention has focused on budget surpluses projected over the next
decade, the federal budget will increasingly be driven by one certainty- the
population is aging and there will be fewer workers supporting each
retiree. In our simulations, saving only the Social Security surpluses will
not be sufficient to accommodate both the projected growth in Social
Security and health entitlements as well as other important national
priorities in the long term (see figure 4. 2). Absent program changes,
saving the Social Security surpluses- and even the Medicare surpluses- is
not enough to ensure retirement security for the aging population without
placing a heavy burden on future generations. Social Security and health
spending alone eventually would exceed total federal revenue and squeeze out
most or all other spending (see figure 4. 3). Even if the entire unified
surplus were saved, our simulations show that the rise in living standards-
measured in terms of GDP per capita- would fall short of the rise enjoyed by
prior generations whose income generally doubled every 35 years (see figure
4.4). Reforming retirement and health entitlement programs is critical to
putting the federal budget on a more sustainable footing for the long term
and to freeing up future resources for other competing needs.
Although increasing government saving is the most direct way for the federal
government to increase national saving, budget surpluses also could be used
to finance federal investment intended to promote long- term economic growth
or to encourage personal saving. Whereas unified budget surpluses increase
national saving available for private investment,
increasing federal spending on national infrastructure, if properly designed
and administered, can be another way to increase the nation?s capital stock.
In addition, federal spending on education and research and
development- while not counting as investment in NIPA- can, if properly
designed and administered, promote the nation?s long- term productivity and
economic growth. The federal government also has sought to encourage
personal saving both to enhance households? financial security and to boost
national saving. But, developing policies that have the desired effect is
difficult. Tax incentives affect how people save for retirement but do not
necessarily increase the overall level of personal saving. Even with
preferential tax treatment for employer- sponsored retirement saving plans
and individual retirement accounts, the personal saving rate has steadily
declined. Economists disagree about whether tax incentives are effective in
increasing the overall level of personal saving. The net effect of a tax
incentive on national saving depends on whether the tax incentive induces
enough additional saving by households to make up for the lower government
saving resulting from the government?s revenue loss. In recent
years, policymakers have explored using government matching or creating new
individual accounts to encourage Americans to save more.
Congress found that a leading obstacle to expanding retirement saving has
been that many Americans do not know how to save for retirement, let alone
how much. The Department of Labor maintains an outreach program to raise
public awareness about the advantages of saving and to help educate workers
about how much they need to save for retirement. Other federal agencies also
play a role in educating the public about saving. Individualized statements
now sent annually by the Social Security
Administration to most workers aged 25 and older provide important
information for personal retirement planning, but knowing more about Social
Security?s financial status would help workers to understand how to view
their personal benefit estimates.
Restoring Social Security to sustainable solvency and increasing saving are
intertwined national goals. Saving for the nation?s retirement costs is
analogous to an individual?s retirement planning in that the sooner we
increase saving, the greater our benefit from compounding growth. The way in
which Social Security is reformed will influence both the magnitude and
timing of any increase in national saving. The ultimate effect of Social
Security reform on national saving depends on complex interactions between
government saving and personal saving- both through pension funds and by
individuals on their own behalf. Various proposals would create new
individual accounts as part of Social Security reform or in addition to
Social Security. The extent to which individual accounts would
affect national saving depends on how the accounts are funded, how the
account program is structured, and how people adjust their own saving
behavior in response to the new accounts.
The Medicare program is fiscally burdensome in its current form, and
Medicare spending (see figure 4. 5) is expected to drive federal government
dissaving over the long run. Given the aging of the U. S. population and the
increasing cost of modern medical technology, it is inevitable that demands
on the Medicare program will grow. The current Medicare program lacks
incentives to control health care consumption, and the cost of health care
decisions is not transparent to consumers. Although future Medicare costs
are expected to consume a growing share of the federal budget and the
economy, pressure is mounting to expand Medicare?s benefit package to cover
prescription drugs, which will add billions to Medicare program costs. In
balancing health care spending with other societal priorities, it is
important to distinguish between health care wants, which are virtually
unlimited; needs, which should be defined and addressed; and overall
affordability, which has a limit. Reducing federal Medicare spending would
improve future levels of government saving, but the ultimate effect on
national saving depends on how the private sector responds to the
reductions.
Key Issues In light of the virtual disappearance of personal saving,
concerns about U. S. reliance on borrowing from abroad to finance domestic
investment, and
the looming fiscal pressures of an aging population, federal decisionmakers
must consider how much of the anticipated budget surpluses to save, spend,
or use for tax reductions. Economic growth will help society bear the burden
of financing Social Security and Medicare, but it alone will not solve our
long- term fiscal challenge. To participate in the debate over how
to reform Social Security and Medicare, the public needs to understand the
difficult choices the nation faces.
Sect on i 1 Personal Saving and Retirement Security Q1. 1. What is the A1.
1. The personal saving rate is the most widely cited statistic about how
Personal Saving Rate much households save, but most people do not know what
the rate measures or what it means. First, it is necessary to distinguish
?saving? and What Does it
from ?savings.? In everyday terms, ?saving? means spending less than your
Mean? income and ?savings? are the assets accumulated over time. To better
distinguish between these concepts in this report, the term ?saving? means
the money set aside from current income for future consumption- i. e.,
how much of each period?s income is saved rather than spent. The terms
?assets accumulated? and ?wealth? are used for the cumulative stock of
resources built over time- what people commonly think of as ?savings.?
The personal saving rate, as measured in the National Income and Product
Accounts (NIPA), 1 reflects how much American households are setting aside
from current income. Under NIPA, personal saving is what is left over from
personal income after taxes and personal spending for goods
and services. Disposable personal income is the income available for
personal spending and saving after federal, state, and local taxes as well
as Social Security and Medicare payroll taxes are paid. The NIPA personal
saving rate is calculated as the ratio of personal saving to disposable
personal income.
To understand what the personal saving rate means, it is helpful to
understand the NIPA definitions of ?persons,? personal income, and personal
spending. For NIPA purposes, ?persons? include not only individuals but also
nonprofit institutions primarily serving individuals,
pension funds, and private trust funds. NIPA personal income includes wages
and salaries; interest and dividend income; rental income; 2 proprietors?
income; government transfer payments, such as Social Security, veterans, and
unemployment benefits; and employer contributions to pension plans as well
as group health and life insurance
plans. Contributions to traditional defined benefit pension plans and
defined contribution plans- such as 401( k) plans- together with pension
1 The national income and product accounts (NIPA) are the comprehensive set
of accounts that show the composition of production and the distribution of
incomes earned in production. NIPA data reflect production in the United
States as well as U. S. transactions with the rest of the world. NIPA data
are prepared by the Bureau of Economic Analysis of the Department of
Commerce. For more information, see Eugene P. Seskin and Robert P. Parker,
?A Guide to the NIPA?s,? Survey of Current Business, Vol. 78, No. 3 (March
1998), pp. 26- 68. 2 NIPA treats the net rental value on owner- occupied
housing as personal income.
funds? interest and dividend income represent an important component of NIPA
personal income and saving. 3 Benefits paid by pension plans are not a
component of NIPA personal income, although pension benefits represent an
important means for many retirees to finance consumption (see Q1.8). NIPA
personal spending includes, for example, food, clothing, rent, utilities,
and medical care; consumer interest payments; and consumer durables, such as
cars and major appliances. 4
Strange as it may seem to the average household, changes in the value of
existing assets, such as stocks, bonds, or real estate, do not contribute to
NIPA personal income and saving. That is because capital gains reflect a
revaluation of the nation?s existing capital stock and do not provide
resources for financing investment that adds to the capital stock. Under the
current NIPA methodology, realized gains do not count as personal income,
but any taxes paid on such gains reduce disposable personal income and thus
personal saving. Although the NIPA personal saving rate is the measure most
frequently cited by analysts and the media, an alternative macroeconomic
measure of personal saving is available from the Federal Reserve?s Flow of
Funds Accounts (FFA). 5 Whereas NIPA measures saving as what is left over
from personal income after taxes and personal spending, FFA measures saving
as the net increase in households? financial and tangible assets less
the net increase in households? liabilities. Both the NIPA and FFA measures
count household purchases of houses as saving. The FFA personal saving rate
also counts household purchases of consumer durables as saving and, thus, is
somewhat higher than the NIPA personal saving rate. Both the NIPA and FFA
macroeconomic measures focus on saving from the economy?s
current production and do not include changes in the market value of
households? existing portfolios. In this report, we use the NIPA measure of
3 A defined benefit pension plan generally provides benefits based on a
specific formula linked to the worker?s earnings and tenure. Typically, a
defined benefit plan is funded completely by the employer, who bears the
investment risk of such as arrangement. Under a defined contribution plan, a
percentage of pay is contributed by the employer to an account for each
worker, with the worker bearing the investment risk. The increasingly
popular 401( k) plans also allow contributions by workers.
4 This refers to spending by ?persons? in NIPA and not just by individuals.
5 The Flow of Funds Accounts (FFA) measure the acquisition of physical and
financial assets throughout the U. S. economy and the sources of funds used
to acquire the assets. For more information, see Guide to the Flow of Funds
Accounts, Vol. 1, Board of Governors of the Federal Reserve System (2000).
personal saving because it more closely represents the resources available
from households for the nation?s capital formation. For the economy as a
whole, the personal saving rate provides a measure of how much households
are saving compared to current disposable personal income. A positive saving
rate means that American households in aggregate are saving. A low personal
saving rate means that households in
aggregate are spending virtually all of their current income. A negative
personal saving rate means that, in aggregate, American households are
spending more than their current income- or ?dissaving.? Given that the
personal saving rate is an aggregate measure, some individuals might be
saving a lot even while others are drawing down past saving, selling
existing assets, or borrowing to finance their current consumption.
Q1.2. Why Measure
A1. 2. For the economy as a whole, personal saving can be a vital source of
Personal Saving? the nation?s saving available to finance private and
government investment. NIPA personal saving is widely recognized by
economists as the key measure of the resources that households contribute to
national saving. A
low personal saving rate- unless offset by relatively higher saving by
businesses and/ or government or by borrowing from abroad- limits how much
the nation can invest and so ultimately limits future economic growth. A low
personal saving rate can raise questions about whether current generations
are setting aside enough to sustain the nation?s
productive capacity, especially if the other components of national saving
are not correspondingly higher. Some analysts are concerned that the demand
for household consumption is in part fueling the U. S. trade deficit.
Section 2 discusses the trend and the components of national saving, and
section 3 explains how saving affects long- term economic growth and living
standards.
The personal saving rate also has implications for Americans? ability to
sustain their current rate of spending. Personal spending represents about
two- thirds of the U. S. economy. A low personal saving rate raises
questions about whether Americans have adequate resources to withstand a
financial emergency such as unemployment in the event of an economic
downturn. In addition, many policymakers and analysts have questioned
whether American households are saving enough to ensure their retirement
security.
Having said this, it is important to recognize that macroeconomic measures
such as the NIPA personal saving rate do not provide a complete picture of
the finances of individual households. A household?s capacity to consume
depends on both its current income and its wealth. One way to measure
households? wealth is net worth, or the difference between households?
assets and their liabilities. 6 The change in households? net worth is
broader
than the NIPA or FFA measures of personal saving and includes both the flow
of saving from current income plus any increase (or decrease) in the market
value of existing assets such as houses and stocks. For the economy as a
whole, however, the change in households? net worth due to revaluation of
households? existing assets does not represent resources
available to invest in the nation?s capital stock. 7 Q1.3. How Has the
A1. 3. Figure 1. 1 shows the personal saving rate- expressed as a Personal
Saving Rate percentage of disposable personal income- over the past 4
decades. The personal saving rate averaged 8. 3 percent over the 1960s and
increased to Changed Over Time? an average of 9.6 percent over the 1970s.
Within each of those 2 decades, annual saving rates were relatively steady,
although they ranged from a low of 7.2 in 1960 to a high of 10.7 percent in
1974. Over the 1980s, the personal saving rate was slightly lower than in
the 1970s. After peaking at 10. 9 percent in 1982, the rate generally
declined over the 1980s, dropping as low as to 7. 3 percent in 1987; for the
decade, the rate averaged 9.1 percent. The personal saving rate rebounded
from 1987 to 1992 when it reached 8.7
percent. Since then, the personal saving rate has steadily declined and
averaged only 5.9 percent over the 1990s. In the late 1990s, the personal
saving rate dropped below the postwar low of 4.7 percent in 1947. In 1999,
the personal saving rate plunged to 2.2 percent- an annual rate not seen
since the Great Depression. As shown in figure 1.1, the personal saving rate
in 2000 was estimated to be -0.1 percent. 8 With the personal saving rate
around zero or negative, economists have questioned how to interpret the
decline; see question 1. 7. 6 Households? aggregate net worth is available
from the Flow of Funds Accounts? balance sheet for the household sector. 7
For further discussion of whether revaluation of existing assets counts as
saving, see questions 1.7 and 2. 4. 8 The last time the personal saving rate
was negative was in 1932 (- 0. 8 percent) and 1933 (- 1.5 percent).
Figure 1. 1: Personal Saving Rate (1960- 2000) Percent of disposable
personal income 12
10 8 6 4 2 0 -2
1960 1965 1970 1975 1980 1985 1990 1995 2000
Source: Bureau of Economic Analysis, Department of Commerce.
Q1.4. Why Do People
A1. 4. Before trying to answer why people are saving less, let?s start with
Save? the question of what motivates people to save. People save for a
variety of reasons such as buying a house, taking a vacation, providing a
college education for their children, or preparing for their own retirement.
They
may also save for general reasons such as for a ?rainy day? or to leave
money to their heirs. People with seemingly identical family and income
situations may make different saving choices- some may save a great deal
while others save little, if anything. Economists and other analysts use
several theories in analyzing how individuals and households decide how much
of their current income to save for the future.
The standard theory for explaining personal saving is the life- cycle model.
9 The basic hypothesis is that people save and accumulate assets to smooth
out their consumption and standard of living over their lifetimes. 9 A
complementary theory of personal saving is the permanent- income hypothesis.
Generally, people save a greater share of income when their annual income is
higher than their expected long- run permanent income and save a smaller
share when their income is lower than the expected long- run level.
Young people entering the workforce, anticipating that their incomes will
increase over their careers, save little and may borrow to finance current
spending. Workers in their peak earning years save to repay past borrowing
and to accumulate assets for retirement. The life- cycle model predicts that
saving is hump- shaped by age so that wealth accumulation peaks just before
retirement. Upon leaving the workforce, the elderly run down their
wealth- or ?dissave.? In saving for retirement, individuals theoretically
take into account not only their expected retirement age and the number of
years they expect to live in retirement but also project their expected
income, real returns on assets accumulated, and inflation over their
lifetime.
Although providing for retirement is a powerful motive for saving, the life-
cycle model in its simplest form cannot fully explain how people decide to
save. Faced with the difficulty of reconciling the standard life- cycle
model with available empirical data, economists have examined other motives
that may help explain saving behavior. While some evidence
supports each motive, economists do not have a unified theory that fully
explains how people choose to save. 10 In general, the other major
incentives or reasons why people save are categorized as follows:
Precautionary saving motive. This is saving to protect against unexpected
expenses or possible emergencies, such as unemployment or illness. In
particular, individuals who face greater uncertainty about
their income and those who are risk- averse may tend to save more for a
?rainy day.? Precautionary saving may be over- and- above basic life- cycle
saving for retirement. Some people may choose to save enough to maintain a
buffer- stock or contingency reserve during their early working years and
defer retirement saving until their 40s or 50s. 11
Bequest saving motive. This is saving beyond basic life- cycle saving for
retirement. Some people may choose to save more in order to bequeath the
accumulated wealth to future generations. The desire to leave a bequest may
explain why the elderly do not fully deplete their wealth and some even
continue to save during retirement. To some
10 For a comprehensive review of personal saving literature, see Martin
Browning and Annamaria Lusardi, ?Household Saving: Micro Theories and Micro
Facts,? Journal of Economic Literature, Vol. XXXIV, No. 4 (1996), pp. 1797-
1855.
11 Christopher D. Carroll, ?Buffer- Stock Saving and the Life Cycle/
Permanent Income Hypothesis,? Quarterly Journal of Economics, Vol. CXII, No.
1 (1997), pp. 1- 56.
extent, bequests may be unplanned and thus reflect unspent retirement and
precautionary saving.
? Big ticket? saving motive. This is relatively short- term saving to
accommodate a mismatch between current income and expenses during the life-
cycle. Some people save to pay for big- ticket items such as cars, other
consumer durables, or vacations. Some must save in advance because they
cannot borrow, while others may prefer to save and avoid borrowing. Another
big ticket is the down payment to buy a home;
households largely borrow to buy homes and later save by repaying their
mortgages. Paying for postsecondary education is a big ticket above and
beyond life- cycle saving for retirement. Given that people save for
different purposes, increasing the rate of return on saving does not
necessarily motivate people to save more. A higher rate of return has two
opposing effects on personal saving. On the one hand, a higher rate of
return may encourage people to save more because future spending becomes
less costly relative to spending today- the substitution effect. On the
other hand, given a higher rate of return,
people need to save less now to finance a given level of future consumption.
This reduced incentive to save as real rates of return increase is called
the income effect. 12 How people react to an increase in the rate of return
depends not only on their preferences about spending today versus spending
in the future but also on the real after- tax rate of return- that is, the
rate expected after taking into account inflation and taxes. 13 Not everyone
behaves like a life- cycle saver. Many people plan over shorter horizons- a
few years or even paycheck- to- paycheck. Instead of trying to forecast
lifetime income and economic conditions in the distant future,
people may use simple rules of thumb, such as saving a fixed share of their
income or avoiding debt. 14 Many people are ?target savers? who aim for a
fixed level of wealth or ratio of wealth to income in order to achieve 12
Textbooks in microeconomics discuss these effects in detail. For a brief
summary of substitution and income effects, see N. Gregory Mankiw,
Macroeconomics, 4th Edition
(New York, N. Y.: Worth Publishers, 2000), pp. 446- 447. 13 See section 4
for a discussion of federal tax incentives for personal saving.
14 People can save for retirement using rules of thumb, such as saving a
fixed percentage of income in an employer- sponsored retirement saving plan
or saving $2, 000 each year in an individual retirement account (IRA).
specific goals such as retirement, college education, a new car, or a
vacation. Once target savers reach their wealth target, they may feel no
need to save more. Individuals may use mental accounts- and even separate
bank accounts- to earmark the money saved for different uses. To ensure
saving discipline, people may use ?contractual? or automatic
mechanisms, such as payroll deductions, to save. A mortgage is a key form of
contractual saving in which the homeowner?s commitment to repay the
principal borrowed compels future saving. Even though economists have
various theories to explain why people choose to save, some people do not
save at all. 15 Low- income and even some moderate- income households may
feel that they are unable to save. Others may be unwilling to save. Some
people may be impatient and they may discount the future so heavily that
retirement saving seems irrelevant compared to current spending.
Q1.5. Why Has the
A1. 5. No one is sure why the personal saving rate has declined. Despite a
Personal Saving Rate great deal of study, economists have found no single
reason that
convincingly explains the decline. Instead, research points to a Declined?
combination of factors that influence the personal saving rate. These
include- but are not limited to- demographics, government programs for the
elderly, credit availability, and expectations about future income and
wealth. 16
Demographics. Under the basic life- cycle model, one would expect that an
increase in the elderly as a percentage of the total population would reduce
the aggregate saving rate. However, empirical research has found that saving
has declined across most age groups. There is no
15 For more information, see Annamaria Lusardi, ?Explaining Why So Many
Households Do Not Save,? Working Paper Series 00. 1, Dartmouth College and
The University of Chicago (January 2000); and Annamaria Lusardi, Jonathan
Skinner, and Steven Venti, ?Saving Puzzles and Saving Policies in the United
States,? Working Paper No. 8237 (Cambridge, MA: National Bureau of Economic
Research, April 2001). 16 Martin Browning and Annamaria Lusardi, in
?Household Saving: Micro Theories and Micro Facts,? Journal of Economic
Literature, Vol. XXXIV, No. 4 (1996), pp. 1797- 1855, identified 11 possible
explanations offered for the decline in personal saving. Jonathan Parker, in
?Spendthrift in America? On Two Decades of Decline in the U. S. Saving
Rate,? Worki ng Paper No. 7238 (Cambridge, MA: National Bureau of Economic
Research, July 1999),
examined seven possible explanations for the decline.
consensus that the aging of the U. S. population caused the decline in the
personal saving rate.
Programs for the elderly. Medicare and Social Security affect people?s
incentives to save for their old age. 17 Medicare may reduce the elderly?s
perceived needs for precautionary saving to cover medical expenses. Social
Security can have opposing effects on personal saving. 18 On the one hand,
Social Security benefits reduce the amount people need to
save on their own for retirement. On the other hand, Social Security may
induce personal saving by encouraging workers to save for earlier
retirement- the retirement effect. In a sense, Social Security makes
retirement an attainable goal and thus can prompt individuals to plan for
retirement. People may save more than they would have otherwise to
supplement their Social Security benefits with additional retirement income
or because they want to retire before they are eligible for Social
Security and Medicare benefits. Nevertheless, some evidence suggests that
the existence of Social Security may have reduced personal saving, and
numerous studies have attempted to estimate the saving offset. 19 However,
given that Social Security was established in 1935 and
Medicare in 1965, it seems unlikely that these programs were major
contributors to the decline in the personal saving rate over the 1980s and
1990s.
Credit availability. Improved access to credit reduces the need to save
before big- ticket purchases. Over the last 20 years, credit cards have
become widely available, and a smaller down payment is needed to buy a
house. Easier access to credit may have contributed somewhat to the saving
decline. The ability to borrow together with a rise in the number of two-
earner families may have reduced the perceived need for precautionary
saving.
17 Means- tested government programs, such as Medicaid, also may affect the
incentive to save. For example, requirements specifying low levels of
financial assets in order to qualify for government benefits may discourage
personal saving. 18 Employer- sponsored pension plans also affect
individuals? incentives to save for retirement on their own. As noted above,
employer pension contributions as well as pension funds? interest and
dividend income are part of NIPA personal income and saving.
19 For more on Social Security, see Congressional Budget Office Memorandum,
Social Security and Private Saving: A Review of the Empirical Evidence (July
1998).
Expectations about future income and wealth. People decide how much to
save based not only on their current income but also on their expectations
about their future lifetime income and wealth. Since March
1991, the United States has enjoyed its longest postwar economic expansion-
unemployment and inflation have remained relatively low and stable, and the
stock market has achieved record highs. Over the 1990s, the booming economy
and stock market may have lulled people into a sense of complacency that
good times were here to stay. People may have saved less because they were
confident about future income prospects, and households were wealthier
because of gains on their existing assets. As discussed below in question
1.6, increased household
wealth in recent years appears to have contributed to the plunge in the
personal saving rate over the late 1990s. Q1.6. What Is the
A1. 6. That Americans save little but households are wealthier is a paradox
Relationship Between that can be confusing. It is widely known that saving
from current income
is the way to accumulate assets and repay past borrowing, thus increasing
Personal Saving and net worth. The flow of saving is essential to
accumulating a stock of Wealth?
wealth- as a general rule someone who never saves will have no wealth. 20
Conversely, dissaving- spending more than current income- reduces the stock
of wealth because amounts saved in the past must be drawn down, existing
assets sold, or borrowing increased. Not only does saving affect the stock
of wealth, but wealth in turn influences the choice to save.
Under the life- cycle model, people save to accumulate assets to finance
future consumption, and attaining their wealth- to- income target depends in
part on the rate of return anticipated. Assets accumulated can generate
income in the form of interest and dividends that in turn may be saved.
Moreover, the change in net worth not only includes the saving flow from
current income but also reflects changes in the market value of assets
accumulated by households. Economists generally agree that saving and
wealth are inversely related: increased wealth increases an individual?s
ability to consume in the future and thus reduces the incentive to save from
current income. In other words, when households? existing assets increase in
value, people can save less from current income and still achieve their
wealth- income target. If households? existing assets lose value, people
have to save more to attain their wealth- income target. While the idea of
wealth 20 A nonsaver could get lucky and receive an inheritance or win the
lottery.
targets may seem abstract to the average household, increased wealth clearly
influences personal saving through traditional defined- benefit pension
plans. For example, gains on existing assets reduce the amount of an
employer?s contribution necessary to fund its pension liability.
Figure 1.2 shows that even as the personal saving rate has fallen, the ratio
of aggregate household net worth to disposable personal income (? the
wealth- income ratio?) has risen in recent years. Over most of the last 4
decades, households? wealth- income ratio did not fluctuate widely from year
to year. Over the 1960s through the mid 1990s, households? aggregate
wealth ranged from a high of 5.3 times households? disposable income in 1961
and 1996 to a low of 4.3 in 1974. Since 1996, households? wealthincome ratio
has increased rapidly- peaking at 6. 4 in 1999. Although the surge in
household wealth contributed to the plunge in the personal saving rate in
recent years, economists agree that increased wealth does not fully explain
the timing or magnitude of the decline over the 1980s and 1990s.
Figure 1. 2: Comparison of the Personal Saving Rate and the Wealth- Income
Ratio (1960- 2000)
Personal saving percent of Household wealth to disposable disposable
personal income
personal income ratio 12
8 10
8 6
6 4 4
2 2
0 -2
0 1960 1965 1970 1975 1980 1985 1990 1995 2000
Personal saving rate Household wealth- to- income ratio
Source: Bureau of Economic Analysis, Department of Commerce, and GAO
analysis of Flow of Funds Accounts data from the Federal Reserve Board of
Governors.
Over the 1990s, aggregate household net worth doubled in nominal terms.
Moreover, the mix of assets held by American households has changed
dramatically. Traditionally, real estate has represented households? largest
asset; while the total value of households? real estate holdings grew by 50
percent over the 1990s, real estate steadily declined as a share of
households? total assets from 31 percent in 1990 to 23 percent in 1999.
Meanwhile, the total value of households? stock holdings grew more than
fourfold over the 1990s, and stocks as a share of households? total assets
increased from 10 percent in 1990 to 28 percent in 1999. 21
As figure 1.2 shows, household wealth accumulation has swelled relative to
disposable personal income even as the flow of saving from current income
has dwindled. Recent research estimated that the growth in households?
aggregate net worth over the 1960s and during the early 1990s was roughly
equally divided between traditional saving and the increase in the nominal
value of existing assets. Over the 1970s and 1980s, the increase in the
nominal value of existing assets was estimated to be about twice as large as
the flow from saving. 22 In recent years, nominal gains on households?
assets- particularly financial assets- have dwarfed the saving flow. For
example, in 1999, even though personal saving was less than $150 billion,
households? wealth still grew by $5. 2 trillion (14 percent). As Americans
learned in 2000 when the stock market declined from its peak value, what
goes up can come down. Aggregate household wealth in 2000 declined for the
first time since data were available in 1945. According
to the latest estimates, personal saving in 2000 was -$ 8.5 billion, but
households? wealth declined by nearly $842 billion (2 percent) largely as a
result of the drop in the market value of households? stock holdings. The
total value of households? stock holdings declined by nearly 18 percent in
2000, and stocks as a share of households? total assets declined to less
than
24 percent. Households? wealth- income ratio dropped from its 1999 peak of
6.4 to 5.9 in 2000 but remains relatively high compared to the 1960s through
the mid 1990s.
The basic life- cycle model of saving holds that people are trying to smooth
their standard of living over their lifetime. Therefore, life- cycle savers
21 Households hold stocks directly as well as indirectly through mutual
funds, pension funds, life insurers, and trusts. 22 William G. Gale and John
Sabelhaus, ?Perspectives on the Household Saving Rate,? Brookings Papers on
Economic Activity (1: 1999), pp. 181- 224.
would not treat gains on existing assets as a windfall to spend today. The
theory predicts that anticipated wealth changes would not affect planned
lifetime spending. Likewise, changes in wealth perceived to be temporary due
to fluctuating market values of assets would not affect planned spending.
However, people can respond to an unexpected increase in wealth that they
think will be permanent by spending more of their current income. This
change in spending in response to a change in wealth is called
the wealth effect. Some people may tap their wealth by selling stocks or
borrowing against their home equity to boost current consumption. The wealth
effect can also work in the opposite direction. A dramatic drop in household
wealth- for example, due to an extended downturn in the stock market- could
eventually dampen household consumption and lead to an increase in saving.
The increase in spending at any one time due to the wealth effect would be
expected to be small, given a life- cycle saver?s tendency to spread
consumption of a significant change in wealth over time. Researchers
estimate that each dollar in increased wealth increases consumption by a
few cents. Estimates of the wealth effect range from 1 to 7 cents, and the
typical estimate is about 3 to 4 cents. A recent study estimated that a
wealth effect of 3 to 4 cents could explain two- fifths to about half of the
decline in the personal saving rate since 1988. 23 23 Annamaria Lusardi,
Jonathan Skinner, and Steven Venti, ?Saving Puzzles and Saving Policies in
the United States,? Working Paper No. 8237 (Cambridge, MA: National Bureau
of Economic Research, April 2001).
Q1.7. If Household
A1. 7. With the personal saving rate around zero or negative, economists
have questioned the relevance of the NIPA personal saving measure. 24 Wealth
Has Increased, Wealth measures, which reflect the value of existing assets
based on Does It Matter if the
current market conditions, show a fundamentally different trend, as Personal
Saving Rate illustrated in figure 1. 2. 25 Although these supplementary
measures may Has Declined?
explain why individual households may choose to save less, the NIPA personal
saving rate shows that people are consuming virtually all of their current
income and saving little for the future. In evaluating the level of personal
saving, it is important to distinguish between saving as a source to finance
the nation?s capital formation and saving as a way for individual households
to finance future consumption. A key difference between measuring the
nation?s saving and gauging a household?s finances is the treatment of
changes in the market value of existing assets. As discussed in section 2,
it is saving from current income- not gains on existing assets- that is key
to financing capital investment and increasing the nation?s capacity to
produce goods and
services. Although an individual household can tap the increased value of
its assets to finance additional consumption or accumulate other assets by
selling an asset to another household, the transaction itself shifts
ownership of the existing asset and does not generate new economic output.
Thus, the nation as a whole may not be able to consume and invest more. 26
Moreover, all households may not be able to simultaneously tap
their apparent wealth to finance consumption because large- scale asset
sales could tend to depress market values.
24 To some extent, spending wealth- like spending income- drives down the
reported personal saving rate. As discussed in Q1. 1, realized gains do not
count as personal income, but any taxes paid on such gains reduce disposable
personal income and thus saving. If households then spend a portion of their
realized gains, this spending further reduces the saving residual and the
saving rate.
25 For alternative measures including changes in the market value of
households? existing assets, see William G. Gale and John Sabelhaus,
?Perspectives on the Household Saving Rate,? Brookings Papers on Economic
Activity (1: 1999), pp. 181- 224; and Richard Peach and Charles Steindel, ?A
Nation of Spendthrifts? An Analysis of Trends in Personal and Gross Saving,?
Current Issues in Economics and Finance, Vol. 6, No. 10 (September 2000). 26
However, the sale of assets to foreigners can affect the nation?s ability to
consume and invest.
Although the personal saving rate is low, economists do not agree on whether
this is a problem or whether private saving is inadequate to finance
domestic investment. On the one hand, some economists are concerned that low
personal saving is undercutting national saving and leaving the United
States more dependent on foreign capital inflows to maintain domestic
investment. 27 On the other hand, other economists have
observed that strong consumer spending- boosted by low saving and the wealth
effect discussed above- has fueled the surge in business investment and
strong economic growth in the U. S. economy in recent years. Some economists
and analysts are concerned that individual households are living beyond
their means and some may have been
counting on continued high gains on their assets to finance future
consumption. If such expectations are not realized and, for example, there
is a sustained stock market downturn or an economic downturn, households may
have to scale back their consumption. This in turn could potentially slow
economic growth given that household spending represents about two- thirds
of the U. S. economy. However, some
researchers suggest that the risk of a collapse in household spending that
would hurt overall economic growth is exaggerated because households have
greater resources than the personal saving rate suggests. 28
Although the aggregate wealth- income ratio rose in recent years, wealth is
fairly concentrated and not all households have experienced gains in the
stock market. To gauge the financial situation of individual households
requires going beyond aggregate household data. The Survey of Consumer
Finances provides detailed data on family net worth and holdings of assets
and liabilities. 29 Figure 1. 3 shows that many households have accumulated
little, if any, net worth. As one might expect, high- income families
typically have accumulated more net worth than low- income families.
27 See Jagadeesh Gokhale, ?Are We Saving Enough?? Economic Commentary,
Federal Reserve Bank of Cleveland (July 2000). 28 Richard Peach and Charles
Steindel, ?A Nation of Spendthrifts? An Analysis of Trends in Personal and
Gross Saving,? Current Issues in Economics and Finance, Vol. 6, No. 10
(September 2000).
29 The Survey of Consumer Finances is a triennial survey of U. S. families
sponsored by the Board of Governors of the Federal Reserve with the
cooperation of the Department of Treasury. For results from the latest
Survey of Consumer Finance, see Arthur B. Kennickell, Martha Starr- McCluer,
and Brian J. Surette, ?Recent Changes in the U. S. Family Finances: Results
from the 1998 Survey of Consumer Finance,? Federal Reserve Bulletin (January
2000).
Figure 1. 3: Family Net Worth by Income Level in 1998 Median family net
worth (dollars) 600,000
$510,800
500,000 400,000 300,000 200,000
$152,000
100,000
$60,300 $24,800 $3,600 0
Less than $10K $10K-$ 25K $25K-$ 50K $50K-$ 100K $100K and over Family
income before taxes
Less than $10K $10K-$ 25K $25K-$ 50K $50K-$ 100K $100K and over Percentage
12.6% 24.8% 28.8% 25.2% 8.6% of families Note: Survey of Consumer Finances
collects information on total cash income before taxes for the
calendar year preceding the survey. Source: Federal Reserve?s 1998 Survey of
Consumer Finances (January 2000).
Although a great deal of attention has been paid to the wealth effect from
the stock market boom of the 1990s, half of American households did not own
stocks as of 1998, according to the 1998 Survey of Consumer Finance. For
most families, real estate remains the most important asset- twothirds of
households owned their homes in 1998. The rise in consumer borrowing over
the 1990s has raised concerns that households are overextended. The ratio of
total debt payments to total income is a common measure of a household?s
debt burden. According to one estimate using 1998 Survey of Consumer
Finances data, the aggregate debt burden
was nearly 15 percent of income, but nearly 13 percent of families had debt
burdens greater than 40 percent. 30 About 10 percent of households did not
30 Arthur B. Kennickell, Martha Starr- McCluer, and Brian J. Surette,
?Recent Changes in the U. S. Family Finances: Results From the 1998 Survey
of Consumer Finance,? Federal Reserve Bulletin (January 2000).
even have a checking account. These households might be seen as outside the
financial mainstream and thus unlikely to be saving.
The key to accumulating wealth for retirement is simply the choice to save,
although investment choices also matter. Some workers choose to save over
their working lives for retirement while others choose to save little and
spend more while working. Recent research found that even households with
similar lifetime earnings approach retirement with vastly different levels
of wealth. 31 Even though many low- income households
have accumulated no wealth as they approach retirement, the researchers
found that some low- income households had managed to accumulate fairly
sizeable wealth. Moreover, the researchers found that a significant portion
of higher- income households save little. Choices about whether to invest,
for example, in the stock market or in less risky, lower- yielding assets
such as a bank saving account also make a difference. Regardless of income
level, those households that do not save much will have few assets on which
to enjoy gains.
Q1.8. How Do Social
A1. 8. Traditionally, retirement income was characterized as a ?three-
legged Security and Personal
stool? comprising Social Security, employer pensions, and individuals? own
saving for retirement. In 1998, Social Security benefits contributed 38
Saving Compare as percent of the elderly?s cash income. As figure 1.4 shows,
saving, both Sources of Retirement
through employer- sponsored pension plans and by individuals on their own
Income?
behalf, provides a significant part of retirement income. Pension benefits
accounted for 19 percent of the elderly?s cash income in 1998 and income
from individuals? accumulated assets for another 20 percent. In addition,
the elderly and their spouses may supplement their retirement income by
continuing to work. As shown in figure 1.4, earnings from continued
employment represent a fourth leg on the retirement- income stool.
31 Steven F. Venti and David A. Wise, ?Choice, Chance, and Wealth Dispersion
at Retirement,? Working Paper No. 7521 (Cambridge, MA: National Bureau of
Economic Research, February 2000).
Figure 1. 4: Share of Elderly Households? Income by Source of Income, 1998
Social Security 37.6%
Earnings 20.7%
Other c 3%
Pensions b 18.7% Income from
assets a 19.9%
Note: Elderly households are individuals and married couples with at least
one member aged 65 and older. Aggregate income represents the sum of cash
income from reasonably regular sources- before taxes and Medicare premiums.
This retirement income definition differs somewhat from the NIPA personal
income definition discussed in Q1. 1.
a Income from accumulated assets includes interest, dividends, royalties,
income from estates and trusts, and rent. Capital gains (or losses) and
lump- sum or one- time payments such as life insurance settlements are
excluded. Cash rental income differs from NIPA rental income, which includes
the imputed net rental value on owner- occupied housing. b Benefit payments
(not lump- sum payments) from private pensions or annuities and government
employee pensions. NIPA personal income includes pension contributions by
employers in the year income is earned, and benefits paid at retirement are
not a component of NIPA income.
c ?Other? income includes SSI, unemployment and workers? compensation,
alimony, child support, and other public assistance. Noncash transfers such
as food stamps or health care benefits are not reflected.
Source: GAO analysis of data from Social Security Administration, Income of
the Population 55 or Older, 1998 (March 2000).
Currently, many financial planners advise people that they will need to
replace about 70 to 80 percent of their pre- retirement income to maintain
their pre- retirement living standard. 32 According to the Social Security
Administration, Social Security benefits currently replace about 39 percent
of pre- retirement income for a worker with average wages ($ 32,105 in
2000). Given Social Security?s progressive benefit formula, however, the
replacement rate varies by income. Social Security currently replaces about
53 percent for low earners and about 24 percent for those who earned the
taxable maximum ($ 72, 600 in 2000). 33
While Social Security provides a foundation for retirement income, pensions,
income from accumulated assets, and current earnings largely determine which
households will have the highest retirement incomes, as figure 1.5 shows.
Social Security makes up over 80 percent of the retirement income for the
first (lowest) and second income quintiles. For the third and fourth
quintiles, Social Security still serves as the most important source of
retirement income. For the highest quintile, pensions
are a more significant income source than Social Security, but pensions
represent a smaller share for this group than either income from accumulated
assets or earnings. It is important to note that these data reflect in part
the fact that pensions are not a universal source of retirement income as is
Social Security. In 1998, about 48 percent of retirees lacked pension income
or annuities, and about 53 percent of those employed lacked a pension plan.
34
32 The replacement rate can be calculated as a simple percentage of pretax
income. Or, the replacement rate considered to be adequate can be computed
in a more sophisticated way, netting out Social Security taxes, other taxes,
or working expenses that will not be paid in retirement. Thus, desired or
target replacement rates can vary significantly depending on
income level and other factors. 33 These replacement rates are based on
applying Social Security benefit rules to hypothetical retired workers age
65 in 2001 who had steady earning levels over their careers. The average
earner represents a worker who earned the average of covered workers under
Social Security each year. The low earner earned 45 percent of this average.
The maximum earner had earnings equal to the maximum taxable amount each
year.
34 Pension Plans: Characteristics of Persons in the Labor Force Without
Pension Coverage (GAO/ HEHS- 00- 131, August 22, 2000).
Figure 1. 5: Pensions, Income from Accumulated Assets, and Earnings
Determine Who Had Highest Retirement Incomes, 1998 Median elderly household
income (doll ars) 70,000
60,000
$59,685
50,000 40,000 30,000
$28,765
20,000
$17,965 $11,220
10,000
$6,510
0 First Second Third Fourth Fifth
Income Level (Quintile)
Other Earnings Pensions Income from accumulated assets
Social Security Note: Median incomes for each quintile are GAO estimates.
Social Security income for the highest fifth may be lower than for the
previous fifth because, among other possible reasons, some elderly workers
or their spouses may not yet be collecting benefits. Elderly households are
individuals and married
couples with at least one member aged 65 and older. See notes to figure 1.4
for descriptions of income types. Source: GAO analysis of data from Social
Security Administration, Income of the Population 55 or Older, 1998 (March
2000).
Personal saving now can contribute substantially to future retirement
income, as illustrated in figure 1.5. While most families say they recognize
the need to save for retirement, many do not save in any systematic way. The
Congressional Research Service recently reported that in 1997 nearly 63
percent of workers between the ages of 25 and 64 replied that they did
not own a retirement saving account, such as an employer- sponsored 401( k)
or an individual retirement account (IRA). 35 According to the 2001
Retirement Confidence Survey, 36 about 46 percent of American workers have
not tried to calculate how much they need to save for retirement. The survey
also found that many people- particularly those planning to work the
longest- underestimate how long they will live in retirement. Half of men
reaching age 65 can expect to be alive at age 82 and half of women
reaching age 65 can expect to be alive at age 86; some will live to age 100
and older. Yet, 15 percent of those surveyed expect their retirement will
last for 10 years or less, and another 11 percent believe their retirement
will last less than 20 years. In addition, many workers are unaware that the
retirement age for full Social Security benefits is gradually rising from
age 65 to 67. Researchers do not agree on whether baby boomers and other
workers are saving enough for their retirement. 37
Research suggests that individuals who are not financially literate tend to
save less. Many people do not appreciate that saving even small amounts over
time is the way to accumulate wealth. According to a 1999 opinion survey,
low and moderate income Americans mistakenly believe they have a better
chance of accumulating $500,000 through winning the lottery than through
saving and investing a portion of their income. 38 One reason for this
mistaken notion is that most Americans dramatically underestimate
35 Patrick J. Purcell, Retirement Savings and Household Wealth in 1997:
Analysis of Census Bureau Data (Washington, D. C.: Congressional Research
Service, April 2001). 36 Now in its 11th year, this annual survey gauges the
views and attitudes of working and retired Americans regarding their
preparations for and confidence about various aspects of retirement. The
2001 survey was cosponsored by the Employee Benefit Research Institute,
the American Savings Education Council, and Mathew Greenwald and Associates,
Inc. 37 For a summary of recent studies addressing retirement saving
adequacy, see Paul Yakoboski, ?Retirement Plans, Personal Saving, and Saving
Adequacy,? Employee Benefit
Research Institute, EBRI Issue Brief No. 219 (March 2000). 38 The Consumer
Federation of America and Primerica, on October 28, 1999, released results
of the public opinion survey conducted by Opinion Research Corporation
International.
the value of compounding- how money saved can grow over time. 39 People
might begin to save more if they were aware how much they need for
retirement and that saving regularly over time is the key to preserving
their future standard of living.
Q1. 9. What Are the A1. 9. As we have reported, the United States faces a
demographic tidal wave in the future that poses significant challenges for
Social Security, Implications of a Medicare, and our economy as a whole. 40
More people are living longer, and Growing Elderly
they will need more resources to finance more years of retirement. The
Population for U. S. elderly population- those aged 65 and over- is growing
and accounts
Retirement Security? for an increasing share of the total population (see
figure 1.6). As a share of the total population, the elderly population has
grown from 9.1 percent to 12. 4 percent over the last 4 decades. Over the
next 75 years, the elderly
population share will nearly double to 22.5 percent, according to the Social
Security Trustees? intermediate actuarial projections. 41 Although the
babyboom generation will contribute heavily to the growth of the elderly
population, increasing life expectancy and declining fertility rates are
also responsible for the aging of the U. S. population. 42
39 Compounding can be explained in terms of the ?rule of 72.? To find out
how fast an amount saved can double, divide the interest rate into 72. For
example, at an interest rate of 5 percent, $100 saved would double to $200
in about 14 years. At a rate of 8 percent, it would take only 9 years to
double.
40 Medicare and Budget Surpluses: GAO?s Perspective on the President?s
Proposal and the Need for Reform (GAO/ T- AIMD/ HEHS- 99- 113, March 10,
1999). 41 Throughout this report, we relied on data from The 2001 Annual
Report of the Board of Trustees of the Federal Old- Age and Survivors
Insurance and Disability Insurance Trust Funds, hereafter ?the 2001 OASDI
Trustees? Report? and The 2001 Annual Report of the Board of Trustees of the
Federal Hospital Insurance Trust Fund, hereafter ?the 2001 HI Trustees?
Report.? In projecting future revenues and benefits, actuaries at the Social
Security Administration and Health Care Financing Administration use
alternative assumptions about economic and demographic trends, including
average earnings, mortality, fertility, and immigration. We used the
intermediate assumptions, which reflect the Trustees? best estimate. Due to
the inherent uncertainty surrounding long- term projections, the Trustees?
reports also include two other sets of assumptions, a high- cost and a low-
cost alternative. 42 Other nations, both developed and developing, are
experiencing similar and often more pronounced aging of their populations.
Figure 1. 6: Aged Population Nearly Doubles From Today as a Share of Total
U. S. Population (1960- 2075)
Percent of total population 25
Population aged 65 and over
20 15 10
5 0
1960 1980 2000 2020 2040 2060 2075
Note: Projections based on intermediate assumptions of the 2001 OASDI
Trustees? Report. Source: GAO analysis of data from the Office of the
Actuary, Social Security Administration.
As people live longer and have fewer children, there will be relatively
fewer workers supporting each retiree unless retirement patterns change. As
figure 1.7 shows, there were about five workers supporting each retiree in
1960. Today, there are approximately 3. 4 workers for each Social Security
beneficiary and by 2030, this number is projected to fall to 2.1, according
to the Trustees? intermediate actuarial assumptions. Those workers will have
to produce the goods and services to maintain their own standard of living
as well as to finance government programs and other commitments for the baby
boomers? retirement. Even as there are relatively fewer workers to pay taxes
to finance Social Security and Medicare, these programs will have to provide
benefits over longer periods of time as life expectancies
rise.
Figure 1. 7: Relatively Fewer Workers Will Support More Retirees (1960-
2075) Covered workers per OASDI beneficiary 6
5 4 3 2 1 0
1960 1980 2000 2020 2040 2060 2075
Note: Projections based on intermediate assumptions of the 2001 OASDI
Trustees? Report. Source: Office of the Actuary, Social Security
Administration.
Social Security has a long- term financing problem. 43 Social Security is
financed mainly on a pay- as- you- go basis, which means that payroll taxes
of current workers are used to pay retirement, disability, and survivor
benefits for current beneficiaries. Social Security now collects more in
payroll taxes than it pays in benefits, but just 15 years from now this will
be
reversed, as shown in figure 1.8. Beginning in 2016, the program faces cash
deficits as benefit payments are projected to outpace cash revenue. Absent
meaningful reform, the Social Security trust fund will be exhausted in 2038,
and projected tax revenue would be adequate to pay for only 73 percent of
projected benefits thereafter.
43 Social Security consists of two separate trust funds: Old- Age and
Survivors Insurance, which funds retirement and survivors benefits, and
Disability Insurance, which provides benefits to disabled workers and their
families. These two accounts are commonly combined in discussing the Social
Security program. For purposes of this product, any reference to the Social
Security trust fund refers to the combined Old- Age, Survivors, and
Disability Insurance (OASDI) trust funds.
Figure 1. 8: Social Security Trust Fund Faces Insolvency in 2038 (2000-
2050) Billions of 2000 dollars 4000
3000 2000 1000
Cash deficits Social Security trust
begin in 2016 fund depleted in 2038
0 -1000
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Cash surplus/ deficit Trust fund balance
Notes: Projections based on intermediate assumptions of the 2001 OASDI
Trustees? Report. The analysis assumes that current- law benefits are paid
in full beyond 2038 through borrowing from the Treasury. The cash surplus/
deficit excludes interest earnings on trust fund assets and interest expense
associated with the assumed borrowing. Both interest earnings and interest
expense are included in the trust fund balance. Data converted to 2000
dollars using the consumer price index for all urban consumers.
Source: GAO analysis of data from the Office of the Actuary, Social Security
Administration. The long- term outlook for Medicare is much bleaker.
Medicare?s financial status has generally been gauged by the financial
solvency of the Part A Hospital Insurance (HI) trust fund, which primarily
covers inpatient hospital care and is financed by payroll taxes. As shown in
figure 1.9, Medicare?s HI trust fund faces cash deficits beginning in 2016,
and the trust fund will be depleted in 2029. These HI projections do not
reflect the
growing cost of the Part B Supplementary Medical Insurance (SMI) component
of Medicare, which covers outpatient services and is financed through
general revenues and beneficiary premiums. SMI accounts for somewhat more
than 40 percent of Medicare spending and is expected to account for a
growing share of total program dollars. As with Social Security, Medicare
spending will swell as the elderly population increases. Moreover, Medicare
costs are expected to increase faster than the rest of the economy.
Projected growth in Medicare reflects the escalation of health care costs at
rates well exceeding general rates of inflation. Increases in the
number and quality of health care services have been fueled by the explosive
growth of medical technology.
Figure 1. 9: Medicare?s Hospital Insurance Trust Fund Faces Insolvency in
2029 (2000- 2050) Billions of 2000 dollars 600
400 200
Trust fund depleted in 2029
0
Cash deficits
-200
emerge in 2016
-400 -600
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Cash surplus/ deficit HI trust fund balance
Notes: Projections based on intermediate assumptions of the 2001 HI
Trustees? Report. The analysis assumes that current- law benefits are paid
in full after 2029 through borrowing from the Treasury. The cash surplus/
deficit excludes interest earnings on trust fund assets and interest expense
associated with the assumed borrowing. Both interest earnings and interest
expense are included in the trust fund balance. Data converted to 2000
dollars using the consumer price index for all urban consumers.
Source: GAO analysis of data from the Office of the Actuary, Health Care
Financing Administration. Although public attention focuses on the trust
fund insolvency dates, the effect of financing Social Security and Medicare
will be felt sooner as the baby boom generation begins to retire. As shown
in figures 1.8 and 1.9, the Social Security and Medicare HI cash deficits
are expected to grow
substantially in the near future. Regardless of whether the trust funds are
relying on interest income or drawing down their balances to pay benefits,
the government as a whole must come up with the cash by reducing overall
budget surpluses, borrowing from the public, increasing other taxes, or
reducing spending for other programs. 44
Without reform, the combined financial burden of Social Security and
Medicare on future taxpayers becomes unsustainable. As figure 1.10 shows,
the cost of these two programs combined would nearly double as a
share of the payroll tax base over the long term. Assuming no other changes,
these programs would constitute a substantial drain on the earnings of our
future workers.
Figure 1. 10: Social Security and Medicare HI Cost and Income as a
Percentage of Taxable Payroll (2000- 2075) Percent of taxable payroll 35
30 25
Cost rate
20 15
Income rate
10 5 0
2000 2025 2050 2075
Note: Projections based on the intermediate assumptions of the 2001 OASDI
and HI Trustees? reports. Source: Office of the Actuary, Social Security
Administration, and Office of the Actuary, Health Care Financing
Administration.
Personal saving plays a dual role in bolstering retirement security for
American workers. For individuals, assets accumulated by saving provide a
key source of retirement income (see Q1.8). Those who do not save and who do
not have pensions will have to depend largely on Social Security in their
old age. According to the 2001 Retirement Confidence Survey, many 44 Q4. 10
discusses how the Social Security trust fund, for example, affects federal
government saving and national saving.
workers are not confident that Social Security (65 percent) and Medicare (57
percent) will continue to provide benefits equivalent to those received
today. Anticipating potential benefit cuts, people could save more now to
supplement their future retirement income and to cushion against future
health care costs or they could choose to work longer and delay retirement.
Alternatively, they might not save more or work longer, and they would
experience a lower standard of living in retirement.
For the nation, personal saving provides resources vital to enhancing the
nation?s productive capacity. Saving more today, in turn, can improve the
outlook for Social Security and Medicare. As discussed in section 3, higher
saving and investment can boost worker productivity and lead to greater
economic growth. A larger economy would mean higher real wages for future
workers and in turn more payroll taxes to finance Social Security and
Medicare. With an aging population and a slowly growing workforce,
increasing the nation?s future economic capacity is critical to ensuring
retirement security in the 21st century.
Sect on i 2 National Saving Overview Q2.1. What Is National
A2. 1. Just as for people, saving for the national economy is the act of
Saving and How Is It setting some of current income aside for the future
instead of spending it for current consumption. In NIPA, saving is measured
as current income Measured?
less current consumption expenditures. National saving is the sum of saving
by households, businesses, and all levels of government (federal, state, and
local). For the economy as a whole, national saving is the portion of the
nation?s income not used for private and public consumption. The sum of
national saving and saving borrowed from abroad represents the total amount
of resources available for investment, that is, the purchase of capital
goods- plant, equipment, software, houses, 1 and inventories- by
businesses and governments. 2 Saving and investing today increase the
nation?s stock of capital goods to be used in the future- the capital stock-
and thus the nation?s capacity to produce goods and services in the future.
National saving is measured in two ways- gross national saving or net
national saving. Gross national saving is a nation?s total income minus its
consumption and represents resources available for domestic or foreign
investment. Some portion of gross national saving pays for replacing capital
goods that have been worn out or used up in producing goods and services-
consumption of fixed capital in technical terms, or hereafter simply
depreciation. 3 The other portion of gross national saving, which is used to
add to the nation?s stock of capital goods, is net national saving. Net
national saving is the measure commonly used to gauge whether the
nation?s capacity to produce goods and services in the future is increasing
or decreasing.
By itself, the dollar amount of national saving is not a particularly
meaningful indicator of the portion of the nation?s income that is not
consumed. National saving is usually expressed as a share of the nation?s 1
Investment in owner- occupied residential property is defined as business
investment. 2 This represents the current NIPA definition of investment used
throughout this primer unless otherwise stated. Other ways of thinking about
national saving and investment are discussed in Q2. 4 and in sections 3 and
4.
3 For more information on how depreciation is measured in NIPA, see Arnold
Katz and Shelby Herman, ?Improved Estimates of Fixed Reproducible Tangible
Wealth, 1929- 95,? Survey of Current Business, Bureau of Economic Analysis,
Vol. 77, No. 5 (May 1997), pp. 69- 92, and Barbara M. Fraumeni, ?The
Measurement of Depreciation in the U. S. National Income and Product
Accounts,? Survey of Current Business, Bureau of Economic Analysis, Vol. 77,
No. 7 (July 1997), pp. 7- 23.
current income- or its economic output. 4 Because the primary measure of the
nation?s economic output is gross domestic product (GDP), saving is often
shown as a percent of GDP. Text box 2.1 compares GDP to another measure of
economic output- gross national product (GNP). In 2000, gross national
saving as a share of GDP was 18.3 percent. After subtracting depreciation,
which was 12.6 percent of GDP, net national saving was 5.7 percent of GDP.
Text Box 2. 1: Gross Domestic Product and Gross National Product a GDP is
the output of goods and services produced by labor and property located in
the United States, while GNP is the output of goods and services produced by
labor and property supplied by U. S. residents, regardless of where they are
located. The difference between GDP and GNP is income receipts from the
goods and services produced abroad using labor and capital of U. S.
residents less income payments for the goods and services produced in the
United States using labor and capital supplied by foreign residents. Because
both GNP and national saving include these income receipts, net of payments,
the Bureau of Economic Analysis (BEA) presents national saving as a share of
GNP. However, since 1991,
BEA has featured GDP as the primary measure of economic activity because GDP
is consistent in coverage with indicators such as domestic investment and
productivity. GDP is also the measure cited in economic trend analyses and
for cross- country comparisons by many, including the President?s Council of
Economic Advisers, the International Monetary Fund, and the Organization for
Economic Cooperation and Development (OECD). Because this report deals not
only with national saving but also with other measures such as investment
and the federal budget position, we express saving, investment, and federal
government spending as a share of GDP. Expressing all of our analysis as a
share of GDP provides a consistent frame of reference for comparing
economywide shares for the United States and for
comparing U. S. saving rates to those of other countries. In the United
States, the difference between GDP and GNP is small. For example, in 2000,
GDP was $9, 963 billion and GNP was $9, 959 billion. b Given the relatively
small difference between the two measures, the denominator has little effect
on calculating saving as a share of the economy. Regardless of which measure
is used, saving as a share of the U. S. economy was 18. 3 percent in 2000.
a ?Gross Domestic Product as a Measure of U. S. Production,? Survey of
Current Business, Bureau of Economic Analysis, Vol. 71, No. 8 (August 1991),
p. 8. b In 2000, GNP was less than GDP because income receipts from the rest
of the world were less than U. S. payments to the rest of the world.
4 The nation?s income is the sum of all the payments made to those who
produce output. This income equals the total spending on the economy?s
output of goods and services; thus, the nation?s income and output are the
same.
Gross national saving is a good indicator of resources available both to (1)
replace old, worn- out capital goods with new, and sometimes more
productive, goods and (2) expand the capital stock. 5 The share of gross
national saving used to replace depreciated capital has increased over the
past 40 years. This increase in depreciation reflects a shift in the capital
stock?s composition from long- lived assets with relatively low depreciation
rates, like steel mills, to shorter- lived assets such as computers and
software. Even if gross national saving were only sufficient to replace
depreciated capital, the economy could grow to some extent because replacing
worn- out and used capital with new equipment tends to bring
improved technology into the production process. Nevertheless, national
saving beyond the amount necessary to replace depreciated capital goods is
important for increasing the overall size of the capital stock and the
nation?s future productive capacity.
Q2.2. How Has U. S.
A2. 2. As figure 2.1 shows, gross national saving rebounded from a low of
National Saving
15. 6 percent of GDP during the saving slump of the early 1990s to 18. 3
percent in 2000. This rebound is due primarily to increased government
Changed Over Time- saving that has more than made up for the decline in
personal saving
Both Overall and by described in section 1. However, despite this rebound,
national saving as a
Component? share of GDP is still below the level of the 1960s- an era
characterized by
high saving and rapid growth in productivity and living standards, defined
in terms of GDP per capita. Since the 1960s, depreciation as a share of GDP
has increased slightly (see Q2. 1), and net national saving as a share of
GDP has declined more than gross national saving. Net national saving rose
from 3.4 percent of GDP in 1993 to 5.7 percent in 2000 but remains well
below the 1960s average of 10.9 percent.
5 As discussed in section 3, a nation can use some of its saving to invest
abroad and can also borrow from abroad to finance domestic investment.
Figure 2. 1: Gross National Saving as a Share of GDP (1960- 2000) Percent of
GDP 25
Gross national saving
20 15
Net national saving available for new investment
10 5
Saving used to replace depreciated capital
0 1960 1965 1970 1975 1980 1985 1990 1995 2000
Source: GAO analysis of NIPA data from the Bureau of Economic Analysis,
Department of Commerce.
Figure 2.2 breaks net national saving down into components. It shows both
the aggregate trend and how saving by households, businesses, and
governments affected net national saving. As discussed in section 1,
personal saving is the amount of aggregate disposable personal income left
over after personal spending on goods and services. 6 Personal saving
averaged 5.7 percent of GDP in the 1960s and increased to an average of
almost 7 percent over the 1970s and 1980s. Since the early 1990s, however,
personal saving has steadily declined to -0.1 percent of GDP in 2000- the
lowest point in over 65 years. 6 NIPA personal saving is measured net of
depreciation on fixed assets owned by unincorporated businesses and owner-
occupied residential dwellings. Because household purchases of residential
dwellings are treated as business investment in NIPA, the depreciation on
these assets is included in gross business saving.
Figure 2. 2: Composition of Net National Saving (1960- 2000) Percent of GDP
15
10 5 0 -5
1960- 1969 1970- 1979 1980- 1989 1990- 1999 1990 1991 1992 1993 1994 1995
1996 1997 1998 1999 2000
State and local surplus/ deficit a Net business saving Net personal saving b
Federal surplus/ deficit c
Net national saving a State and local surpluses in 1990 and 1993 and the
deficits in 1992 are less than 0.1 percent of GDP. b Net personal saving was
-0.1 percent in 2000.
c Although the NIPA federal surplus or deficit is arithmetically similar to
the federal unified budget surplus or deficit, there are some conceptual
differences. Text box 4.1 describes how the NIPA and unified budget concepts
differ. Source: GAO analysis of NIPA data from the Bureau of Economic
Analysis, Department of Commerce.
Personal and business saving together make up the nation?s private saving.
Business saving reflects the earnings retained by businesses after paying
taxes and dividends. These retained earnings are available to finance
investment. For business saving, it is important to distinguish between net
and gross saving. On a gross basis, businesses have been the biggest savers
in recent years, accounting for over 70 percent of gross national saving in
2000. However, given that a large portion of business saving is used to
replace capital goods worn out or used in the production process, business
saving net of depreciation is a smaller share- about 47
percent- of net national saving. As shown in figure 2.2, net business saving
has averaged about 3 percent of GDP from 1960 to 2000.
Government saving arises when federal, state, and local government revenue
exceeds current expenditures. Government saving, also called a
surplus, adds to the pool of national saving available to finance investment
and allows a government to reduce its outstanding debt or purchase
nongovernment assets. Conversely, government dissaving, or a deficit,
absorbs funds saved by households and businesses and reduces overall
national saving available to finance private investments. To finance a
deficit, a government has to borrow or sell assets it owns. State and local
government net saving has been relatively small, ranging from a surplus of
1.1 percent of GDP in 1973 to a deficit of 0.1 percent in 1991. The federal
government?s effect on net national saving has varied widely over the past
40 years. During most of the 1960s, the federal government was a net saver.
However, the federal government ran large deficits through
much of the 1980s and early 1990s, which reduced the overall level of
national saving in the economy. Federal deficits averaged 3.4 percent of GDP
in the 1980s and reached 4.7 percent in 1992. In 1992 and 1993, federal
deficits absorbed more than half of private saving. Since 1990, deficit
reduction initiatives and economic growth have reduced federal dissaving.
From 1998 through 2000, the federal government achieved surpluses, shifting
from being a drain on net national saving to become a contributor to it.
These surpluses also allowed the federal government to reduce its
outstanding debt held by the public. 7 Section 4 discusses in more detail
how federal fiscal policy affects national saving.
Despite this recent shift in the federal position, net national saving as a
share of GDP remains well below the average level of the 1960s largely as a
result of the decline in personal saving. Traditionally, personal saving had
been a key source of net national saving available for new investment.
Whereas personal saving represented one- half to three- quarters of average
7 For more information on debt reduction, see Federal Debt: Answers to
Frequently Asked Questions- An Update (GAO/ OCG- 99- 27, May 28, 1999),
Federal Debt: Debt Management in a Period of Budget Surplus (GAO/ AIMD- 99-
270, September 29, 1999), and Federal Debt: Debt Management Actions and
Future Challenges (GAO- 01- 317, February 28, 2001).
net national saving in the 1960s and 1970s, personal dissaving absorbed
resources that otherwise would have been available for private investment in
2000. 8 Q2.3. How Does U. S.
A2. 3. Although gross national saving as a share of GDP in the 1990s was
National Saving low by U. S. historical standards, U. S. saving as a share
of GDP has generally been lower than other major industrialized countries
over the Compare to Other past 40 years. Since the 1960s, U. S. gross
national saving as a share of GDP
Major Industrialized has ranked sixth among a group of seven major
industrialized countries- Nations?
the G- 7. Interestingly, as figure 2.3 shows, saving as a share of GDP
across all of these countries has declined since the 1960s.
8 When federal dissaving peaked in 1992, personal saving as a share of GDP
was nearly double net national saving as a share of GDP. In a sense,
government dissaving consumed much of the personal saving, leaving
relatively little to finance private investment.
Figure 2. 3: International Trends in Gross National Saving (1960- 1997)
Percent of GDP 40
35 30 25 20 15 10
5 0
Japan Italy France Germany Canada United United
Kingdom States
1960s 1970s 1980s 1990s a
Note: Because depreciation is measured differently across countries,
international saving comparisons are shown on a gross saving basis. a Covers
1990- 1997. Source: GAO analysis of data from Standard & Poor?s DRI OECD
National Income Accounts database.
It is not surprising that national saving varies across countries. The
increased output resulting from a given level of saving and investment
depends on the investment choices available and selected in each country. In
addition, national saving may vary across countries due to differences in
the price of capital goods, income levels, growth rates, economic and social
policies, demographics, and even culture. For example, recent research
suggests that capital goods are relatively cheaper in the United States than
in other countries, which means it takes less saving to buy a given amount
of capital goods in the United States than in other developed countries. 9
As noted in section 1, Americans may choose to save less because they have
ready access to credit and have been confident about the future of the U. S.
economy. 10 As figure 2.3 shows, Japan?s gross national saving as a share of
GDP has consistently ranked the highest among the G- 7 countries. Japan?s
high saving rate has been attributed to several factors including less
access to consumer credit and cultural factors. For example, Japanese
households face greater borrowing constraints than households in the United
States and must save a great deal to purchase a home. In addition, the
Japanese are considered to be more risk- averse and forward- looking than
American consumers. 11
Q2. 4. What Are Other
A2. 4. In the context of long- term economic growth, the NIPA saving Ways of
Defining
definition is traditionally used to describe resources available to sustain
and expand the nation?s capital stock. Since its creation in the 1930s, NIPA
Saving and definitions and measurement have evolved to better portray the
changing
Investment? U. S. economy. NIPA historically recognized tangible investments
and
considered other spending to be consumption. 12 However, software- a form of
intangible capital- has played an increasingly important role in the U. S.
economy. Recognizing that software, like other investment goods,
provides a flow of services that lasts more than one year, NIPA now counts 9
Milka S. Kirova and Robert E. Lipsey, ?Measuring Real Investment: Trends in
the United States and International Comparisons,? Federal Reserve Bank of
St. Louis Review (January/ February 1998), p. 6. 10 Norman Loayza, Klaus
Schmidt- Hebbel, and Luis Serven, ?What Drives Private Saving Across the
World?? Review of Economics and Statistics (May 2000) and N. Gregory Mankiw,
Macroeconomics, 4th edition (2000), p. 450. 11 N. Gregory Mankiw,
Macroeconomics (2000), p. 450, and Fumio Hayashi, ?Why Is Japan?s Saving
Rate So Apparently High?? NBER Macroeconomics Annual 1986, pp. 147- 210. 12
NIPA had already recognized mineral exploration as investment, and in 1996,
NIPA reclassified government purchases of plant and equipment as investment.
software as investment. 13 Because saving equals investment in the economy-
a national income accounting identity- reclassifying software as investment
not only raised the measure of investment but also raised the measure of
gross saving and of the nation?s total output. Although NIPA measurement has
evolved, the nation?s human capital and
knowledge- also forms of intangible capital- are not part of the NIPA
definitions of investment and saving. This means that, under NIPA, business
computer purchases count as saving and investment, but spending to train
workers to use the new computers counts as current consumption rather than
investment. Many economists agree that spending
both on education and on general research and development (R& D) enhances
future economic capacity and, conceptually, should be considered investment.
Nonetheless, broadening the NIPA investment definition to include education
and R& D would be difficult because there is no consensus on which
expenditures should be included or how to measure the depreciation and
contribution to output of intangible capital.
Although counting education and R& D as investment would raise the measured
level of investment, this broader measure of investment has also experienced
a downward trend. Federal Reserve researchers estimated that, as of the
early 1990s, U. S. investment including education and R& D had declined as a
share of GDP since the 1970s. 14
A more controversial measure of personal saving would include changes in the
value of existing assets. 15 Since NIPA focuses on the current production of
goods and services and on the income arising from that production, NIPA
income and saving do not reflect changes in the value of existing tangible
and financial assets, such as land, stocks, or bonds. As discussed
13 This change was among those made in the 11th comprehensive revision of
the national accounts in 1999. For more information on the recent NIPA
definitional and classificational changes, see Brent R. Moulton, Robert P.
Parker, and Eugene P. Seskin, ?A Preview of the 1999 Comprehensive Revision
of the National Income and Product Accounts,? Survey of Current Business,
Bureau of Economic Analysis, Vol. 79, No. 8 (August 1999), pp. 7- 20.
14 Milka S. Kirova and Robert E. Lipsey, ?Does the United States Invest ?Too
Little??? Federal Reserve Bank of St. Louis, Research Division Working
Papers 97- 020A (November 1997). 15 Whether changes in the market value of
existing assets should be counted as saving is beyond the scope of this
report. For a review of the literature, see William G. Gale and John
Sabelhaus, ?Perspectives on the Household Saving Rate,? Brookings Papers on
Economic Activity (1: 1999), pp. 181- 224.
in section 1, economists generally agree that wealth- based measures that
reflect changes in the value of existing assets are useful for gauging
individual households? finances and retirement preparations. However, it is
uncertain whether wealth- based measures are reliable for gauging the growth
in the nation?s capital stock and whether revaluation of existing assets
should count as saving for society as a whole. Some portion of the change in
the market value of existing assets may reflect increased productive
capacity and thus could represent income and saving, but it is difficult to
isolate that portion. 16 Most gains and losses from transferring
assets within and between sectors ?wash out? at the national level and may
not represent newly available resources for the economy as a whole. 17 For
example, when one household sells an appreciated asset to another household,
any gain realized may be used to finance the seller?s
consumption, but the transaction does not increase the nation?s income or
output. Moreover, the market value of financial assets is often volatile and
may not reflect a real, permanent change in the productive potential of the
underlying capital assets. Lastly, some of the increased market value of
households? stock holdings may stem from the use of businesses? retained
earnings for investment, which is already reflected in NIPA saving and
investment.
16 An asset?s market value can change as a result of changes in tax
treatment; investors? perceptions of risk; taste; or households?
expectations of future economic capacity arising from, for example, the
introduction of new technology. Only the last source, however, may relate to
the asset?s productive capacity. 17 However, gains and losses arising from
sale of assets to foreigners do not ?wash out? and could affect national
consumption and investment.
Sect on i 3 National Saving and the Economy Q3.1. How Does
A3. 1. National saving provides the resources for a nation to invest
National Saving
domestically and abroad. Domestic investment in new factories and equipment
can boost productivity of the nation?s workforce. Increased Contribute to
worker productivity, in turn, leads to higher real wages and greater
Investment and
economic growth over the long term. U. S. investment abroad does not add
Ultimately Economic to the domestic capital stock used by U. S. workers to
produce goods and
services. U. S. investment abroad does increase the nation?s wealth and will
Growth? generate income adding to U. S. GNP. When national saving is lower
than domestic investment, a nation can borrow from foreign savers to make up
the difference. 1 The resulting increase in domestic capital would enhance
worker?s productivity and wages, but the payments to foreign lenders flow
abroad. In general, saving today increases a nation?s capacity to produce
more goods and services and generate higher income in the future. Increased
economic capacity and rising incomes will be crucial as the population ages
because a relatively smaller workforce will bear the burden of financing
Social Security and Medicare while also seeking to maintain its own standard
of living.
Saving entails a tradeoff because it requires consuming less now in exchange
for consuming more later. While those who sacrifice to save now can
themselves enjoy higher consumption in the future, some of the resulting
increase in the nation?s capital stock and the related income will also
benefit future generations. Thus, current saving and investment decisions
have profound implications for the level of wellbeing in the
future, and current generations are in a sense stewards of the economy on
behalf of future generations.
Figure 3.1 is a flow chart illustrating saving?s central role in providing
resources to invest in the capital needed to produce the nation?s goods and
services. In this simplified depiction of the production process, capital
and labor are the basic inputs used to produce goods and services. The
resources used for domestic investment come from saving by households,
businesses, and all levels of government. In addition, a nation can invest
more in domestic capital than it saves by borrowing from other countries.
1 When foreign investment in a nation exceeds that nation?s investment
abroad, the nation?s net foreign investment will be negative. Q3.3 discusses
the extent to which the United States has supplemented its saving and
investment by borrowing from abroad.
Figure 3. 1: Overview of Saving, Investment, Output, and Income Flows TOTAL
FACTOR PRODUCTIVTY
LABOR GROSS (Hours
DOMESTIC NATIONAL
Worked) PRODUCT
SAVING DOMESTIC
= Personal INVESTMENT CAPITAL Saving
= = Domestic Investment STOCK
GROSS + Business
+ Net Foreign Investment (Plant,
NATIONAL Saving
Equipment, PRODUCT
+ Government Software, etc.)
INCOME Saving
RECEIPTS FROM - INCOME PAYMENTS TO NET INTERNATIONAL INVESTMENT POSITION
THE REST OF = U. S.- Owned Assets Abroad
THE WORLD - Foreign- Owned Assets in the U. S.
INCOME
The amount of goods and services produced depends not only on the amount of
capital and labor but also on how efficiently these inputs are used. This is
called total factor productivity. Total factor productivity is the portion
of output not explained by the use of capital and labor and is generally
associated with the level of technology and managerial efficiency. 2
Education, training, and R& D also can potentially increase
output; in this simplified flow chart, these would influence total factor 2
The Bureau of Labor Statistics (BLS) publishes an official measure of output
per unit of combined labor and capital inputs- multifactor productivity.
BLS? measure of labor input not only takes into account changes in the size
of the labor force, but also changes in its composition as measured by
education and work experience. Capital inputs are measured in terms of
efficiency or service flow rather than price or value. For more information
on
multifactor productivity, see ?Productivity Measure: Business Sector and
Major Subsectors,? BLS Handbook of Methods, Bureau of Labor Statistics
(April 1997), pp. 89- 98; and Edwin R. Dean and Michael J. Harper, ?The BLS
Productivity Measurement Program,? Bureau of Labor Statistics (July 5,
2000), paper presented to the NBER Conference on Research in Income and
Wealth on New Directions in Productivity Analysis, March 20- 21, 1998.
productivity. A nation?s total output of goods and services, or its GDP, is
a function of the hours worked, the capital stock, and total factor
productivity. Adding the net income payments received from the rest of the
world (which can be negative) to GDP yields the gross national income, or
GNP. A portion of the nation?s income, in turn, is saved, allowing for
additional investment in domestic factories, equipment, and other forms of
capital that workers use to produce more goods and services or for
investment abroad. Investment in the capital stock is a principal source of
growth in labor productivity, or output per hour worked. 3 Through its
influence on real wages, labor productivity is the fundamental determinant
of a nation?s standard of living. Minimum levels of investment in a nation?s
physical and human capital are crucial just to maintain labor productivity
and living standards. Equipment that wears out must be replaced; younger
workers entering the labor force need to be trained in skills to replace
older workers
as they retire. Even as the population ages, the U. S. labor force itself
will continue growing- although slowly, with annual growth in aggregate
hours worked averaging about 0.1 percent after 2020 4 -and the demand for
capital goods is likely to increase. Not only must capital goods be replaced
as they depreciate, but new generations of workers must be comparably
3 According to neoclassical growth theory, the rate of growth of labor
productivity depends on the growth rate in the capital- labor ratio,
weighted by capital?s share and the growth rate of total factor
productivity. See Robert M. Solow, ?Technical Change in the Aggregate
Production Function,? Review of Economics and Statistics, Vol. 39, No. 3
(1957), cited in Dean and Harper (1998), p. 7. 4 The labor force projection
reflects the OASDI Trustees? 2001 intermediate assumptions, including those
for fertility, immigration, and labor force participation.
trained and equipped (capital widening). 5 Otherwise, output per worker and
living standards may fall. Beyond the minimum level of investment needed to
maintain the capital stock, additional investment to expand the capital
stock is an important way to increase labor productivity, and thus future
living standards. With the retired population projected to swell after 2010,
investment in new capital is an important way to raise the productivity of
the slowly growing
labor force. Investment boosts labor productivity because workers can
produce more per hour when they have more and better equipment and better
skills (capital deepening). The essence of this point can be illustrated
with a simple example. Consider the transformation of ditch- digging from a
relatively slow and somewhat imprecise process involving several ordinary
shovels, much labor effort, and low skill levels to
a faster and more precise process often involving a single power digger
controlled by a skilled operator. The elements of this example, repeated
across millions of individual tasks, encapsulates the difference between an
advanced industrial economy with a high standard of living and a less
developed country with a low standard of living. Growth in output per worker
also depends on total factor productivity growth. A higher rate of
technological change and improved efficiency in using labor and capital can
boost GDP and thus future living standards. Even if there were no net
investment- that is, if gross investment were only enough to replace
depreciated capital- the economy could grow to some extent because the new
capital tends to embody improved technology. However, there is no agreement
on how to raise total factor
productivity. Spending on education and R& D is thought to help because 5
While the aging of the population is a commonly voiced argument for raising
national saving, some analysts maintain that the projected decline in labor
force growth will increase the capital- labor ratio and reduce the return to
capital while raising the productivity of
labor. They conclude that, under some circumstances, saving should actually
decline slightly in response to population aging. Other analysts point out,
however, that if the economy is operating below the optimal saving rate,
saving can rise without overly depressing market rates of return and,
therefore, provide significant improvement to future incomes. In addition,
saving can be invested abroad without lowering the global rate of return.
See Douglas W. Elmendorf and Louise M. Sheiner, ?Should America Save for its
Old Age? Fiscal Policy, Population Aging, and National Saving,? Journal of
Economic Perspectives, Vol. 14, No. 3, Summer 2000, pp. 57- 74; and Barry
Bosworth and Gary Burtless, ?Social Security Reform in a Global Context,? in
Social Security Reform Conference Proceedings: Links to Saving, Investment,
and Growth, Steven A. Sass and Robert K. Triest, eds., Federal Reserve Bank
of Boston, Conference Series No. 41, June 1997, pp. 243- 274.
education and training enhance the knowledge and skills of a nation?s work
force- the nation?s human capital- and R& D can spur technological
improvement. A legal and institutional environment that facilitates the
development and enforcement of contracts and discourages crime and
corruption may also contribute to economic growth. Thus, economic growth
depends not only on the amount of saving and investment but also on an
educated work force, an expanding base of knowledge, a continuing infusion
of innovations, and a sound legal and institutional environment. Q3.2. Has
the
A3. 2. Although national saving as a share of GDP remains below the 1960s
Relatively Low average, annual GDP growth in recent years reached levels
similar to the 1960s average of 4.2 percent. After slowing to 3.2 percent
over the 1970s National Saving Rate and 1980s and further to only 2.4
percent in the early 1990s, annual GDP
Affected Investment growth accelerated to an average of 4.3 percent from
1995 to 2000. This and Economic higher growth stemmed, in part, from the
rebound in national saving that was largely attributable to federal deficit
reduction. The U. S. was also able Growth? What Factors
to borrow from abroad to help finance domestic investment, as discussed Have
Fostered
further below. In addition, two domestic investment trends helped promote
growth in GDP and living standards: (1) the price of investment goods
Economic Growth in declined relative to other goods and (2) investment in
high- yielding
Recent Years? information technology has risen rapidly. Thus, even though
saving as a
share of the economy has been low by historical standards, economic growth
has been high because more and better investments were made. A dollar of
saving buys more investment goods now than in the past because the price of
investment goods has decreased relative to other goods in recent years. From
1995 to 2000, the price index for nonresidential investment goods declined
0.9 percent per year on average, while overall prices as measured by the GDP
price index rose, albeit at a modest annual rate of 1.8 percent. The major
source of the overall decline in investment- good prices was the over 22
percent average annual decline in the price of computers and peripheral
equipment since 1995. In other
words, in each succeeding year, a dollar spent on computers purchased 22
percent more computing power on average than it did the previous year. 6
6 See J. Steven Landefeld and Bruce T. Grimm, ?A Note on the Impact of
Hedonics and Computers on Real GDP,? Survey of Current Business, Bureau of
Economic Analysis, Vol. 80, No. 12 (December 2000), pp. 17- 22.
Not only has each dollar of saving bought more investment goods in recent
years, but a greater share of that dollar was invested in information
technology, including computers, software, and communications equipment.
From 1990 to 2000, the share of business fixed investment devoted to
information equipment and software rose from less than
28 percent to 39 percent. The increasing share of investment going to
information processing equipment and software helped boost overall economic
growth over the 1990s because information technology has appeared to be
highly productive in recent years. This is true even though rapid
depreciation and obsolescence characterize information technology. For
example,
computers and related equipment have an estimated annual depreciation rate
of 31 percent, 7 and new versions of software applications are released
every few years. Hence, for investment in information technology to be
profitable, its gross rate of return must be quite high. Its high rate of
return
combined with its increasing share of total investment meant that
information technology has been a major contributor to the rapid economic
growth since 1995. Indeed, recent economic research suggests that investment
in information technology explains most of the acceleration in labor
productivity growth- a major component of overall economic growth- since
1995. 8 From 1995 to 2000, labor productivity growth averaged 2.8 percent
per year compared to 1. 6 percent from 1970 to 1995 and 2.9 percent during
the 1960s. 9
7 Fixed Reproducible Tangible Wealth in the United States, 1925- 94, Bureau
of Economic Analysis (August 1999), p. M- 29. 8 Stephen D. Oliner and Daniel
E. Sichel, ?The Resurgence of Growth in the Late 1990s: Is Information
Technology the Story?? Journal of Economic Perspectives, Vol. 14, No. 4
(Fall 2000), pp. 3- 22; and Robert J. Gordon, ?Does the ?New Economy?
Measure Up to the Great Inventions of the Past,? Journal of Economic
Perspectives, Vol. 14, No. 4 (Fall 2000), pp. 49 74.
9 Because of difficulties in measuring productivity of farms and nonmarket
activities, the most widely used measure of labor productivity growth is the
rate of increase in nonfarm business sector output per hour worked.
Economic research suggests investment in information technology also may
have led to faster growth in total factor productivity since 1995. 10 As
noted earlier, total factor productivity growth reflects technological
change and new and better ways of organizing production. Firms producing
computers and semiconductors have achieved substantial operating
efficiencies and high rates of return on capital investments in recent
years, despite a large expansion in their capital stock. These high rates of
return
seem to contradict economists? general expectations that increasing the
supply of capital reduces its return and thus seems to indicate a rise in
total factor productivity. Although total factor productivity growth appears
to have risen, the pace of growth may decelerate. Technological advances
generally come in waves that crest and eventually subside. Abundant saving
alone does not always generate robust growth because the saving must also be
invested well. Japan?s economy over the 1990s
demonstrated that high saving can coincide with economic stagnation. Among
the reasons offered for Japan?s lengthy slowdown is poor investment choices
due in part to its less developed financial markets in which savers had
fewer options and were left with low returns. Also, the government?s role
both in investing in physical infrastructure and in allocating capital to
industrial borrowers at preferential rates also resulted in many low-
yielding investments. Finally, with its high postwar investment levels,
Japan?s production processes became more capital intensive
compared to most other advanced nations. With this greater capital
intensity, diminishing returns to capital have reduced the return on
investment in Japan over the years. 11
10 However, some economists are concerned that the acceleration may be
concentrated in durable manufacturing rather than widely disseminated
throughout the economy. See Robert J. Gordon, ?Does the ?New Economy?
Measure Up to the Great Inventions of the Past,? Journal of Economic
Perspectives, Vol. 14, No. 4 (Fall 2000), pp. 49- 74. 11 Arthur J.
Alexander, ?Japan?s Economy in the 20th Century,? Japan Economic Institute
Report, No. 3 (January 21, 2000), p. 3.
Q3. 3. To What Extent
A3. 3. An economy that is not open to international trade and investment Has
the United States must rely solely on its own saving to provide the
resources to invest in plant, equipment, and other forms of capital. In
contrast, citizens, Supplemented Its companies, and governments in an open
economy such as the United
Saving and Investment States can finance the gap between domestic investment
and national
by Borrowing Saving saving with foreign investment in the United States. In
essence, the U. S. economy can borrow the saving of other countries to
finance more
From Abroad? How investment than U. S. national saving would permit. Figure
3. 2 shows the Does Such Borrowing
difference between domestic investment and national saving, which is defined
in the NIPA as net foreign investment. Over most of the 1980s Affect the
Economy? and 1990s, the U. S. was able to invest more than it saved by
attracting financing from abroad. This means that the United States has been
a net
borrower of saving from other nations.
Figure 3. 2: National Saving, Domestic Investment, and Net Foreign
Investment (1960- 2000) Percent of GDP 25
20 15 10
5 0 -5
1960 1965 1970 1975 1980 1985 1990 1995 2000
Net foreign investment National saving Domestic investment
Source: GAO analysis of NIPA data from the Bureau of Economic Analysis,
Department of Commerce.
A nation?s net foreign investment, in theory, is the same as its current
account balance, which is the combined balance on trade in goods and
services, income, and net unilateral current transfers. 12 That is, the
international flow of financial assets and the international flow of goods,
services, and income receipts can be described as two sides of the same
coin. In effect, borrowing from abroad allows a nation to acquire more
foreign goods and services than it sells to foreigners- the trade deficit.
12 In practice, measurement errors create some divergence between these
balances. For a more detailed discussion of the current account balance, see
Douglas B. Weinberg, ?U. S. International Transactions, Third Quarter 2000,?
Survey of Current Business, Bureau of Economic Analysis, Vol. 81, No. 1
(January 2001), pp. 47- 55; Craig Elwell, The U. S. Trade Deficit in 1999:
Recent Trends and Policy Options, Congressional Research Service (May 22,
2000); and CBO Memorandum: Causes and Consequences of the Trade Deficit: An
Overview, Congressional Budget Office (March 2000).
When the United States runs a trade deficit, foreigners buy less than a
dollar?s worth of U. S. goods and services with every dollar they earn on
their exports sold to the United States. They generally invest those excess
dollars in U. S. assets. Their willingness to acquire U. S. assets -i. e.,
to lend
to the United States- allows the United States to run trade deficits. In
fact, U. S. trade deficits may be as much due to foreigners? willingness to
acquire U. S. assets as to the U. S. desire to acquire foreign goods and
services.
While using foreign investors? saving allows U. S. domestic investment to
exceed national saving, these financial inflows have implications for the
nation?s economic growth and for future living standards. This effect
depends in part on how the borrowed funds are used. To the extent that
borrowing from abroad finances domestic investment, the foreign borrowing
adds to the nation?s capital stock and boosts productive capacity. This
augments future income, although a portion of the income
generated by the investment will be paid to foreign lenders. However, if the
borrowing from abroad is used to finance consumption, short- term wellbeing
is improved but the ability to repay the borrowing in the future will not be
enhanced. In this respect, U. S. experience in the 1990s differs
from that of the 1980s. Over the 1980s, mounting federal deficits and the
decline in personal saving reduced the supply of national saving available
for investment. Although borrowing from abroad helped finance additional
investment, consumption rose more than domestic investment during the 1980s.
In contrast, since 1992 there has been an upward trend in U. S.
national saving while domestic investment has surged. Borrowing from abroad
has allowed the United States to overcome its saving shortfall and take
advantage of productive investment opportunities. The increased investment
has contributed to higher GDP growth in recent years, and the stronger
economy should help in servicing the debt owed to foreigners.
Persistent U. S. current account deficits have translated into a rising
level of indebtedness to other countries. Figure 3. 3 shows the net U. S.
ownership of foreign assets- the net international investment position 13
-and net income receipts on net U. S. assets abroad. Prior to 1986, the
United States had been a net creditor because its holdings of foreign assets
exceeded foreign holdings of U. S. assets. The nation first became a net
debtor in 13 The net international investment position is presented here
with direct investment positions valued at current cost. BEA also publishes
a measure with direct investment positions measured at market value. See
Russell B. Scholl, ?The International Investment Position of the United
States at Yearend 1999,? Survey of Current Business, Bureau of Economic
Analysis, Vol. 80, No. 7 (July 2000), pp. 46- 56.
1986. Although foreign asset holdings in the United States have swelled in
recent years, not until 1998 did the United States pay more in interest,
dividends, and other investment returns to other countries than it received
on the assets it held abroad. The lag reflects the fact that the rate of
return on U. S. assets abroad consistently exceeded the return on foreign-
owned
assets in the United States. 14 So far, the net payments from the United
States to foreign lenders have been small as a share of GDP, as shown in
figure 3.3.
Figure 3. 3: Net U. S. Holdings of Foreign Assets and Net Income From Abroad
(1977- 1999) Net assets (billions)
Net income (percent of GDP) 500
Beginning in 1998, the U. S. paid more
2
on foreign investments here than it earned on U. S. assets abroad
0 0
Beginning in 1986, foreign holdings of U. S. assets exceed U. S. holdings of
-500
foreign assets
-2 -1000
-4 -1500
-6
1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991
1992 1993 1994 1995 1996 1997 1998 1999 Net holdings of foreign assets Net
income from the rest of the world
Source: GAO analysis of data from the Bureau of Economic Analysis,
Department of Commerce.
14 Raymond J. Mataloni, Jr., ?An Examination of the Low Rates of Return of
Foreign- Owned U. S. Companies,? Survey of Current Business, Bureau of
Economic Analysis, Vol. 80, No. 3 (March 2000), pp. 55- 73.
Economists and policymakers are concerned about whether the United States
can continue to increase its reliance on foreign capital inflows. Investors
generally try to achieve some balance in the allocation of their portfolios,
and U. S. assets already represent a significant share of foreign
portfolios. Although the United States accounts for 30 percent of global
GDP, it received two- thirds of the saving exported by countries with
current account surpluses in 1999. 15 Given this, it may not be realistic to
expect ever- increasing foreign investment in the United States, as has been
the case in recent years. Net foreign investment in the United States might
even decrease from the recent high rates if foreign investors find more
attractive opportunities elsewhere. Over the long term, many other nations
currently financing investment in the United States will themselves be
confronted with aging populations and declining national saving. Thus,
continuing to rely on foreign lenders to finance such a large share of U. S.
domestic investment is not a viable strategy over the long run.
If the net inflow of foreign investment were to diminish, the United States
would no longer be able to invest so much more in the domestic capital stock
than it saves. Although a nation can run current account deficits for
extended periods of time, a low level of national saving implies a low level
of domestic investment over the long run. According to recent empirical
research, current account deficits eventually have been followed by periods
of declining investment. 16 Rather than forgo domestic investment
opportunities that would enhance the nation?s future standard of living, the
United States could increase national saving. Any increase in national
15 Donald J. Mathieson and Garry J. Schinasi, eds., International Capital
Markets: Developments, Prospects, and Key Policy Issues (Washington, D. C.:
International Monetary Fund, September 2000), pp. 9- 10. 16 Giovanni P.
Olivei, ?The Role of Savings and Investment in Balancing the Current
Account: Some Empirical Evidence from the United States,? New England
Economic Review,
(July/ August, 2000), pp. 3- 14; and Caroline Freund, ?Current Account
Adjustments in Industrial Nations,? International Finance Discussion Paper
No. 2000- 692, (Washington, D. C.: Federal Reserve Board of Governors,
December 2000).
saving that did not finance domestic investment would increase net foreign
investment and improve the current account balance. 17
Q3.4. What Is the
A3. 4. The current long- term economic outlook for U. S. national saving and
Current Long- Term
investment is subject to wide ranging uncertainty about economic changes and
the responses to those changes. However, one certainty is that the U. S.
Economic Outlook for
population is aging and there will be fewer workers supporting each U. S.
National Saving
retiree. This demographic shift is expected to cause a decline in economic
and Investment? How growth rates when labor force growth slows after 2010.
Moreover, the aging
of the population may exert negative pressure on national saving. As Would
the Long- Term discussed in section 1, people tend to draw down their assets
in their
Economic Outlook retirement years. As government spending on health and
retirement
programs for the growing elderly population swells, government saving is
Change With Higher also likely to decline. Q4.3 examines the long- term
outlook for federal
Levels of National government saving/ dissaving. Saving?
To get a sense of the long- term implications of alternative national saving
paths, we examined the economic outlook over the next 75 years under two
different assumptions: (1) gross national saving remains constant at its
2000 share of GDP- 18.3 percent- and (2) gross national saving varies
depending on how much the federal government saves. 18 One possible fiscal
policy, which we used in our simulation, would be for the federal government
to save only the Social Security surpluses and to spend the non Social
Security surpluses projected over the first 10 years on some mix
of permanent tax cuts and spending increases. For simplicity, the Save the
Social Security Surpluses simulation assumes that saving by households,
businesses, and state and local governments remains constant as a share of
17 The current account balance would improve to the extent that the increase
in saving is used to increase net foreign investment rather than domestic
investment. Research suggests that for each additional dollar of saving,
perhaps one- third is used to increase net foreign
investment and two- thirds is used to increase domestic investment. See
Martin Feldstein and Philippe Bacchetta, ?National Saving and International
Investment,? National Saving and Economic Performance, D. Bernheim and J.
Shoven, eds., (Chicago: University of
Chicago Press, 1991) pp. 201- 226. 18 Long- term simulations are useful for
comparing the potential outcome of alternative national saving paths within
a common economic framework. Such simulations can illustrate the long- term
economic consequences of saving choices that are made today. Simulations
should not be viewed as forecasts of economic outcomes 50 or 75 years in the
future. Rather, they should be seen only as illustrations of the economic
outcomes associated with alternative saving paths based on common
demographic and economic assumptions. See appendix II for a detailed
description of the modeling methodology.
GDP at 16.1 percent- average nonfederal saving as a share of GDP since 1998.
19 As figure 3.4 shows, gross national saving as a share of GDP remains
fairly steady over the next decade under the Save the Social Security
Surpluses simulation. After 2010, as spending for health and retirement
programs mounts, dissaving by the federal government begins crowding
out other saving, and national saving begins to decline. By 2024, gross
national saving as a share of GDP drops below the mid 15 percent range
experienced during the saving slump in the early 1990s. By 2042, gross
national saving would plunge below 5 percent- lower than during the
Great Depression. Under the Save the Social Security Surpluses simulation,
gross national saving eventually disappears, and the nation begins dissaving
in 2047.
19 The 3- year period coincides with federal surpluses and its use avoids
extending the unusually low nonfederal saving rate of 2000 throughout the
simulation period.
Figure 3. 4: Gross National Saving as a Share of GDP Under the Save the
Social Security Surpluses Simulation (1990- 2075) Percent of GDP 20
Gross national saving in 2000 b
15
Save the Social Security
10
Surpluses a Gross national saving during the low point of the Great
Depression c
5 0
1990 2000 2010 2020 2030 2040 2050 2060 2075
Note: Actual historical data shown through 2000; simulated data thereafter.
a Gross nonfederal saving is held constant as a share of GDP at 16.1 percent
(the ratio in 1999), and federal saving varies. Data end when the nation
begins to dissave in 2047. b Gross national saving was 18.3 percent of GDP
in 2000. (Gross national saving reached a high of 24.6 percent of GDP in
1942.)
c Gross national saving reached a low of 5.3 percent of GDP in 1932. Source:
GAO?s March 2001 analysis.
The Save the Social Security Surpluses simulation is not sustainable, but it
is useful for illustrative purposes. Ultimately, this would be a doomsday
scenario for the U. S. economy. National saving would be inadequate to
finance even the investment necessary to maintain the nation?s capital
stock. Figure 3. 5 shows that, as the nation?s capital stock eroded, future
living standards- measured in terms of GDP per capita- inevitably would
fall. However, before such catastrophic effects, low national saving would
probably result in higher interest rates, rising inflation, and the
increasing reluctance of foreign investors to lend to a weakening U. S.
economy. These more immediate consequences would force action before
national saving
plunged to the levels shown in the simulation. The simulation is not a
prediction of what will happen in the future. Rather, it serves as a warning
that the United States must both save more in the near term and reform
entitlement programs for the elderly to put the budget on a more sustainable
footing for the long term.
Figure 3. 5: GDP Per Capita Under Alternative Gross National Saving Rates
(2000- 2075)
Per capita 2000 dollars
Double 2035 level by 2070 a 140,000
Constant 2000 Saving Rate b 120,000
100,000 80,000
a Double 2000 level by 2035 60,000
Save the Social Security Surpluses c
40,000 20,000
0 2000 2010 2020 2030 2040 2050 2060 2075
a Historically in the United States, GDP per capita has doubled on average
from one 35- year generation to the next. b Gross national saving is held
constant as a share of GDP at 18.3 percent, the ratio in 2000. c Gross
nonfederal saving is held constant as a share of GDP at 16.1 percent (the
ratio in 1999). Federal non- Social Security surpluses are eliminated
through 2010, and unified deficits emerge in
2019. This simulation can be run only through 2056 due to elimination of the
capital stock. Source: GAO?s March 2001 analysis.
Figure 3.5 is not solely a warning. It also illustrates how saving more
would improve the long- term economic outlook. Just as we enjoy a higher
living standard today than our grandparents did, future generations of
Americans
will reasonably expect to enjoy rising standards of living. Living standards
can be compared in terms of real GDP per capita, which historically in the
United States has doubled every 35 years. 20 In considering future living
standards, doubling every 35 years represents a way to gauge whether future
generations will enjoy an improvement comparable to that enjoyed by previous
generations. Suppose the United States could maintain gross national saving
at its 2000 GDP share of 18.3 percent through some combination of personal,
business, and government saving. This constant saving rate is roughly
comparable to saving the Social Security surpluses over the next decade but
is considerably higher after 2010 (as shown in figure 3.4). As shown in
figure 3.5, GDP per capita under the Constant 2000 National Saving Rate
simulation would fall short of doubling every 35 years. GDP per capita in
2035 would be nearly double the 2000 level (falling short by about 8
percent), and by 2070, GDP per capita would fall almost 13 percent short of
doubling the 2035 level. Yet, the Constant 2000
National Saving Rate simulation yields a vast improvement in future living
standards compared to saving the Social Security surpluses. Although
national saving in 2000 was relatively low compared to past U. S.
experience, maintaining that level (18.3 percent of GDP) over the long run
would not be easy as the population ages. The Constant 2000 National Saving
Rate simulation is intended only to show how saving more results in higher
economic growth over the long term. It should not be interpreted as a
recommendation about how much the United States needs to save because saving
is not free and there are other ways in which governments,
businesses, and individuals can and will adjust. For example, as people live
longer, rather than save more to finance more years of retirement,
individuals could choose to work longer and postpone retirement. Clearly,
saving more would improve the nation?s long- term economic outlook- but how
much more do we need to save? Establishing a tradeoff between the
consumption of current and future generations entails value judgments that
economic theory alone cannot provide. Initially, increasing saving and
investment adds to the capital stock and boosts worker productivity and the
economy?s rate of growth. In the long run, a larger
capital stock also requires more saving just to replace depreciating
capital. After reaching this long- run equilibrium, increased saving and
investment yields a higher level of GDP per capita but does not boost worker
productivity and economic growth. Permanently boosting the rate of GDP
growth would require ever- increasing relative shares of saving and 20 Since
World War II, annual growth in GDP per capita has averaged roughly 2
percent. Of course, growth was faster during some periods- the 1950s and
1960s, and the second half of the 1990s- and slower during other periods-
the 1970s.
investment. From a macroeconomic perspective, any increase in saving up to
the ?golden rule saving rate? allows a nation to increase consumption in the
long run. 21 Below the golden rule rate, saving and investing more today
permits increased consumption. Saving beyond the golden rule rate
is counterproductive and would reduce consumption not only initially but
also in the long- term. However, the nation?s saving rate is unlikely to
reach the golden rule level, much less exceed it. Given the steady decline
in the personal saving rate, it is doubtful that Americans would willingly
reduce consumption so much that the nation would be at risk of saving too
much. Estimates based on our long- term growth model suggest that the golden
rule saving rate for the United States would be more than 30 percent. These
estimates also suggest that increasing U. S. national saving would not
substantially decrease the return to capital and therefore could provide
significant improvement to future incomes and consumption. Although the
golden rule saving rate can be a useful analytical concept in evaluating a
nation?s saving, the golden rule is not the best policy for saving.
Maximizing consumption per capita over the long term may not be socially
optimal if people value current consumption more than future consumption and
discount the future. Another way to gauge national saving is to estimate how
much we need to save to achieve specific national objectives. In simple
terms, the nation could act like a ?target saver.? For example, a key target
would be saving
enough to afford the nation?s costs for supporting the aging population.
Boosting saving and GDP is unlikely to prevent a rise in the share of GDP
devoted to government spending on the elderly because economic growth also
tends to increase health spending and raise retirement benefits-
although with a lengthy lag for the latter. A more realistic goal would be
to increase saving by an amount that would generate a rise in future GDP
equivalent to the increase in spending on the elderly. Recent economic
research estimated that increasing saving as a share of GDP by one
percentage point above the 1999 rate would boost GDP enough to cover 95
percent of the increase in elderly costs between now and 2050. 22 This is
21 The golden rule saving rate maximizes consumption per capita over the
long run. For a more extensive discussion, see N. Gregory Mankiw,
Macroeconomics, Fourth Edition (New York, N. Y.: Worth Publishers, 2000),
pp. 90- 97; or Olivier Blanchard, Macroeconomics,
Second Edition (Upper Saddle River, N. J.: Prentice Hall, 2000), pp. 214-
220. 22 See Barry Bosworth, ?Challenges to Capital Flows,? CSIS Policy
Summit on Global Aging, Washington, D. C., January 26, 2000.
equivalent to increasing national saving to 19.3 percent of GDP from 18. 3
percent used in our Constant 2000 Saving Rate simulation.
While it is unclear just what the right level of saving is, it is clear that
America needs to begin saving more if it is to avoid severe problems in the
future. Saving now is vital because expanding the nation?s productive
capacity through national saving and investment is a long- term process.
While saving the Social Security surpluses is a laudable fiscal policy goal,
Americans need to save more to ensure their own retirement security as well
as the nation?s future prosperity. Increased saving by current generations
would expand the nation?s capital stock, allowing future generations to
better afford the nation?s retirement costs while also enjoying higher
standards of living.
Sect on i 4 National Saving and the Government Q4.1. How Has Federal
A4. 1. Federal fiscal policy affects the federal surplus or deficit which,
Fiscal Policy Affected when measured on a NIPA basis, represents the amount
of federal government saving or dissaving, which in turn directly affects
national U. S. National Saving? saving. Federal deficits subtract from
national saving by absorbing funds saved by households, businesses, and
other levels of government that would otherwise be available for investment.
To finance a budget deficit,
the federal government borrows from the public by issuing debt securities,
adding to its debt held by the public. 1 Conversely, federal surpluses, as
measured under NIPA, add to national saving and increase resources
available for investment. When a budget surplus occurs, the federal
government can use excess funds to reduce the debt held by the public. Text
box 4. 1 explains how the NIPA surplus or deficit differs from the federal
unified budget surplus or deficit. While the NIPA measure reflects how
government saving affects national saving available for investment, the
unified budget measure is the more common frame of reference for discussing
federal fiscal policy issues. Given that the two measures are roughly
similar as a share of GDP, in this section we use the unified budget measure
unless otherwise specified.
1 Federal debt held by the public is also called ?publicly held debt? but is
not the same as ?public debt.? Debt held by the public plus debt held by
government accounts, such as budget trust funds, compose gross federal debt.
For more information, see Federal Debt: Answers to Frequently Asked
Questions- An Update (GAO/ OCG- 99- 27, May 1999).
Text Box 4. 1: How do the NIPA and federal unified budget concepts of
federal surpluses and deficits differ?
In 2000, the NIPA federal surplus was 2.2 percent of GDP while the unified
budget surplus was 2. 4 percent. Although the two measures are roughly
similar, there are some conceptual differences. The federal unified budget
measure is generally a cash or cash- equivalent measure in which receipts
are recorded when received and expenditures are recorded when paid
regardless of the accounting period in which the receipts are earned or the
costs incurred. Thus, the unified surplus
reflects the difference between federal receipts and all federal government
outlays including those used to purchase capital goods, such as roads,
buildings, and weapons systems. The NIPA federal budget surplus, however,
reflects the current, or operating, account of the federal government and
does not count purchases of capital goods as current spending. Instead, NIPA
includes a depreciation charge (? consumption of general government fixed
capital?) in current spending as a proxy for the contribution of capital to
the output of government services.
The NIPA and federal unified budget measures also differ in their treatment
of federal employees? pension programs. In the unified budget, federal
employee pension benefits are recorded as outlays when paid in cash; these
outlays are offset, in whole or in part, by the government?s and employees?
contributions to the pension programs. NIPA, on the other hand, counts the
government?s contribution to the pension programs as an outlay to the
household sector, where the contribution is added to personal income and
saving. The benefits paid by the pension programs are not counted as
government outlays under NIPA but rather as a drawdown of accumulated
household assets.
Other differences between the unified budget and NIPA measures arise because
NIPA focuses on current income and production within the United States. For
example, NIPA excludes capital transfers, like estate tax receipts, which
are recorded as revenue in the unified budget, and investment grants- in-
aid to state and local governments, which the unified budget records as
outlays. Lastly, revenue and spending related to Puerto Rico, the Virgin
Islands, and other U. S. territories are counted in the federal unified
budget but not in NIPA.
The unified budget measure is useful in explaining annual changes in the
federal debt held by the public. The NIPA measure is useful in explaining
how government saving has affected net national saving available for
investment. Again, these measures yield roughly similar estimates of the
federal government?s budget position as a share of GDP. In order to provide
a consistent frame of reference for discussing federal fiscal policy issues,
this section refers to the unified budget measure unless otherwise
specified. Note: For more details, see Laura M. Beall and Sean P. Keehan,
?Federal Budget Estimates, Fiscal Year 2001,? Survey of Current Business,
Bureau of Economic Analysis, Vol. 80, No. 3 (March 2000), pp. 16- 25; or
Budget of the U. S. Government: Fiscal Year 2001, Analytical Perspectives,
Office of Management and Budget (2000), pp. 361- 365.
From the 1970s through the mid 1990s, federal deficits consumed a large
share of increasingly scarce private saving and reduced the amount of
national saving available for investment. 2 Since 1990, the Congress and the
President have taken action to eliminate the annual federal budget deficit
through several initiatives including the Budget Enforcement Act of 1990,
the Omnibus Budget Reconciliation Act of 1993, and the Balanced Budget Act
of 1997. As noted in section 2, the combination of these policy actions and
strong economic growth reduced federal government dissaving over the 1990s
(see figure 4. 1). With the swing to surplus in recent years, federal
government saving added to the saving of other sectors to increase the
amount of national saving available for investment. Unified budget surpluses
since 1998 have been the longest- running surpluses in over 50 years, and
federal budget surpluses are projected for the next decade. So far, the
federal government has used excess funds to reduce debt held by the public,
paying down $223 billion in fiscal year 2000 alone. 3
2 See figure 2.2 for the composition of net national saving from 1960 to
2000. 3 Federal Debt: Debt Management Actions and Future Challenges (GAO-
01- 317, February 28, 2001). As discussed further in text box 4. 2, if the
projected budget surpluses materialize, the federal government will reach a
point at which the projected surpluses will exceed the amount of federal
debt available to be redeemed.
Figure 4. 1: The Effect of Federal Surpluses and Deficits on Net National
Saving (1990- 2000)
Percent of GDP 10
5 0 -5
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Net nonfederal saving Federal surplus/ deficit Net national saving
Note: The saving of households, businesses, and state and local governments
makes up nonfederal saving. National saving data are on a NIPA basis. The
NIPA federal surplus/ deficit measure as a share of GDP is roughly similar
to the unified budget measure. Source: GAO analysis of NIPA data from the
Department of Commerce, Bureau of Economic Analysis.
Although one might expect an increase in federal saving to lead to an
increase in national saving, changes in federal saving do not flow through
to changes in national saving and investment in a dollar- for- dollar
relationship. Figure 4.1 illustrates that federal and nonfederal saving,
which consist mainly of private saving, tend to be inversely related. In
other words, when federal government saving increases (smaller deficits or
larger surpluses), private saving may decrease somewhat. When federal saving
decreases (smaller surpluses or larger deficits), private saving may
increase. For example in figure 4. 1, although federal government saving
increased as a share of GDP by 5.5 percentage points from 1990 to 2000, net
national saving increased by only 1. 1 percentage points because private
saving as a share of GDP decreased by 4.9 percentage points over the same
period. 4 4 The total change in net national saving from 1990 to 2000 was
also affected by an increase in state and local government saving of about
0.6 percentage points.
Q4.2. Why Do
A4. 2. Government and private saving tend to move in opposite directions
Government and
for several reasons- three of which are discussed here. First, federal
borrowing can be large enough to affect current interest rates, which in
Private Saving Tend to turn may influence private saving and investment.
Government dissaving Move in Opposite
absorbs funds available for private investment and puts upward pressure
Directions? on interest rates. Higher interest rates both raise the return
on saving and reduce the market value of existing financial assets issued
when rates were lower. 5 The combination of higher returns to saving and
reduced wealth might encourage households and businesses to save more.
Conversely, an increase in government saving adds to the supply of resources
available for investment and may put downward pressure on interest rates.
Lower
interest rates both reduce the return on saving and increase the market
value of existing financial assets issued when rates were higher. Lower
returns to saving and increased wealth might dampen private saving. Second,
if federal budget surpluses are achieved, in part, through higher taxes,
those higher taxes reduce households? disposable personal income. As
discussed in section 1, disposable personal income is the after- tax
personal income (including government transfer payments) available for
households? consumption and saving. Households may choose to save less of
their disposable income and maintain their current level of consumption
especially if they consider the higher tax payments to be temporary. Reduced
personal saving would tend to offset the increased government saving due to
higher taxes. Third, some economists believe that government saving has some
effect on households? expectations about future tax rates even across
generations. This Ricardian equivalence hypothesis holds that people are
forward- looking and recognize that current government surpluses or deficits
affect government debt and future tax rates. 6 Thus, when the government
runs deficits and accumulates debt, Ricardian consumers would save more to
ensure that they or their descendants can pay the expected higher future
taxes. Alternatively, when the government runs
5 For example, market prices of interest- bearing securities, such as
Treasury securities, fluctuate inversely with market interest rates. The
market price of a Treasury security falls when the current interest rate on
Treasury securities of equal maturity rises. 6 Although this view is named
after the 19th century economist David Ricardo who first explored the
possible relationship, the seminal work on this theory is Robert Barro, ?Are
Government Bonds Net Wealth?? Journal of Political Economy, Vol. 82, No. 6
(1974), pp. 1095- 1117.
surpluses and reduces debt held by the public (as in 1998 through 2000),
Ricardian consumers would save less in anticipation of future tax cuts. If
all consumers were fully Ricardian, private saving would fully offset any
change in government saving, and national saving would be unchanged.
Economists continue to debate how well the Ricardian equivalence theory
works in practice. People may be too shortsighted in their saving decisions
to look ahead to the implications of current government debt on future
generations. When federal budget deficits and debt mounted in the 1980s,
private saving declined- the opposite of what the Ricardian equivalence
hypothesis would suggest. However, in recent years, as figure 4.1
illustrates, private saving- which is the major component of nonfederal
saving- declined as federal saving rose- which is consistent with the
Ricardian equivalence hypothesis.
In summary, it is unclear how much each additional dollar of government
saving will ultimately increase national saving. Evidence shows that changes
in saving by households and businesses tend to offset some of the changes in
government saving. While economists disagree over the magnitude of the
private saving offset, studies generally suggest it is less than one- for-
one. This means that for each additional dollar of government saving,
aggregate private saving falls by less than a dollar. To what extent the
aggregate offset is due to the changes in interest rates, wealth,
disposable personal income, expectations of future tax rates, or other
reasons is ambiguous. Estimating the private saving offset is complicated by
the fact that individuals may respond differently to changes in government
saving. 7
Q4.3. What Is the LongTerm
A4. 3. While media attention has focused on budget surpluses projected for
Outlook for
the next 10 years, the long- term outlook for federal government saving has
received considerably less attention. The outlook for government saving
Federal Government
over the next 75 years is subject to wide ranging uncertainty due to Saving/
Dissaving?
economic changes and future legislation. However, one certainty is that as
life expectancy rises and the baby boom generation retires, the U. S.
population will age, and fewer workers will support each retiree. The
7 For example, some households live paycheck- to- paycheck and might spend
all of a tax cut, whereas other households might spend only a portion; a
Ricardian household might save all of a tax cut in anticipation of future
tax increases. For further discussion about accommodating consumer behavior
in modeling fiscal policy, see N. Gregory Mankiw, ?The
Saver- Spender Theory of Fiscal Policy,? NBER Working Paper 7571 (February
2000).
federal budget will increasingly be driven by demographic trends. Absent
changes to current law, government saving is likely to decline as government
health and retirement programs for the growing elderly population claim a
larger share of federal resources.
Any fiscal policy path in which some portion of the anticipated budget
surpluses is saved ultimately leads to a stronger fiscal position than
annually balancing the budget in each of the next 10 years. But what does it
mean to ?save the surplus?? If the surplus is not spent on government
programs or used for tax cuts, it is ?saved.? Saving some portion of the
projected budget surpluses would allow the federal government to reduce the
overhang of federal debt built over decades of deficit spending. Using
surpluses to reduce debt held by the public results in lower interest costs
today, all other things being equal, and a lower debt burden for future
generations. 8 Within this decade, the projected surpluses may likely exceed
the amount of debt held by the public available to be redeemed. Text box 4.2
discusses government saving in an environment where reducing federal debt
held by the public is not an option.
8 For more information on using surpluses to redeem debt held by the public,
see Federal Debt: Answers to Frequently Asked Questions- An Update (GAO/
OCG- 99- 27, May 28, 1999), Federal Debt: Debt Management in a Period of
Budget Surplus (GAO/ AIMD- 99- 270, September 29, 1999), and Federal Debt:
Debt Management Actions and Future Challenges (GAO- 01- 317, February 28,
2001).
Text Box 4. 2: Government Saving When Reducing Publicly Held Federal Debt is
Not an Option If the projected budget surpluses materialize, the federal
government will reach the point at which the annual surpluses will exceed
the amount of debt available to be redeemed or that can be bought back at
reasonable prices. Although estimates as to when this point will be reached
vary depending on several assumptions, most analysts agree that it could
occur within the decade; estimates range from the Congressional Budget
Office?s (CBO) January 2001 estimate of 2006 to the Office of Management and
Budget?s March 2001 estimate of 2008. This point will occur before the debt
held by the public is eliminated, and the resulting accumulation of cash
will require decisions about what to do with these cash balances. This
raises the question of how the federal government can save if reducing
federal debt held by the public is not an option.
Just as the flow of personal saving affects the stock of financial assets
accumulated by households, government saving affects the stock of federal
debt. The federal government borrows from the public to finance a deficit.
Conversely, when a budget surplus occurs, the federal government can use
excess funds to reduce the debt held by the public, accumulate cash
balances, or acquire nonfederal financial assets. Holding cash or nonfederal
financial assets would not reduce debt held by the public but would reduce
the net debt of the federal government. Net debt represents the federal
government?s total financial liabilities, including debt held by the public,
less its total financial assets. Positive amounts of net debt reflect how
much of the nation?s private wealth has been absorbed to finance federal
deficits. Negative amounts of net debt reflect how much of the nation?s
private financial assets have been acquired by the federal government.
Acquiring nonfederal financial assets could be another way to translate
budget surpluses into resources available for investment. However, the issue
of the federal ownership of nonfederal assets is controversial. Federal
Reserve Chairman Greenspan, among others, has expressed concern that there
would be tremendous political pressure to steer the federal
government?s asset selection to achieve economic, social, or political
purposes. Although the governance issues may not be insurmountable, another
possible concern is that the federal government could become the largest
single investor. There is a growing body of experience by other governments
that might help policymakers address the question of whether and how the
federal government can or should acquire nonfederal financial instruments.
Investing in the financial markets is a standard practice for state and
local government pension funds in the United States. Also, other nations
have decided that the potential risks of political interference can be
managed and are outweighed by what those nations perceive as the risk of
failing to save for the future or provide a cushion for contingencies. In
the future, we plan to study how other
nations invest in nongovernmental assets to learn more about how they deal
with governance and other issues Note: The net debt concept is based on the
OECD definition of net financial liabilities that can be calculated by
subtracting financial assets from financial liabilities.
In recent years, the fiscal policy debate has focused on the importance of
saving the Social Security portion of projected unified budget surpluses.
While policymakers appear to have generally agreed to save Social Security
surpluses, there is considerable debate over whether and how to use the non-
Social Security surpluses. After recent years of fiscal discipline and focus
on fiscal responsibility, the anticipated surpluses offer a chance to meet
pent- up demand for discretionary domestic spending, increase defense
spending, cut taxes, shore up Social Security and Medicare, reduce
the debt, or do some combination of these. How the surpluses are used has
long- term implications for federal government saving, national saving, and
ultimately the nation?s future living standards. 9
To get a sense of the long- term implications of broad fiscal policy
choices, we examined the fiscal and economic outlook over the next 75 years
under two alternatives: (1) assuming that the federal government saves only
the Social Security surpluses and (2) assuming that the federal government
saves the entire unified surpluses. 10 For simplicity, these fiscal policy
simulations assume that saving by households, businesses, and state and
local governments remains constant as a share of GDP and that the surpluses
saved are used to reduce debt held by the public. 11 Once debt held by the
public is eliminated, these simulations assume excess cash is used to
acquire an unspecified mix of nonfederal assets with a rate of return
equivalent to the average interest rate on Treasury securities. 12
9 Federal Budget: The President?s Midsession Review (GAO/ OCG- 99- 29, July
21, 1999). 10 Since 1992, GAO has provided the Congress with a long- term
perspective on alternative fiscal policy paths. See Budget Policy: Prompt
Action Necessary to Avert Long- Term Damage to the Economy (GAO/ OCG- 92- 2,
June 5, 1992), The Deficit and the Economy: An Update of Long- Term
Simulations (GAO/ AIMD/ OCE- 95- 119, April 26, 1995), Budget Issues:
Deficit Reduction and the Long Term (GAO/ T- AIMD- 96- 66, March 13, 1996),
Budget Issues: Analysis of Long- Term Fiscal Outlook (GAO/ AIMD/ OCE- 98-
19, October 22, 1997), Budget Issues: Long- Term Fiscal Outlook (GAO/ T-
AIMD/ OCE- 98- 83, February 25, 1998), Budget
Issues: July 2000 Update of GAO?s Long- Term Simulations (GAO/ AIMD- 00-
272R, July 26, 2000), and Long- Term Budget Issues: Moving From Balancing
the Budget to Balancing Fiscal Risk (GAO- 01- 385T, February 6, 2001).
11 As noted in section 3, simulations are illustrative and do not represent
forecasts. See appendix II for a detailed description of the long- term
modeling methodology. 12 Acquiring nonfederal financial assets would reduce
the reported unified surplus or increase the unified deficit because, under
current budget scoring rules, such acquisitions would be treated as
spending.
Saving the Social Security surpluses produces unified budget surpluses for
almost 20 years, as shown in figure 4.2, and eliminates the debt held by the
public by 2015. Under the Save the Social Security Surpluses simulation, the
non- Social Security surpluses are eliminated by an unspecified mix of
permanent tax cuts and spending increases. Under this scenario, unified
budget deficits emerge again in 2019- just as the Social Security and
Medicare programs are being strained by the retiring baby boom generation.
As discussed in section 3, the large deficits and debt under this simulation
imply a substantial reduction in national saving and investment in the
capital stock leading to a decline in living standards- in terms of GDP per
capita. Although policymakers would likely act to reduce the
budget deficits and to promote higher national saving before facing the
economic doomsday implied under the Save the Social Security Surpluses
simulation, this scenario serves as a reminder to be cautious in committing
surpluses to large permanent tax cuts and spending increases.
Figure 4. 2: Unified Surpluses and Deficits as a Share of GDP Under
Alternative Fiscal Policy Simulations (2000- 2075)
Percent of GDP 5
Save the Unified Surpluses a
0
Save the
-5
Social Security Surpluses a
10 15 20
2000 2010 2020 2030 2040 2050 2060 2075
a Data end when deficits reach 20 percent of GDP. Source: GAO?s March 2001
analysis.
Figure 4.2 also shows an alternative fiscal policy path assuming the federal
government saves all of the projected unified surpluses. Under the Save the
Unified Surpluses simulation, federal budget surpluses would be higher over
the next 40 years, but deficits would emerge in the 2040s. Although the
government would have to borrow again from the public to finance deficits
over the long run, the simulation implies that, absent policy or economic
change, debt held by the public could be fully eliminated before the end of
the decade. 13 Just as the Save the Social Security Surpluses simulation is
an implausible doomsday scenario, the Save the Unified Surpluses simulation
can also be viewed as implausible. Under this simulation, annual federal
surpluses, which peak at 5 percent of GDP, would last longer than ever
before in the nation?s history and the government would hold nonfederal
financial assets for over 50 years. Q4.4. How Does Saving
A4. 4. Government saving directly affects future budgetary flexibility
Affect Future through its effect on interest payment spending. In the past,
interest payments contributed to deficits and helped fuel a rising debt
burden. Budgetary Flexibility?
Rising debt, in turn, raised interest costs to the budget, and the federal
government increased debt held by the public to finance these interest
payments. A change from a budget deficit to a surplus reduces federal debt
and replaces this ?vicious cycle? with a ?virtuous cycle? in which saving
some portion of the budget surpluses results in lower debt levels. Lower
debt levels lead to lower interest payments- possibly at lower interest
rates. These lower interest payments in turn lead to larger potential
surpluses and/ or increased budget flexibility.
Figure 4.3 shows the long- term implications for budgetary flexibility of
saving the Social Security surpluses. Again, this simulation assumes that
nonfederal saving remains constant as a share of GDP at 16. 1 percent, the
average nonfederal saving rate since 1998. Absent program changes, saving
the Social Security surpluses- and even the Medicare surpluses 14 -is not
enough by itself to finance the retirement and health programs for the
elderly. As figure 4.3 shows, saving only the Social Security surpluses will
not be sufficient to accommodate both the projected growth in Social
Security and health entitlements and other national priorities in the long
term. These programs will eventually squeeze out most or all other spending.
By 2030, saving the Social Security surpluses results in a 13 Although
estimates as to when this point will be reached vary depending on several
assumptions, most analysts agree that it could occur within the decade; see
Federal Debt: Debt Management Actions and Future Challenges (GAO- 01- 317,
February 28, 2001). 14 Budget Issues: July 2000 Update of GAO?s Long- Term
Fiscal Simulations (GAO/ AIMD00- 272R, July 26, 2000).
?haircut? for spending on programs other than Social Security, Medicare, and
Medicaid. In other words, there is increasingly less room for other federal
spending priorities such as national defense, law enforcement, and federal
investment in infrastructure, education, and R& D. 15 Absent changes in the
structure of Social Security and Medicare, some time during the 2040s,
government would do little but mail checks to the elderly and their health
care providers. Budget flexibility declines drastically so that by 2050, net
interest on the debt would absorb roughly half of all federal revenue.
Furthermore, Social Security and health spending alone would exceed total
federal revenue.
15 These fiscal policy simulations do not reflect other federal commitments
and responsibilities not fully recognized in the federal budget, including
the costs of federal insurance programs, clean- up costs from federal
operations resulting in hazardous wastes, and the demand for new investment
to modernize deteriorating or obsolete physical infrastructure (e. g.,
transportation systems, and sewage and water treatment plants).
Figure 4. 3: Composition of Federal Spending as a Share of GDP Under the
Save the Social Security Surpluses Simulation Percent of GDP 50
40 30
Revenue
20 10
0 2000 2030 2050
All other spending Medicare and Medicaid Social Security Net interest
Note: Revenue as a share of GDP declines from its 2000 level of 20.6 percent
as a result of unspecified permanent policy actions. In this display, policy
changes are allocated equally between revenue reductions and spending
increases. The Save the Social Security Surpluses simulation can only be run
through 2056 due to the elimination of the capital stock.
Source: GAO?s March 2001 analysis.
Over the long- term, meaningful Social Security and Medicare reform will be
necessary to avert massive government dissaving, reduce the economic burden
of government spending for an aging population, and restore budgetary
flexibility to address other national priorities. Q4.10 and Q4. 12 discuss
the need for Social Security and Medicare reform more fully.
Just as saving more of the anticipated budget surpluses would enhance future
budgetary flexibility, increasing private saving would also improve the
federal government?s budget outlook. As discussed in section 3, increasing
national saving boosts investment and economic growth.
Because the U. S. economy is essentially the tax base for the federal
government, economic growth in turn increases government revenue. Increased
economic growth, thus, could provide the resources to help
finance the retirement and health programs for the elderly as well as
increase budget flexibility to pay for other federal programs and
activities. Q4.5. What are the
A4. 5. Fiscal policy choices about how much of the surpluses to save affect
Implications of Current not only the level of government saving but
ultimately the nation?s longterm economic outlook. Saving the Social
Security surpluses would allow Fiscal Policy Choices Americans to enjoy
higher standards of living in the future, as figure 4.4
for Future Living shows. However, under the Save the Social Security
Surpluses simulation,
Standards? GDP per capita growth slows and eventually turns negative. Even
if the
entire unified surplus were saved, GDP per capita would fall somewhat short
of the U. S. historical average of doubling every 35 years. The implication
of such simulations is that even if government saving is sustained at
unprecedented levels, future generations of workers might not enjoy a rise
in living standards comparable to that enjoyed by previous generations.
Thus, saving Social Security surpluses is not enough to ensure retirement
security for the aging population without placing a heavy burden on future
generations. Q4.10 and Q4.12 discuss how Social Security and Medicare reform
might affect national saving.
Figure 4. 4: GDP Per Capita Under Alternative Fiscal Policy Simulations
(1960- 2075) Per capita 2000 dollars
Double 2035 level by 2070 140,000 120,000
Save the Unif ied Surpluses
100,000 80,000
Double 2000 level by 2035
60,000
2000 level is double Save the Social
40,000
t he level in 1967 Security Surpluses
20,000 0
1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2075
Note: The Save the Social Security Surpluses simulation can only be run
through 2056 due to the elimination of the capital stock.
Source: GAO?s March 2001 analysis.
It is tempting to push aside gloomy simulation results and to discount the
significance of fiscal constraints several decades in the future, but recent
good news about the budget does not mean that difficult budget choices
are a thing of the past. The history of budget forecasts should be a
reminder not to be complacent about the certainty that large surpluses will
materialize over the next 10 years as projected. Not so long ago the
forecasts were for ?deficits as far as the eye can see.? Budget projections
are inherently uncertain and even a small change in one assumption can lead
to very large changes in the fiscal outlook over a decade.
The Congressional Budget Office (CBO) describes its projections as more
tentative than usual because the increase in CBO?s productivity growth
assumption is based on data only for the past few years. 16 According to
CBO, that limited time span is insufficient to determine whether the rate of
16 For more information about potential sources of uncertainty in CBO?s
projections, see ?The Uncertainties of Budget Projections,? Chapter 5, The
Budget and Economic Outlook: Fiscal Years 2002- 2011, Congressional Budget
Office (January 2001), pp. 93- 103.
productivity growth has indeed accelerated or has just temporarily deviated
from underlying historical trends as it has many times in the past. 17 Some
observers have declared that the U. S. economy has entered a new era of more
rapid economic growth, and it is possible that future growth could be even
more robust than CBO?s baseline economic projections assume. However, CBO
has pointed out that the recent burst in productivity may prove temporary if
the ?new economy? turns out to be
just a flash in the pan. In addition to the greater- than- usual uncertainty
about productivity growth, it is too soon to tell whether recent boosts in
federal revenue reflect a structural change in the economy or a more
temporary divergence from historical trends. CBO has pointed out that simply
assuming a return to historical trends and slightly faster growth in health
care spending would dramatically reduce the surpluses projected. Given these
uncertainties, lower unified surpluses and even deficits are possible budget
outcomes over the next decade.
Caution is warranted before committing the anticipated surpluses to
permanent changes on either the revenue or spending side. Although
policymakers appear to have generally agreed to save Social Security
surpluses, there is considerable debate over whether and how to use the
rest of the projected surpluses. Yet, the amounts available for new tax or
spending initiatives may be considerably less than policymakers and the
public anticipate. 18 CBO?s budget projections are intended to provide
estimates of federal spending and revenue assuming current law related to
taxation and entitlement programs is unchanged. For this reason, CBO?s
projections do not reflect the full cost of maintaining current policies if
maintaining those policies would require enacting new legislation. For
example, the budget projections do not reflect the costs of laws that are
regularly extended for a few years at a time, such as continuing payments to
farmers that have been provided for the last three years or extending tax
credits due to expire. The projections also do not reflect the expected
17 See Congressional Budget Office, The Budget and Economic Outlook: An
Update (July 2000), pp. 34- 35. 18 ?How Much of the New CBO Surplus Is
Available for Tax and Program Initiatives,? Center on Budget and Policy
Priorities (July 18, 2000); and James Horney and Robert Greenstein, ?How
Much of the Enlarged Surplus Is Available for Tax and Program Initiatives?
Available Funds Should Be Devoted to Real National Priorities,? Center on
Budget and Policy Priorities (July 7, 2000).
enactment of a law to alleviate the Alternative Minimum Tax for middleincome
taxpayers. Moreover, CBO?s inflated baseline assumes that discretionary
spending- which is controlled through annual appropriations- will grow after
2002 at the rate of inflation. However,
discretionary spending historically has grown faster than the rate of
inflation.
Q4.6. How Does
A4. 6. Not only does government saving directly affect national saving
Government
available for private investment, but the federal government also is a key
contributor to the nation?s capital stock and productivity through its own
Investment Affect
investment spending. 19 For example, the federal government invests in
National Saving and building roads, training workers, and conducting
scientific research.
Economic Growth? Although unified budget surpluses increase national saving
available for private investment, increasing federal spending on
infrastructure, if properly designed and administered, can be another way to
increase
national saving and investment. Federal spending on education and R& D-
while it does not count as NIPA investment- can, if properly designed and
administered, also promote the nation?s long- term productivity and economic
growth. GAO has reported that well- chosen federal spending for
infrastructure, education, and R& D that is directly intended to enhance the
private sector?s long- term productivity can be viewed as federal
investment. 20 However, CBO has questioned whether increasing federal
investment spending could significantly increase economic growth. 21
A sound public infrastructure plays a vital role in the nation?s capacity to
produce goods and services in the future. Public facilities, such as
transportation systems and water supplies, are vital to meeting the
19 Fiscal policy choices affect not only how much the government saves and
invests but also affect how businesses and households save and invest. Q4. 7
discusses federal policies aimed at encouraging private saving. 20 For more
information about defining federal investment for long- term economic
growth, see Budget Issues: Choosing Public Investment Programs (GAO/ AIMD-
93- 25, July 23, 1993) and related GAO products listed in appendix V.
21 CBO concluded that increased federal spending on investment in
infrastructure, education and training, and R& D was unlikely to increase
economic growth and could possibly reduce growth. According to CBO, many
federal investments have little net economic benefit- either because they
are selected for political or other noneconomic reasons or because they
displace more productive private- sector or state and local investments. See
The Economic
Effects of Federal Spending on Infrastructure and Other Investments,
Congressional Budget Office (June 1998).
immediate as well as long- term public demands for safety, health, and
improved quality of life. While most infrastructure spending takes place at
the state, local, or private- sector level, the federal government also
invests
in infrastructure such as highways, bridges, and air traffic control. 22 As
federal unified deficits declined over the 1990s, federal investment in
nondefense physical assets remained relatively constant as a share of GDP.
Federal spending on education and nondefense R& D, which is intended to
enhance the nation?s long- term productivity, also remained relatively
constant as a share of GDP over the 1990s.
At some point, reducing federal unified deficits or maintaining unified
surpluses at the expense of federal R& D and education spending raises
concerns about future workers? skills, technological advancement, and, thus,
economic growth. R& D and education have long been seen as areas for
government activity given the private sector?s inability to capture all of
the societal benefits that such investments provide. The federal
government has played a central role in supporting R& D and thus enhancing
the nation?s long- term productivity. One rationale for this has been that
the societal gains from R& D, for example, are often not felt until far in
the future and so might not provide much profit for an individual firm. The
Internet, computers, communications satellites, jet aircraft, and
semiconductors are all examples of benefits from federal R& D investments
over the past 50 years. Federal R& D investment spending on genetic medicine
and biotechnology has helped lead to the mapping of human genes. Although
the Human Genome Project has been hailed as ?the most important, most
wondrous map ever produced by humankind,? its full
societal benefits will not be seen for years to come. 23 Fiscal policy
choices about the allocation of government spending between consumption and
investment are influenced in part by the federal budget process. The federal
government?s cash- based budget process is largely a
short- term plan focusing on the short- to medium- term cash implications of
government obligations and fiscal decisions. The budget seeks to serve 22
For more on the federal government?s role in infrastructure investment, see
U. S. Infrastructure: Funding Trends and Opportunities to Improve Investment
Decisions (GAO/ RCED/ AIMD- 00- 35, February 7, 2000).
23 ?Remarks by the President, Prime Minister Tony Blair of England (Via
Satellite), Dr. Francis Collins, Director of the National Human Genome
Research Institute, and Dr. Craig Venter, President and Chief Scientific
Officer, Celera Genomics Corporation, on the Completion of the First Survey
of the Entire Human Genome Project,? The White House, Office of the Press
Secretary (June 26, 2000).
many purposes, but one of its primary functions is to control obligations
up- front before the government commitment is made. As a result, the budget
process tends to view a dollar spent on consumption the same as a dollar
spent on investment because both represent commitments by the government and
represent resources taken out of the private sector for use
by the government. Some have argued that the budget may actually favor
short- term consumption because the cost of both must be scored up- front as
part of the Budget Enforcement Act process even though most of the
benefits from investment programs accrue in the future. 24 In the past, GAO
has suggested that the budget could better facilitate policymakers? weighing
choices between federal investment and consumption by
incorporating an investment component with agreed- upon levels of investment
spending. This could promote the consideration of spending intended to
benefit the economy over the long term while maintaining overall fiscal
discipline. 25 As the Congress moves to modify the federal budget process
with the expiration of the Budget Enforcement Act, attention is warranted as
to how the process considers the long- term
implications of alternative spending choices. Q4.7. What Policies of
A4. 7. Although increasing government saving is the most direct way for the
the Federal federal government to increase national saving, the federal
government can also encourage saving and investment by state and local
governments and Government Have
the private sector. For example, the federal government provides funding-
Been Aimed at
such as grants, loans, or loan guarantees- to state and local governments
Encouraging to finance the construction and improvement of the nation?s
highways,
mass transit systems, and water systems. The federal government also
Nonfederal Saving and
provides financial aid to encourage postsecondary education. In addition to
Investment? its direct spending, the federal government offers tax
incentives to encourage nonfederal saving and investment. The revenue loss
associated
with a tax incentive represents the federal government?s budgetary cost of
promoting saving and investment for particular purposes. The current income
tax system provides preferential treatment- such as special exemptions,
special deductions, and/ or credits, as well as special
24 Budget Trends: Federal Investment Outlays, Fiscal Years 1981 2003 (GAO/
AIMD- 98- 184, June 15, 1998). 25 Budget Structure: Providing an Investment
Focus in the Federal Budget (GAO/ T- AIMD95- 178, June 29, 1995).
tax rates- for both businesses and individuals. Under current law, some
types of saving and investment are exempt from taxes while other types are
fully taxed; some forms of consumption- in particular, health care-
receive preferential treatment. Although a comprehensive discussion of
income versus consumption taxes is beyond the scope of this primer, it is
helpful to highlight various federal tax incentives for saving and
investment. 26
The federal government uses tax incentives to encourage particular forms of
investment. Some tax provisions allow accelerated depreciation so that
businesses can more quickly recover the costs of investing in certain types
of equipment and structures. Other tax incentives encourage investment in
the nation?s infrastructure. For example, interest income on state and local
government bonds, which are used primarily for infrastructure purposes, are
exempt from federal taxes. This tax preference allows state and local
governments to borrow at lower rates to build highways, schools, mass
transit facilities, and water systems. In addition, tax preferences may
encourage particular forms of infrastructure investment, such as special tax
credits for investments in developing low- income rental housing. Also,
special tax credits and deductions are aimed at spurring private R& D.
The federal government also has sought to encourage personal saving both to
enhance households? financial security and to boost national saving. Table
4. 1 highlights some tax provisions aimed at encouraging saving for
retirement, buying homes, and investing in education. 27 The largest tax
incentive for saving- in terms of the tax revenue loss- is the preferential
tax treatment of employer- sponsored pension plans; additional tax
incentives encourage retirement saving outside of employer pensions. The
second largest category of tax incentives aimed at encouraging saving
promotes home ownership. Other tax incentives encourage college and other
postsecondary education. While some tax incentives for education encourage
households to accumulate assets such as U. S. Series EE savings 26 For more
information about the differences between income and consumption taxes and
the current tax treatment of saving and investment, see Tax Administration:
Potential Impact of Alternative Taxes on Taxpayers and Administrators (GAO/
GGD- 98- 37, January 14, 1998), pp. 55- 77.
27 While this discussion focuses on tax incentives encouraging personal
saving, some federal programs and tax provisions may actually discourage
people from saving. As discussed in section 1, Social Security also affects
people?s incentives to save for retirement. Capital
gains taxation and estate transfer taxes may also affect household decisions
about saving and asset accumulation.
bonds or education savings accounts to pay for college, other provisions,
such as the HOPE credit, are aimed more at making college more affordable.
Table 4. 1: Selected Federal Income Tax Provisions That Influence Personal
Saving FY 2000 revenue loss Tax provision estimate in millions
Encourage retirement saving
Net exclusion of pension contributions and earnings for: (1) qualified
employer pension plans $89, 120 (2) Individual Retirement Accounts (IRAs)
$15, 200 (3) Keogh plans $5, 500
Encourage home ownership
Deductions for mortgage interest on homes $60, 270 Deductions for State and
local property taxes on homes $22, 140 Exclusion of capital gains income
from home sales $18, 540
Encourage personal investment in postsecondary education
HOPE scholarship tax credits for tuition payments for the first 2 years of
college $4, 210 Deductibility of student- loan interest $360 Exclusion of
interest earned on U. S. Series EE savings bonds when used for qualified
education expenses $10
Note: This table does not represent all federal tax provisions related to
personal saving. For a more comprehensive discussion, see Joint Committee on
Taxation, Present Law and Background on Federal Tax Provisions Relating to
Retirement Savings Incentives, Health and Long- Term Care, and Estate and
Gift Taxes (JCX- 29- 99), June 15, 1999.
Source: GAO analysis based on information provided in Analytical
Perspectives, Budget of the United States Government, Fiscal Year 2002.
For individual taxpayers, tax incentives increase the after- tax return on
saving for particular purposes or on specific types of assets accumulated.
This would narrow the wedge between the individual?s return on saving and
society?s return on investment that results from the taxation of income from
saving. As explained in section 1, higher rates of return may or may not
encourage people to save more. For the federal government, tax incentives
reduce tax revenue and hence government saving. How tax incentives affect
personal saving, and ultimately, national saving is less certain. The net
effect on national saving- discussed further in Q4.8- depends on the
interaction between any additional personal saving and government dissaving
associated with financing the incentive.
Tax incentives affect how people save for retirement but do not necessarily
increase the overall level of personal saving. Since the 1970s, preferential
tax treatment has been granted to Individual Retirement Accounts
(IRAs) and employer- sponsored 401( k) pension plans. Even with these
retirement saving incentives, the personal saving rate has steadily
declined. Although the tax benefits indeed seem to encourage individuals to
contribute to these kinds of accounts, the amounts contributed may not be
totally new saving. Some contributions may represent saving that would have
occurred even without the tax incentives or amounts merely shifted from
taxable assets or even financed by borrowing. Economists disagree about
whether tax incentives are effective in increasing the overall level of
personal saving. In a 1996 symposium examining universal IRAs available
in the early 1980s, 28 researchers reached three widely divergent
conclusions: (1) yes, most contributions represented new saving, (2) no,
most IRA contributions were not new saving, and (3) maybe, about 26 cents of
each dollar contributed may have represented new saving. 29
Even if tax incentives do not increase personal saving much in the short
term, they may encourage individual households to earmark resources
specifically for retirement. Once the funds are earmarked in retirement
accounts, the prospect of taxes and penalties for early withdrawals might
induce some households to save more outside of retirement accounts to
achieve nonretirement goals. However, if people can readily withdraw money
from tax- preferred accounts for purposes other than retirement, there is no
assurance that tax incentives would ultimately enhance individuals?
retirement security.
Allowing access to voluntary accounts like IRAs or 401( k) plans before
retirement- through borrowing or early withdrawals to buy a home or to pay
for education or medical expenses- is a double- edged sword. Access 28 The
Journal of Economic Perspectives, Vol. 10, No. 4 (Fall 1996) presented three
papers representing these viewpoints: James M. Poterba, Steven F. Venti, and
David A. Wise, ?How Retirement Saving Programs Increase Saving,? pp. 91-
112; Eric M. Engen, William G. Gale,
and John Karl Scholz, ?The Illusory Effects of Saving Incentives on Saving,?
pp. 113- 138; and R. Glenn Hubbard and Jonathan S. Skinner, ?Assessing the
Effectiveness of Saving Incentives,? pp. 73- 90. 29 Researchers have also
attempted to estimate the effect of employer- sponsored 401( k) plans on
personal saving. For a recent summary of this empirical debate, see William
Gale,
?The Impact of Pensions and 401( k) Plans on Saving: A Critical Assessment
of the State of the Literature,? paper presented at ERISA After 25 Years: A
Framework for Evaluating Pension Reform, Washington, D. C., September 17,
1999.
provisions may increase saving because more people may choose to participate
and to contribute larger amounts. 30 Yet, borrowing and early withdrawals
can ultimately reduce individuals? retirement income. There would be little
benefit to national saving from allowing early access to mandatory accounts
with set contribution levels- which has been proposed for Social Security
(see Q4.10 and Q4.11).
Q4.8. Given That
A4. 8. The net effect on national saving depends on whether a tax incentive
Experts Disagree induces enough additional saving by households to make up
for the government?s revenue loss. To gain a better understanding of how tax
About Whether
incentives affect national saving, look at one example: how a tax deduction
Retirement Saving Tax
for a traditional tax- deferred IRA may affect government and ultimately
Incentives Are national saving. For simplicity, consider a married couple in
which neither spouse is covered by an employer- sponsored pension plan and
each
Effective In Increasing contributes $2, 000- the maximum per person per year
allowed under
Personal Saving current law- to a traditional IRA. As shown in table 4. 2,
how much the couple?s $4,000 annual contribution adds to national saving
that year
Overall, How Do These depends on (1) how much their IRA tax deduction costs
the government Tax Incentives Affect
and (2) whether their contributions represent new saving or were shifted
National Saving?
from existing assets. Further assume, for simplicity, that our hypothetical
couple?s marginal tax rate is 28 percent, so their deduction costs the
federal government $1, 120 (28 percent of $4,000). In other words,
government saving decreases by $1,120 (or government dissaving increases by
that amount, depending on the government?s surplus/ deficit position for the
year). If the couple would have otherwise spent the $4, 000 (i. e., their
contributions represent new saving), national saving would increase by $2,
880- the $4,000 increase in personal saving less the $1,120 decrease in
government saving. At the other extreme, if the couple merely shifted the
funds from another account or asset to the IRAs (i. e., no increase in
personal saving), national saving would fall by the amount of the
government?s tax loss. The actual change in national saving probably falls
somewhere between these two examples. Table 4.2 also provides a third
scenario- the impact on national saving if about 26 percent of the couple?s
contributions represent new saving. In this case, national saving would drop
slightly, but the couple would have saved more and expressly earmarked more
of their assets for retirement.
30 401( k) Pension Plans: Loan Provisions Enhance Participation But May
Affect Income Security for Some (GAO/ HEHS- 98- 5, October 1, 1997).
Table 4. 2: Change in Government and National Saving Resulting From a $4,
000 Tax- Deductible IRA Contribution Under Alternative Personal Saving
Assumptions Change in personal
Change in government Change in national
Alternative personal saving assumptions a saving saving b saving c 15-
percent marginal tax bracket (annual income under $43,050)
No new saving $0 -$ 600 -$ 600 26- percent new saving +1,040 -600 +440 All
new saving +4,000 -600 +3, 400
28- percent marginal tax bracket (annual income over $43, 050, but not over
$104,050)
No new saving $0 -$ 1, 120 -$ 1, 120 26- percent new saving +1,040 -1,120
-80 All new saving +4,000 -1,120 +2, 880
39. 6- percent marginal tax bracket (annual income over $183,150)
No new saving $0 -$ 1, 584 -$ 1, 584 26- percent new saving +1,040 -1,584
-544 All new saving +4,000 -1,584 +2, 416
Note: This table illustrates a hypothetical couple in which neither spouse
is covered by an employersponsored retirement plan and each contributes
$2,000 to a traditional IRA. Their $4,000 IRA contributions are fully
deductible. If either spouse is covered by an employer- sponsored plan,
their
contributions may not be fully deductible depending on their income. a
Change in personal saving depends on how much of the $4,000 IRA contribution
represents new
saving. These assumptions were drawn from three papers presented in the Fall
1996 Journal of Economic Perspectives; see footnote 28. b Change in
government saving represents tax revenue loss in first year due solely to
tax deduction for IRA contribution. Amount does not include revenue forgone
as a result of tax- deferral on investment income. Taxes on contribution and
investment income are deferred until amounts are withdrawn.
c Change in national saving represents the sum of the change in personal and
government saving for a simplified example focused on one household and one
type of IRA. The ultimate effect of any tax incentive on national saving
would depend on how households in aggregate respond.
Source: GAO analysis based on 1999 individual income tax rates and IRS
publication 590 Individual Retirement Arrangements.
Table 4. 2 also shows the effect on national saving of tax- deductible IRA
contributions under different tax brackets. If our hypothetical couple were
in the highest income tax bracket and their contributions represented all
new saving, their $4, 000 deduction would cost the government $1, 584 and
add $2,416 to national saving. If they were in the lowest tax bracket, their
deduction would cost the government $600 and add as much as $3,400 to
national saving. Of course, this simplified example focuses on one
household and one type of IRA. 31 The ultimate effect of any tax incentive
on national saving would depend on how households in aggregate respond. A
tax incentive for retirement saving may encourage some households to save
more while encouraging others to shift their existing balances into tax-
preferred accounts.
Again, the net effect of a tax incentive on national saving depends on
whether the tax incentive induces enough additional personal saving to make
up for the government?s revenue loss. As illustrated in table 4.2,
deductions for taxpayers in higher tax brackets are more costly for the
government. Although deductions for lower- income taxpayers appear to yield
a greater net increase in national saving because they are less costly for
the government, they also offer relatively less incentive for lowerincome
families to save. Low- and moderate- income households have fewer resources
and may have less capacity to contribute to an IRA or to earmark more assets
for retirement. Most people saving through taxpreferred
retirement accounts are middle- to upper- income. Although higher- income
households might be encouraged to save more by increasing the annual
contribution limits to IRAs and employer- sponsored 401( k) plans- currently
$2, 000 and $10,500, respectively- increasing contribution limits alone is
not likely to induce more saving from low- income
households. Nonrefundable tax incentives may not be particularly effective
in encouraging saving by lower- income taxpayers, who already owe relatively
little or no federal income taxes.
In recent years, policymakers have explored providing refundable tax
incentives and government matching to encourage Americans to save more. Text
box 4.3 describes two federal initiatives allowing governmentsubsidized
saving accounts for low- income families. First, the 1996 welfare 31 Besides
the tax- deductible traditional IRA, other retirement saving vehicles also
receive preferential tax treatment. Depending on their circumstances, people
may also be able to choose from nondeductible traditional IRAs, new Roth
IRAs, SEP IRAs for the selfemployed, SIMPLE IRAs sponsored by small
employers, and the popular 401( k) employersponsored saving plans. The oddly
named education IRA is not a retirement arrangement.
reform law allowed states to use Temporary Assistance for Needy Families
(TANF) funds to establish subsidized saving accounts for TANF recipients.
Second, the Assets for Independence Act of 1998 authorized federal funding
for a 5- year demonstration project to evaluate the effectiveness of
matching incentives for certain low- income savers.
Text Box 4. 3: Individual Development Accounts for Low- Income Savers
Individual development accounts (IDAs) are special saving accounts for low-
income families. In theory, IDAs help lowincome families save, accumulate
assets, and achieve economic self- sufficiency. IDAs are like the better
known IRAs in the sense that the assets accumulated are to be used only for
limited purposes. Whereas IRAs are for retirement, IDAs can be used to buy a
first home, to pay for college or other job training, or to start a small
business. IDAs are special in that low- income savers receive matching funds
from federal and state governments as well as private sector organizations
as
an incentive to save. Usually, IDA account holders must undergo economic
literacy training as a condition of participation. The 1996 welfare reform
law allowed states to use Temporary Assistance for Needy Family (TANF) funds
to establish subsidized saving accounts for TANF recipients. TANF recipients
are to make contributions from earnings, and state matching funds used for
IDAs count towards a state?s maintenance- of- effort spending requirement.
IDA balances generally are not to be considered in determining eligibility
and benefits for means- tested federal programs. According to the Center for
Social Development, as of January 2001, 29 states had passed legislation
establishing IDA programs, and 32 states had incorporated IDAs into their
TANF plans. Matching rates and dollar limits vary by state. Matching rates
range from two- toone
in Virginia to three- to- one in Indiana and Missouri. Limits on IDA
balances range from $4, 000 in Virginia to $10,000 in South Carolina and
$50, 000 in Missouri. Some states restrict IDA use to paying for education
or training. The Assets for Independence Act of 1998 authorized federal
funding for a 5- year demonstration project to evaluate the effectiveness of
matching incentives for low- income savers. The IDA demonstration project
provides direct federal funding to state and local governments as well as
nonprofit community organizations to match saving contributions by low-
income families eligible for TANF or the Earned Income Tax Credit. In fiscal
years 1999 and 2000, $10 million was
appropriated each year for the demonstration project. In those 2 years,
awards totaling $17.7 million were made to 65 grantees sponsoring IDA
programs. For fiscal year 2001, $25 million was appropriated for the IDA
demonstration. Because the first grants were awarded in September 1999, it
is too soon in the demonstration project to fully evaluate the effectiveness
of IDAs as a saving incentive.
Sources: The Center for Social Development, Washington University in St.
Louis, and Vee Burke, Temporary Assistance for Needy Families and Individual
Development Accounts, Congressional Research Service, January 17, 2001.
Recent proposals have aimed at creating a broader system of subsidized
accounts to encourage more Americans to save for retirement. For example,
President Clinton?s 2000 Retirement Savings Accounts (RSAs) proposal would
have provided government matching on voluntary
retirement contributions for low- and moderate- income families. 32 Under
the RSA proposal, a worker between the ages of 25 and 60 with family
earnings of at least $5,000 could contribute up to $1, 000 annually through
either an employer- sponsored saving plan or a tax- deferred individual
account. 33 A worker earning up to $12,500 was to receive a two- to- one
(200 percent) match on the first $100 contributed each year and a one- to-
one match (100 percent) on additional contributions. The progressive
matching formula was to phase down as income increased. A worker earning
between $25,000 and $40, 000 was to receive a 20 percent match on the first
$100 contributed and additional contributions. For individuals who did not
owe federal income taxes, the government match was to be in the form of a
tax credit to the employer or financial institution holding the taxpayer?s
account. Although the RSAs were aimed at accumulating assets for retirement,
the proposal would have allowed limited withdrawals after 5 years for such
purposes as buying a home or paying educational or medical expenses.
At this time, it is unclear how new tax- subsidized saving accounts might
affect personal saving and ultimately national saving. Like any tax
incentive, matching tax credits would clearly reduce federal revenue and
government saving. The tax credits by themselves would have no net effect on
national saving: absent any change in household consumption, personal saving
would increase by the amount of the government match, but government saving
would decrease by the same amount. Of course, the purpose of matching is to
change household behavior. Government
matching of voluntary contributions could increase national saving if these
incentives indeed induce people to save more. 34 A progressive match-
providing a higher match for low- income workers and eliminating the match
for high- income workers- would serve to target low- income 32 President
Clinton?s 1999 Universal Savings Accounts (USA) proposal would have created
a
more costly centralized system of accounts with a flat annual general tax
credit of up to $300 for low- and moderate- income workers plus a 50 to 100
percent government match on voluntary contributions. Low- income workers
were to receive a one- to- one match on their contributions, and the match
progressively declined based on income so that higher- income workers would
receive a lower match or none at all. 33 Contribution limits and eligibility
thresholds for RSAs for a couple were twice the amount for an individual.
For example, a couple could contribute up to $2, 000 annually. 34 Depending
on the design and implementation, government matching could potentially
reduce national saving. For example, a household could transfer amounts from
existing assets to get the government match and then increase consumption in
response to its increased wealth.
workers who now receive little tax benefit from existing retirement saving
incentives. Even with generous matching, low- income workers may not
voluntarily save more for retirement. In light of the conflicting expert
views on how existing tax incentives affect personal saving, it is unclear
how new
matching incentives might affect individuals? saving choices and retirement
security. Q4.9. What Is the
A4. 9. While a great deal of attention focuses on how much retirement
Federal Government
saving tax incentives cost the government and how much, if any, new personal
saving they generate, what is sometimes overlooked is that tax Doing to
Educate the incentives remind people to save for retirement. The existence
of IRAs and Public About Why
401( k) s serves to raise public awareness about retirement saving Saving
Matters?
opportunities. Advertising by financial institutions offering IRAs and
information about employer- sponsored 401( k) options serve as reminders
about ways to save for retirement. Yet, even as the tax code provides more
opportunities than ever to save for retirement, Americans may not understand
why saving matters. In the ?Savings Are Vital for Everyone?s Retirement Act
of 1997? (SAVER Act), the Congress found that a leading obstacle to
expanding retirement saving is that many Americans do not know how to save
for retirement, let
alone how much. According to the 1998 National Summit on Retirement Savings,
the nation must do a better job of educating the public- employers and
individuals alike- about the importance of saving more today to secure the
nation?s retirement security. 35 Increasing personal saving is vital to
enhancing individual households? retirement security, to increasing national
saving available to invest in the nation?s capital stock,
and ultimately to reducing the burden on future generations of financing
government programs for the elderly.
As mandated by the SAVER Act, the Department of Labor maintains an outreach
program to raise public awareness about the advantages of saving and to help
educate workers about how much they need to save for retirement. The
Department of Labor?s original Retirement Savings Education Campaign was
launched in 1995 in partnership with the
35 Final Report on The National Summit on Retirement Savings, Department of
Labor (September 1998). This bipartisan summit, held June 4- 5, 1998, was
mandated by the SAVER Act. Additional national summits are to be held in
2001 and 2005.
Department of the Treasury and other public and private organizations. 36
The SAVER Act also requires the Department of Labor to coordinate with
similar efforts undertaken by other public and private organizations. In
addition to the Department of Labor?s outreach program, other federal
agencies also play a role in saving education. The Securities and Exchange
Commission?s Office of Investor Education and Assistance promotes financial
literacy and seeks to encourage Americans to save wisely and
plan for the future. The Administration on Aging and FirstGov for Seniors
also provide information to educate the public about how they can better
prepare for a more financially secure retirement. In 2000, the Department of
the Treasury launched the National Partners for Financial Empowerment. This
new coalition planned to raise public awareness about
the importance of financial literacy and saving and to help Americans
develop the skills they need to take charge of their financial future.
Education campaigns to promote financial literacy and retirement saving
represent a potentially valuable tool for encouraging people to save more.
Building on policymakers? efforts to enhance tax incentives for retirement
saving, education campaigns are a means to convey easy- to- understand
information about the variety of saving vehicles available. 37 Efforts such
as the Department of Labor?s saving outreach program can serve as a catalyst
to educate employers about pension plan options they can offer to their
employees as well as to encourage individuals to save more on their own
behalf. Public education campaigns are one way to get people started with
retirement planning. The key steps are to calculate how much income they
need to retire, estimate how much retirement income they can expect from
Social Security and employer- sponsored pensions, and decide how much more
they need to save.
Individualized Social Security statements now sent annually by the Social
Security Administration to most workers aged 25 and older provide important
information for personal retirement planning. The statement provides
estimates of potential retirement, disability, and survivor benefits. It
also asks statement recipients to check their listed earnings to help
correct errors and ensure benefits are correct when workers retire, become
disabled, or die. The newly revised statement more successfully
36 These public- private partnerships were a catalyst in 1995 for forming
the American Savings Education Council. This coalition of public and private
entities undertakes initiatives aimed at raising public awareness about
personal finance and retirement planning.
37 Appendix IV includes a list of educational websites on saving.
meets its purpose of providing basic information to individual workers, but
further improvement is always possible. 38 For example, readers may not
understand that the ?current dollar? estimates provided reflect today?s
price level, not the price level that will exist when they actually start to
receive benefits. The Social Security Administration will need to continue
to review and streamline the statement to make it clearer and easier to
understand. Individualized Social Security statements also explain that
Social Security benefits were not intended to be the only source of
retirement income, and the statements encourage workers to supplement their
benefits with pensions and personal saving. Once they know their Social
Security benefits promised under current law, workers can calculate how much
they
can expect from employer- sponsored pension plans and how much they need to
save on their own for retirement. 39 Knowing more about Social Security?s
financial status would help workers to understand how to view their personal
benefit estimates. As discussed in section 1, Social Security benefits are
projected to exceed the program?s cash revenue in 2016, and
the trust fund will be depleted in 2038. At that time, Social Security
revenue would only be sufficient to pay for roughly 73 percent of promised
benefits. The individualized statements disclose that, absent a change in
the law, only a portion of the benefits estimated may be payable. Knowing
this can
help workers understand that some combination of revenue increases and
benefit reductions will be necessary to restore the program?s long- term
solvency.
Q4.10. How Would
A4. 10. Restoring Social Security to sustainable solvency and increasing
Social Security Reform saving are intertwined national goals. Saving more
today would alleviate the burden of financing Social Security commitments.
Increased saving and Affect National Saving?
investing can lead to greater economic growth, and a larger economy in turn
would mean higher real wages, resulting in more government revenue to pay
benefits. Social Security reform- depending on the elements of the reform
package and the timing of implementation- could foster saving and 38 Social
Security: Providing Useful Information to the Public (GAO/ T- HEHS- 00- 101,
April 11, 2000). 39 The Social Security Administration also offers an online
retirement planner with calculators to help workers understand how much they
can expect from Social Security under different retirement scenarios.
provide resources for capital formation and economic growth. Prompt action
is vital because economic growth is a long- term process. A bigger economic
pie would make it easier for future workers to meet the dual challenges of
paying for the baby boomers? retirement while achieving a
rising standard of living for themselves. For individuals and the nation as
a whole, saving more means forgoing consumption today in order to consume
more in the future. However, this trade- off between today?s consumption and
tomorrow?s consumption is somewhat different for an individual than for the
nation. When an
individual delays retirement saving, that individual enjoys the additional
consumption in the early years and then personally bears the burden of
saving larger amounts later, working longer, or accepting a lower standard
of living in retirement. From the nation?s perspective, if current
generations forgo saving for their retirement costs, they also forgo
investment opportunities and the economic growth that would result.
Therefore, their saving choices affect not only their own retirement income
but also potentially affect the standard of living for future workers.
Greater economic growth from saving more now could alleviate the burden that
a
slow- growing workforce will bear in producing the goods and services to be
consumed by a society with a large retired population that consumes but does
not work. In other respects, saving for the nation?s retirement costs is
analogous to an individual?s retirement preparations. The sooner we begin,
the less we have to save per year and the greater our benefit from
compounding growth. The conventional measure of Social Security solvency is
gauged in terms of the actuarial balance of the program?s trust fund over a
75- year period. According to the Social Security Trustees? 2001
intermediate projections, restoring the program?s actuarial balance over the
next 75 years would require a combination of reform options equal to 1.86
percent of taxable payroll. In simple terms, increasing payroll taxes by 1.
86 percent (a 15-
percent increase over the 2001 rate paid by employers and workers) now could
head off a Social Security shortfall for 75 years. Delaying reform until
Social Security?s insolvency is imminent would necessitate drastic changes
over a shorter period. Absent reform, by 2038, Social Security?s annual
deficit would require cutting benefits by about a quarter (26 percent) or
raising payroll taxes by about a third (35 percent) just to restore balance
for that year. Restoring Social Security?s long- term solvency will require
some combination of increased revenues and reduced expenditures. Various
options are available within the current structure of the program including
raising the retirement age, reducing the cost- of- living adjustment,
altering the benefit formula, increasing payroll taxes, and investing trust
fund surpluses in higher- yielding assets. In addition, some proposals would
fundamentally alter the program structure by setting up individual
retirement accounts.
Before trying to explore how various reform options might affect national
saving, it is useful to highlight how the current Social Security program
affects personal saving, the Social Security trust fund, and government
saving.
Personal saving. As discussed in Q1. 5, some evidence suggests that the
existence of Social Security may have reduced personal saving. The
retirement benefits promised under current law reduce the amount
people believe they need to save on their own for retirement. Although some
may view their payroll tax contributions as a form of retirement saving,
workers need to understand that their contributions are not deposited into
interest- bearing accounts for each individual but are
largely used to finance current benefits.
Social Security trust fund. In the federal budget, a ?trust fund? is
simply an accounting mechanism to record earmarked receipts and
expenditures. 40 From Social Security?s perspective, its annual cash
surpluses are saved in the trust fund, and the trust fund balance represents
resources accumulated to help pay future benefits. However, the accumulation
and exhaustion of the trust fund?s balance does not reflect how Social
Security finances affect federal government and national saving. The extent
to which cash surpluses ?saved? in the Social Security trust fund translate
into increased national saving depends on
federal saving as a whole. Although the trust fund appears solvent until
2038, Social Security will begin dissaving at the point that program cash
deficits emerge in 2016 (shown in figure 1.8).
Government saving. For the years since the 1983 reforms until 1998, Social
Security surpluses partially offset a deficit in all other
40 For more information about trust funds in the federal budget, see Federal
Trust and Other Earmarked Funds: Answers to Frequently Asked Questions (GAO-
01- 199SP, January 2001).
government accounts within the unified budget. 41 In effect, Social Security
surpluses reduced the magnitude of government dissaving and the government?s
need to borrow from the public. Since 1998, when the federal government
began running unified surpluses, policymakers appear to have agreed to using
the Social Security surpluses to reduce
federal debt held by the public, and these amounts would translate dollar-
for- dollar into government saving. When the trust fund begins running cash
deficits in 2016, the government as a whole must come up
with the cash to finance Social Security?s cash deficit by reducing any
projected non- Social Security surpluses, borrowing from the public, raising
other taxes, or reducing other government spending. The Save the Social
Security Surpluses simulation illustrates the magnitude of
fiscal challenges associated with our aging society. Absent reform, Social
Security deficits would contribute to government dissaving (shown in figure
4. 2) and greatly constrain budgetary flexibility over the long run (shown
in figure 4.3).
In evaluating reform proposals, it is important to consider whether a reform
package will truly increase national saving and ?grow the economic pie.?
From a macroeconomic perspective, increasing the trust fund?s
balance, without underlying reform, does nothing to enhance the government?s
fiscal capacity to finance future benefits. For example, crediting
additional securities to the trust fund or increasing the interest rate paid
on the trust fund?s securities would commit additional future general
revenue to the Social Security program but does not increase the
government?s overall revenue or reduce its costs.
Reforms that reallocate the composition of the nation?s saving and asset
portfolio may serve only to redistribute the existing pie. For example,
individual accounts- discussed more fully in Q4.11- affect the contributions
of government and personal saving relative to national saving. Investing
Social Security surpluses in the stock market affects the government?s asset
holdings but does not directly increase national saving. As we reported in
1998, potentially higher returns- albeit with greater
risk- on the government?s stock holdings could boost Social Security?s
financing and reduce the size of other revenue increases or benefit
41 During the late 1970s and early 1980s, Social Security?s expenditures
regularly exceeded revenues, causing a rapid decline in the trust fund?s
balance and raising concerns about the program?s solvency. In response, the
Congress passed reforms in 1977 and 1983 that together were intended to
assure Social Security?s solvency for a 75- year period.
reductions needed to restore solvency. 42 Acquiring stocks or other
nonfederal financial assets would have approximately the same effect on
national saving as using the same amount of money to reduce debt held by the
public. If reducing federal debt held by the public is not an option, as
discussed in text box 4.2, investing in nonfederal financial assets on
behalf of the Social Security trust fund could be another way for government
saving to provide resources for private investment. Most traditional reform
options involve workers paying more for promised benefits or getting lower
benefits. From the government?s perspective, increasing payroll taxes or
reducing benefits would improve Social Security?s finances and increase
government saving- assuming no other
changes in government spending or taxes. The ultimate effect of Social
Security reform on national saving depends on complex interactions between
government saving and personal saving- both through pension funds and by
individuals on their own behalf. The way in which Social Security is
reformed will influence both the magnitude and timing of any
increase in national saving. To illustrate the complexities in evaluating
how traditional program reforms might affect national saving, let?s examine
two basic options that would directly improve Social Security?s financial
imbalance- increasing payroll taxes and reducing benefits.
Payroll tax increases. At first glance, increasing payroll taxes appears
to be a straightforward way to increase saving now to take advantage of
compounding growth. Payroll tax increases are easy to implement and directly
improve the trust fund?s finances. However, the extent to which payroll tax
increases would translate into increased government saving depends on
whether the cash generated by the payroll tax increase is used to finance
new spending or a general tax cut. Thus, increased
Social Security surpluses will not necessarily increase government saving.
Even if the federal government saves all of the increased Social Security
surpluses, national saving would not increase dollar- for- dollar. Changes
in personal saving may counterbalance any increase in
government saving resulting from higher taxes. Higher payroll taxes may
depress personal saving to the extent that households have less disposable
income to save. How people adjust their saving in response
to payroll tax increases may also depend on the form of the increase. 42
Social Security Financing: Implications of Government Stock Investing for
the Trust Fund, the Federal Budget, and the Economy (GAO/ AIMD/ HEHS- 98-
74, April 22, 1998).
Raising the payroll tax rate would affect all workers whereas increasing the
maximum taxable earning level would affect high- income earners.
Benefit reductions. Options reducing initial benefits or raising the
retirement age take time to implement or phase in, allowing time for people
to adjust their retirement plans. Reducing future benefits obviously reduces
future spending for Social Security retirement benefits and stems government
dissaving. At first glance, reducing future benefits promised to current
workers would not seem to increase resources available to invest now.
However, changes in personal saving may complement any increase in
government saving resulting from benefit reductions. If Social Security
reform reduces anticipated
retirement income, many analysts expect that workers might, to some degree,
want to offset this effect by increasing their saving outside the Social
Security system. If people adjust their retirement plan to reflect benefit
reductions, increased personal saving today could provide new
resources to invest. For example, raising the retirement age reduces
benefits and could induce some individuals to save more now in order to
retire before they are eligible for Social Security.
In evaluating a Social Security reform proposal, it is important to consider
that increasing national saving is one criterion in assessing the extent to
which the proposal achieves sustainable solvency. Beyond weighing how a
proposal would affect the federal budget and the economy, policymakers need
to consider the balance struck between the twin goals of income adequacy
(level and certainty of benefits) and individual equity (rates of return on
individual contributions). 43 Reform elements that could increase national
saving may not satisfy these adequacy and equity goals. For
example, benefit cuts, depending on how they are structured, could leave
those most reliant on Social Security with inadequate retirement income.
Also, increasing payroll taxes reduces the implicit rate of return for
future beneficiaries. It is crucial to evaluate the effects of an entire
reform package considering interactions between individual reform elements
as well as how the package as a whole achieves policymakers? most important
goals for Social Security.
43 For more information about the analytical framework for assessing Social
Security reform proposals offered by GAO, see Social Security: Criteria for
Evaluating Social Security Reform Proposals (GAO/ T- HEHS- 99- 94, March 25,
1999) and Social Security: Evaluating Reform Proposals (GAO/ AIMD/ HEHS- 00-
29, November 4, 1999).
Q4.11. How Would
A4. 11. Evaluating the potential effect of proposals to establish individual
Establishing Individual accounts can be confusing. Various proposals have
been advanced that would create a new system of individual accounts as part
of comprehensive Accounts Affect
Social Security reform, while other proposals would create new accounts
National Saving? outside of Social Security. Individual account proposals
also differ as to whether individuals? participation would be mandatory or
voluntary. As we have previously reported, the extent to which individual
accounts would
affect national saving depends on how they are financed, how the program is
structured, and how people adjust their own saving behavior in response to
individual accounts. 44
To understand how individual accounts might affect national saving, it is
necessary to examine the first- order effects accounting for how the
government might fund the accounts and then to consider how people might
adjust their saving in response to a new account program. One important
determinant of the effect on national saving is the funding source for the
individual accounts. Shifting funds from the federal government would affect
the relative contributions of the federal government and households to
national saving. For instance, diverting funding from the Social Security
trust fund- such as a carve- out from current payroll taxes- would likely
reduce government saving by the same
amount that the accounts increase personal saving. Although national saving
would be unchanged, financing of the Social Security program- absent other
changes- would be worsened. If accounts are funded outside of the Social
Security system using general revenues, the effect on national saving is
unclear and would depend on what would have been done instead
with the general funds.
If the general funds would have been used to redeem federal debt held by
the public or acquire nonfederal financial assets, national saving initially
would be unchanged because personal saving would increase by the amount that
government saving decreases. In a sense, individual accounts could serve as
a way to channel saving through the government into resources for private
investment while avoiding issues
associated with government ownership of nonfederal assets. 44 See Social
Security: Capital Markets and Educational Issues Associated With Individual
Accounts (GAO/ GGD- 99- 115, June 28, 1999).
If the general funds would have been spent on additional government
consumption, then any increase in personal saving due to the individual
accounts would represent an increase in national saving. If the general
funds would have been used for infrastructure investment, national saving
would be unchanged but more funds would be available for private investment.
If the general funds would have been used for a general tax cut, then
national saving would initially increase because personal saving would
increase by the amount of individual accounts whereas some portion of a tax
cut would be consumed.
National saving also would be affected by how households and businesses
respond to individual accounts. Regardless of the financing source, the
effect of individual accounts would be to raise, at least to some extent,
the level of personal saving unless households fully offset the new accounts
by reducing their other saving. Households for whom individual accounts
closely resemble 401( k) s and IRAs and who are currently saving as much as
they choose for retirement would probably reduce their own saving in the
presence of individual accounts. The extent of the behavioral effects would
depend in part on the structure of the individual account program and any
limits on accessing the funds. For instance, mandatory account proposals are
more likely to increase private saving because such a program would require
households that do not currently save- such as many low- income individuals
or families- to place some amount in an individual account. Prohibitions or
restrictions on borrowing or other forms of pre- retirement distributions
could limit the ability of some households to reduce their other saving in
response to individual accounts. In addition to the effects
on household saving choices, individual accounts may also affect the
relationship and interactions between Social Security and private pensions.
45
45 Social Security Reform: Implications for Private Pensions (GAO/ HEHS- 00-
187, September 14, 2000).
Q4.12. How Would
A4. 12. As we have reported, the current Medicare program, without
improvements, is ill- suited to serve future generations of Americans. 46
The Medicare Reform
program is fiscally unsustainable in its current form, and growing Medicare
Affect National Saving? spending is expected to drive federal government
dissaving over the long run. Despite this looming financial problem,
pressure is mounting to update Medicare?s outdated benefit design. Given the
aging of the U. S. population
and the increasing cost of modern medical technology, it is inevitable that
demands on the Medicare program will grow.
In addition to the aging population and the increasing cost of modern
medical technology, the current Medicare program lacks incentives to control
health care consumption. The actual costs of health care are not
transparent, and third- party payers generally insulate consumers from the
cost of health care decisions. In traditional Medicare, for example, the
effect of cost- sharing provisions designed to curb the use of services is
muted because many Medicare beneficiaries have some form of supplemental
health care coverage- such as Medigap insurance- that pays
these costs. For these reasons, among others, Medicare presents a great
fiscal challenge over the long term. In the past, Medicare?s fiscal health
has generally been gauged by the solvency of the HI trust fund projected
over a 75- year period. Although the HI trust fund is viewed as solvent
through 2029, HI outlays are predicted to exceed HI revenues beginning in
2016. According to the Medicare Trustees? 2001 intermediate assumption,
restoring the HI program?s actuarial balance
over the next 75 years would require a combination of reform options equal
to 1. 97 percent of taxable payroll. In other words, averting a HI shortfall
for 75 years now would require an increase in payroll taxes by 1.97 percent
(a 68- percent increase over the 2001 rate paid by employers and workers 47
), a cut in HI spending by 37 percent, or some combination of the two.
According to the Office of the Actuary at the Health Care Financing
Administration, the estimated net present value of future additional
resources needed to fund HI benefits alone over the 75 years is $4. 6
trillion.
46 Medicare: Higher Expected Spending and Call for New Benefit Underscore
Need for Meaningful Reform (GAO- 01- 539T, March 22, 2001). See appendix V
for other GAO products related to Medicare financing and reform.
47 Medicare payroll taxes are paid on all earnings whereas Social Security
payroll taxes apply to earnings up to an annual maximum-$ 76,200 in 2000.
But, these estimates do not reflect the growing cost of the SMI component,
which accounts for somewhat more than 40 percent of Medicare spending.
When viewed from the perspective of federal saving and the economy, the
growth in total Medicare spending will be become increasingly burdensome
over the long run. According to the Medicare Trustees? 2001 intermediate
estimates, Medicare costs will grow at 1 percentage point above the growth
in GDP per capita each year. 48 As shown in figure 4.5,
total Medicare spending (Part A HI and Part B SMI combined) is expected to
consume 5 percent of GDP by 2035- more than double today?s share of 2
percent. By 2075, Medicare would consume over 8 percent of GDP, according to
the Medicare Trustees? 2001 intermediate estimates. 49 Under the Save the
Social Security Surpluses simulation, federal health care spending will
greatly constrain budgetary flexibility (shown in figure 4.3).
Absent cost containment reforms, Medicare spending would contribute to
federal dissaving over the long term even if the unified surpluses projected
over the next decade are saved.
48 These latest actuarial projections incorporate more realistic assumptions
about long- term health care spending, and as result, Medicare spending is
expected to grow faster than previously estimated. For further discussion of
the Medicare Trustees? 2001 estimates, see
Medicare: Higher Expected Spending and Call for New Benefit Underscore Need
for Meaningful Reform (GAO- 01- 539T, March 22, 2001).
49 Including federal Medicaid spending, federal health care spending would
grow to 14. 5 percent of GDP compared to today?s 3.5 percent.
Figure 4. 5: Medicare HI and SMI Spending as a Share of GDP (2000- 2075)
Percent of GDP 10
8 6 4
SMI 2
HI 0 2000 2010 2020 2030 2040 2050 2060 2075
Notes: Medicare gross outlay projections based on intermediate assumptions
of the 2001 HI and SMI Trustees? reports. Source: GAO analysis of data from
the Office of the Actuary, Health Care Financing Administration.
Although future Medicare costs are expected to consume a growing share of
the federal budget and the economy, pressure is mounting to expand
Medicare?s benefit package to cover prescription drugs, which will add
billions to Medicare program costs. It is a given that prescription drugs
play a far greater role in health care now than when Medicare was created.
Today, Medicare beneficiaries tend to need and use more drugs than other
Americans. Overall, the nation?s spending on prescription drugs has been
increasing about twice as fast as spending on other health care services,
and it is expected to keep growing. Adding a prescription drug benefit to
Medicare will be costly, but the cost consequences ultimately depend on
choices about the benefit?s scope and financing. Any option to expand
Medicare?s benefit package- absent other reforms- runs the risk of
exacerbating the program?s fiscal imbalance and increasing government
dissaving. Any substantial benefit reform should be coupled with adequate
and effective cost containment measures to avoid worsening Medicare?s
long- range financial condition. Ultimately, we will need to look at broader
health care reforms to balance health care spending with other societal
priorities. It is important to note the fundamental differences between
health care wants, which are virtually unlimited; needs, which should be
defined and addressed; and overall
affordability, which has a limit. Realistically, reforms to address
Medicare?s huge long- range financial imbalance will need to proceed
incrementally. To avoid more painful and disruptive changes once the baby
boomers begin
retiring, the time to begin these difficult but necessary steps is now.
Reform options that reduce Medicare?s growth rates or strengthen the
program?s underlying sustainability would raise future levels of government
saving (assuming no other changes in government spending and taxes).
However, the effect of reduced federal Medicare spending on national saving
depends on how the private sector responds to the reductions. For example,
greater private spending for elderly health care- by beneficiaries
themselves or by employers and insurers on beneficiaries? behalf- could
offset some or all of the improvement in government saving in the short run.
Over time, personal saving could increase if individuals choose to save more
to pay for health care in their old age.
Sect on i 5 National Saving and Current Policy Issues Q5. 1. What Are Key
A5. 1. Each generation is a steward for the economy it bequeaths to future
Issues in Evaluating generations, and the nation?s long- term economic
future depends in part on
today?s decisions about consumption and saving. The federal government
National Saving?
has gone from the budget deficits of recent decades to surplus as a result
of a growing economy and difficult decisions to reduce deficits . We appear-
at least for the near future- to have slain the deficit dragon. However,
today?s fiscal good fortune will not survive over the long run. If the
prospect of surpluses over the next decade lulls us into complacency, the
nation could face daunting demographic challenges without having changed the
path of programs for the elderly or having built the economic capacity to
bear the costs of the programs as currently structured.
Economic growth will help society bear the burden of financing Social
Security and Medicare, but it alone will not solve the long- term fiscal
challenge. Increasing the nation?s economic capacity is a long- term
process. Thus, saving now and making meaningful Social Security and Medicare
reform sooner rather than later are important. Because every generation is
in part responsible for the economy it passes on to the next,
today?s fiscal policy choices must be informed by the long- term. Common
sense tells us that the nation needs to save more when it has a healthy
economy, sufficient resources to meet some current needs while still
building our capacity for the future, and a relatively large workforce.
National saving pays future dividends- but we need to begin soon to permit
compounding to work for us. From a macroeconomic perspective, it does not
matter who does the saving- any mix of increased saving by households,
businesses, and government would help to grow the economic pie. Yet, in
light of the virtual disappearance of personal saving, concerns about U. S.
reliance on borrowing from abroad to finance domestic investment, and the
looming fiscal pressures of an aging population, now is an opportune time
for the federal government to save some portion of its anticipated budget
surpluses. Higher federal saving- to the extent that the increased
government saving is not offset by reduced private saving- would increase
national saving and tend to improve the nation?s current account balance,
although typically not on a dollar- for- dollar basis.
In considering how much of the anticipated budget surpluses to save, policy
choices must balance today?s unmet needs and tomorrow?s fiscal challenges.
Saving the surpluses would allow the federal government to reduce the debt
overhang from past deficit spending and enhance future
budgetary flexibility. Choices about federal spending for infrastructure,
education, and R& D as well as tax incentives for private saving and
investment also have implications for future economic growth.
Increased government saving and entitlement reform go hand- in- hand. Over
the long term, the federal government cannot avoid massive dissaving without
reforming retirement and health programs for the elderly. Increasing
national saving and thus long- term economic growth is crucial
to the long- term sustainable solvency of Social Security and Medicare.
Since the economy provides the tax base for the government, economic growth
increases government revenue, which helps finance these programs as well as
other federal programs and activities, and increases budget flexibility. But
saving and economic growth alone cannot solve the looming demographic
challenges. Saving the Social Security surpluses- and even
the Medicare surpluses- is not enough by itself to finance the government?s
commitments to the elderly. Program reform is needed as well, or Social
Security and Medicare will constitute a heavy drain on the earnings of
future workers. In a sense, saving more yields a bigger pie, but
policymakers will still face the difficult choice of how to divide the pie
between retirees and workers.
The federal government can also undertake steps to encourage personal
saving. Saving education campaigns are one tool to encourage people to save
more for their own retirement. To participate in the debate over how
to reform Social Security and Medicare, the public needs to understand the
difficult choices the nation faces. Announcing any benefits changes sooner
rather than later would make it easier for individuals to plan for
retirement and to adjust their saving behavior accordingly. The federal
government
can explore how to design tax incentives that induce households to save
enough to make up for the government?s revenue loss and the lower government
saving that would result.
Appendi Appendi xes x I Objectives, Scope, and Methodolog y This report is
designed to present information about national saving and its implications
for economic growth and retirement security. Specifically, this report
addresses the following questions: (1) What is personal saving, how is it
related to national saving, and what are the implications of low personal
saving for Americans? retirement security? (2) What is national saving and
how does current saving in the United States compare to historical trends
and saving in other countries? (3) How does national
saving affect the economy and how would higher saving affect the longterm
outlook? (4) How does federal fiscal policy affect national saving, what
federal policies have been aimed at increasing private saving, and how would
Social Security and Medicare reform affect national saving? And, (5) what
are key issues in evaluating national saving?
Personal Saving, Household Because this report focuses on the macroeconomic
implications of saving
Wealth, and Retirement and investment, we used saving data from the National
Income and Security
Product Accounts (NIPA) compiled by the Bureau of Economic Analysis (BEA). 1
This report presents the trend in the personal saving rate as measured on a
NIPA basis. As a comparison point, we also examined an alternative personal
saving rate available from the Federal Reserve?s Flow of Funds Accounts
(FFA). 2 Because FFA counts household purchases of consumer durables as
saving, the FFA personal saving rate is somewhat higher than the NIPA
personal saving rate but also shows a downward
trend. Both the NIPA and FFA measures focus on saving as a flow from the
economy?s current production and do not include changes in the market value
of households? existing portfolios. For information about the stock of
wealth accumulated by households, we obtained net worth data from the FFAs?
balance sheet aggregated for the household sector. In addition to
1 The NIPA data presented throughout this report reflect changes made in the
11th comprehensive revision of the national accounts in 1999, including the
reclassification of software purchases as investment, which is discussed in
Q2.5. Historical NIPA data were downloaded from BEA?s website (www. bea.
doc. gov/ bea. dnl. htm) and reflect recent data
presented in Survey of Current Business, Bureau of Economic Analysis, Vol.
81, No. 4 (April 2001). 2 Historical FFA data were downloaded from the
Federal Reserve Board website: www. federalreserve. gov/ releases/ Z1/
Current/ data. htm and reflect data presented in Flow of Funds Accounts of
the United States: Flows and Outstandings, Fourth Quarter 2000 (Board of
Governors of the Federal Reserve System, March 9, 2001).
these macroeconomic data, we used results from the Federal Reserve?s 1998
Survey of Consumer Finance to present a snapshot of individual households?
net worth by income level. 3
Fully exploring the dynamics of personal saving behavior and gauging the
adequacy of retirement saving are beyond the scope of this national saving
report. The literature attempting to explain why and how people save- or do
not save as the case may be- is extensive, and the empirical research is
conflicting. For this report, we provide an overview of the major theories
about why people save and describe various factors associated with the
decline in personal saving. Appendix IV lists the major references used in
preparing this report.
For demographic trends and the financial outlook for the Social Security and
Medicare Hospital Insurance programs, we used the intermediate actuarial
projections, which reflect the best estimate of the Social Security and
Medicare Boards of Trustees. We also examined income sources and amounts for
those aged 65 and older using the Social Security Administration?s Income of
the Population, 55 or Older, 1998. 4 National Saving and
We also used NIPA data to describe historical trends in (1) U. S. national
Investment saving by component, (2) domestic and foreign investment in the
United States, and (3) the U. S. net international investment position. To
provide a long- term perspective we focused on saving trends over the last 4
decades- from 1960 to 2000. We also compared U. S. national saving to the
saving of other major industrialized nations. Specifically, we relied on
national saving data for the G- 7 nations- Canada, France, Germany, Italy,
3 The Survey of Consumer Finances is a triennial survey of U. S. families
sponsored by the Board of Governors of the Federal Reserve with the
cooperation of the Department of the Treasury. For results from the latest
Survey of Consumer Finance, see Arthur B. Kennickell, Martha Starr- McCluer,
and Brian J. Surette, ?Recent Changes in U. S. Family Finances: Results from
the 1998 Survey of Consumer Finances,? Federal Reserve Bulletin (January
2000).
4 Social Security Administration, Income of the Population, 55 or Older,
1998, (Washington, D. C.: U. S. Government Printing Office, March 2000).
This biennial report presents information combined for the population aged
55 and older as well as separately for those aged 65 and older. The report
reflects U. S. Census Bureau data from the Current Population Survey.
Japan, the United Kingdom, and the United States- compiled by the
Organization for Economic Cooperation and Development. 5
Our national saving trend analysis is based on current NIPA definitions of
saving and investment. We also examined literature that presents other ways
of thinking about national saving. For example, a broader saving and
investment measure might encompass spending on education as well as research
and development. These are not included in the conventional NIPA measures
but are related to long- term productive capacity. Long- Term Simulations We
used our long- term economic growth model to simulate alternative
fiscal policies and national saving rates. Long- term simulations are useful
for comparing the potential outcomes of alternative saving rates within a
common economic framework. Such simulations can help policymakers assess the
long- term consequences of fiscal policy and saving choices made today.
While long- term simulations provide a useful perspective, they should be
interpreted carefully. Given the range of uncertainty about future economic
changes and the responses to those changes, the simulation results should
not be viewed as forecasts of budgetary or economic outcomes 50 or 75 years
in the future. Rather, they should be seen only as illustrations of the
different budget and economic outcomes associated with alternative fiscal
policy and saving paths based on common demographic and economic
assumptions.
In our simulations, we used a model originally developed by economists at
the Federal Reserve Bank of New York that relates long- term economic
growth- measured in terms of gross domestic product (GDP)- to economic and
budget factors. The key interaction between the budget and the economy is
the effect of the federal deficit/ surplus on the amount of national saving
available for investment. 6 Conversely, the rate of economic
growth helps determine the overall federal surplus or deficit through its
effect on federal revenue and spending. In our model, the level of national
saving affects investment and, in turn, GDP growth.
5 OECD National Income Account data were downloaded from Standard and Poor?s
DRI database. 6 Text box 4. 1 explains how the NIPA surplus or deficit
differs from the federal unified budget surplus or deficit. Both measures
are roughly similar as a share of GDP.
In general, federal deficits measured on a NIPA basis represent dissaving-
they subtract from national saving by absorbing nonfederal funds that
otherwise would be used for investment. Conversely, federal surpluses add to
national saving. While the NIPA measure of government saving directly
affects national saving, the unified budget measure is the
more common frame of reference for discussing federal fiscal policy issues.
Our simulation results reflect unified budget deficits/ surpluses.
Our simulations are based on the Congressional Budget Office?s (CBO) January
2001, 10- year budgetary and economic projections 7 through calendar year
2010. 8 Beyond that, we used long- term actuarial projections for Social
Security and Medicare. 9 We assume that current- law benefits are paid in
full (i. e., we assume that all promised Social Security benefits are
paid even after the projected exhaustion of the OASDI Trust Funds in 2038).
For Medicaid in the out- years, we used the growth rates from CBO?s October
2000 long- term analysis. 10 Interest spending is determined by interest
rates- which are held constant over the long- term- and the level of federal
debt held by the public, which depends on the path of budget deficits/
surpluses within each simulation. All other spending as well as federal
revenue are assumed to grow at essentially the same rate as the
economy. In other words, other spending and revenue both remain constant as
shares of GDP. Appendix II presents a more detailed description of the model
and the assumptions we used.
We present two fiscal policy simulations: (1) Save the Unified Surpluses and
(2) Save the Social Security Surpluses. The Save the Unified Surpluses
simulation assumes the entire unified surpluses are saved and used to
reduce federal debt held by the public. The Save the Social Security 7 The
Budget and Economic Outlook: Fiscal Years 2002- 2011, Congressional Budget
Office (January 2001). 8 In our modeling, all CBO budget projections were
converted from a fiscal year to a calendar year basis. The last year of
CBO?s projection period was 2011, permitting the calculation of calendar
year values through 2010. 9 The 2001 Annual Report of the Board of Trustees
of the Federal Old- Age and Survivors Insurance and Disability Insurance
Trust Funds (March 2001), The 2001 Annual Report of the Board of Trustees of
the Federal Supplementary Medical Insurance Trust Fund (March 2001), and The
2001 Annual Report of the Board of Trustees of the Federal Hospital
Insurance Trust (March 2001).
10 The Long- Term Budget Outlook, Congressional Budget Office (October
2000). See appendix II for more details about the Medicaid assumption.
Surpluses simulation assumes that only the Social Security surpluses are
saved and used to reduce federal debt held by the public. Unspecified policy
actions- spending increases and/ or tax cuts- are taken that eliminate the
non- Social Security surpluses through 2010. These
unspecified policy actions are left in place through the end of the
simulation period. For simplicity, we assumed nonfederal saving- saving by
households, businesses, and state and local governments- would remain
constant as a share of GDP in both fiscal policy simulations.
As a reference point, we also simulated a path assuming that national saving
remains constant at the 2000 level of 18. 3 percent of GDP. The Constant
2000 National Saving Rate simulation reflects an unspecified mix of saving
by households, businesses, and all levels of government. To provide a useful
perspective on how alternative levels of national saving affect future
living standards, we also compared our simulation results to a
historical benchmark. In the United States, GDP per capita has doubled about
every 35 years. Since World War II, annual growth in GDP per capita has
averaged roughly 2 percent. Of course, growth was faster during some
periods- the 1950s and 1960s, and the second half of the 1990s- and slower
during other periods- the 1970s. Doubling GDP per capita every 35 years
represents a way to gauge whether future generations will enjoy a rise in
living standards comparable to that enjoyed by previous generations. While
this report discusses the potential consequences of alternative saving
paths, it does not suggest any particular course of action. The choice of
the most appropriate fiscal policy path is a policy decision to be made by
the Congress and the President. While fiscal policy is the most direct way
to increase national saving, how much the nation saves also depends on the
saving choices of households and businesses.
We did our work in accordance with generally accepted government auditing
standards from December 1999 through May 2001 in Washington, D. C. We
requested comments from BEA, OMB, and several subject matter experts. Staff
from BEA and OMB and the experts we consulted provided technical and
clarifying comments, which we incorporated in this report where appropriate.
Appendi x II
The Economic Model and Key Assumptions In this report, we simulated the
effect of different saving rates on the nation?s standard of living using a
standard model of economic growth originally developed by economists at the
Federal Reserve Bank of New York. The major determinants of economic growth
in the model are changes in the labor force, capital formation, and the
growth in total factor productivity. To analyze the effect of fiscal policy
on saving and growth, we
modified the original model to include a set of relationships that describe
the federal budget and its links to the economy, using the framework of the
National Income and Product Accounts (NIPA). To isolate the effect of
changes in saving on growth, we varied the saving rate while using the
same assumptions for the growth in the labor force and total factor
productivity. The model is helpful for exploring the long- term implications
of national saving and fiscal policy and for comparing alternative paths
within a common economic framework. Since 1992, GAO has provided the
Congress with a long- term perspective on alternative fiscal policy paths. 1
The results provide illustrations rather than precise forecasts of the
economic outcomes associated with alternative policy or saving rate
assumptions. The model depicts the links between saving and the economy over
the long term and does not reflect their interrelationships during short-
term business cycles. We have made several simplifying assumptions such as
holding interest rates and total factor productivity growth constant, but
sensitivity analyses suggest that variations in these assumptions generally
would not affect the relative outcomes of alternative policies. These
simulations are not predictions of what will happen in the future as
policymakers would likely take action to prevent damaging out- year fiscal
and economic consequences.
Overview of the Model In the model, GDP is determined by the labor force,
capital stock, and total factor productivity. GDP in turn influences
nonfederal saving, which 1 See Budget Policy: Prompt Action Necessary to
Avert Long- Term Damage to the Economy (GAO/ OCG- 92- 2, June 5, 1992), The
Deficit and the Economy: An Update of Long- Term Simulations (GAO/ AIMD/
OCE- 95- 119, April 26, 1995), Budget Issues: Deficit Reduction and the
Long- Term (GAO/ T- AIMD- 96- 66, March 13, 1996), Budget Issues: Analysis
of LongTerm Fiscal Outlook (GAO/ AIMD/ OCE- 98- 19, October 22, 1997),
Budget Issues: Long- Term Fiscal Outlook (GAO/ T- AIMD/ OCE- 98- 83,
February 25, 1998), Budget Issues: July 2000 Update of GAO?s Long- Term
Simulations (GAO/ AIMD- 00- 272R, July 26, 2000), and LongTerm Budget
Issues: Moving From Balancing the Budget to Balancing Fiscal Risk (GAO01-
385T, February 6, 2001).
consists of the saving of the private sector and state and local government
surpluses or deficits. Through its effects on federal revenues and spending,
GDP also helps determine the NIPA federal budget surplus or deficit.
Nonfederal and federal saving together compose national saving, which
influences investment and the next period?s capital stock. Capital combines
with labor and total factor productivity to determine GDP in the next
period, and the process continues.
The model allows us to focus on the contribution of national saving to
output and living standards through the linkage between saving and the
capital stock. In particular, the model provides a useful framework for
assessing the long- term implications of alternative budget policies through
their effect on national saving. Our model does not differentiate between
tax policy changes and spending changes. The aggregate effect on the amount
of federal government saving is what affects the level of national saving
and economic growth. Federal surpluses increase national saving
while deficits reduce national saving, and higher saving translates into
higher GDP. Higher GDP in turn lessens the share of the nation?s output
dedicated to government transfer programs in our modeling because we use a
simplifying assumption that such programs do not simply keep pace with
overall economic growth. 2
In our simulations, we make the simplifying assumption that the combined
saving rate of the household, business, and state and local government
sectors will remain constant throughout the simulation period at 16.1
percent of GDP- average nonfederal saving as a share of GDP since 1998. 3
Future saving rates of these sectors will of course vary in response to a
variety of influences, such as demographics, expectations, and changes in
preferences. Nonetheless, this simplifying assumption allows us to assess
the effect of budget policy on saving, investment, and output in the future.
Labor Input Economic growth is partly dependent on how much labor is
employed. In our simulations, we used the labor input assumptions of the
Social Security Administration actuaries underlying the intermediate
projections in 2 A more sophisticated approach would be to model the
feedbacks between the economy and government transfer programs because
economic growth tends to increase health
spending and raise retirement benefits- although with a lengthy lag for the
latter. 3 The 3- year period coincides with federal surpluses and its use
avoids extending the unusually low nonfederal saving rate of 2000 throughout
the simulation period.
The 2001 Annual Report of the Board of Trustees of the Federal Old- Age and
Survivors Insurance and Disability Trust Funds. The intermediate
projections, which reflect the Trustees? best estimate, reflect changes in
the
working age population, particularly the increasing rate of retirement by
the baby boom generation after 2010. They also reflect projections of labor
force participation rates, unemployment rates, and weekly hours worked. The
demographic and economic assumptions imply a sharp drop in the average
annual growth of aggregate hours worked from 0.7 percent through 2010 to 0.
2 percent from 2020 through 2075.
Total Factor Productivity The three sources of economic growth in the model
are increased labor input, capital accumulation, and the advance of total
factor productivity. 4 The latter is a catch- all category reflecting
sources of growth not captured in straightforward measures of aggregate
labor input and aggregate physical capital employed. These include not only
the improvements in products and processes yielded by advancing technology
but also the improved quality of labor and capital inputs, reallocation of
inputs to uses where they are more productive, and improvements in physical
and social infrastructure.
Our simulations assume that total factor productivity growth in the nonfarm
business sector will average 1.5 percent annually over the 75- year period.
Basically, we used the productivity assumption underlying CBO?s
January 2001, 10- year budget projections. In its most recent long- term
modeling report, CBO assumed total factor productivity growth of 1. 7
percent beyond 2010. 5 The intermediate projections in the 2001 OASDI
Trustees? report assume that labor productivity for the entire economy will
increase 1.5 percent annually over the next 75 years. The Trustees? longterm
assumption reflects the average labor productivity growth over the 4 The
Bureau of Labor Statistics (BLS) publishes an official measure of output per
unit of combined labor and capital inputs- multifactor productivity. BLS?
measure of labor input not only takes into account changes in the size of
the labor force, but also changes in its composition as measured by
education and work experience. Capital inputs are measured in terms of
efficiency or service flow rather than price or value. For more information
on
multifactor productivity, see ?Productivity Measure: Business Sector and
Major Subsectors,? BLS Handbook of Methods, Bureau of Labor Statistics
(April 1997), pp. 89- 98; and Edwin R. Dean and Michael J. Harper, ?The BLS
Productivity Measurement Program,? Bureau of Labor Statistics (July 5,
2000), paper presented to the NBER Conference on Research in Income and
Wealth on New Directions in Productivity Analysis, March 20- 21, 1998.
5 The Long- Term Budget Outlook, Congressional Budget Office (October 2000).
last 30 years and would correspond to a lower assumption for total factor
productivity growth than CBO?s most recent assumption. Our use of CBO?s
January 2001, 10- year assumption for total factor productivity growth
throughout the 75- year simulation period places our long- term assumption
between the Trustees? and CBO?s current long- term assumptions.
International Financial There are also important links between national
saving and investment and
Flows the international sector. In an open economy such as the United
States, an
increase in saving due to, for example, an increase in the federal budget
surplus may not result in an equivalent increase in domestic investment.
Instead, part of the increased saving may flow abroad in the form of an
increase in U. S. net foreign investment. The income earned on U. S.- owned
foreign assets adds to the nation?s income (GNP). The portion of an
increase in national saving used for domestic investment adds to the capital
stock available for workers to produce goods and services in the United
States (GDP). The model incorporates a simple representation of net
financial flows between the U. S. economy and the rest of the world.
Essentially the rest of the world is treated as analogous to a bank where
the United States can make deposits or withdrawals or draw on a credit line.
Every year there are income flows to or from this bank corresponding to
interest received on deposits or paid on advances. The amount corresponding
to the bank balance (positive or negative) is called the net international
investment position (NIIP) of the United States, which generates a net flow
of income
receipts. A key model assumption affecting international flows is the
allocation of gross saving between its foreign and domestic investment uses.
Over the long run, we assume that market forces such as adjustments in
exchange rates, interest rates, and prices will tend to move net foreign
investment and the current account balance towards zero. To reflect this
tendency to move towards equilibrium, we hold net foreign investment
constant at the
nominal dollar level in 2000. This reduces the ratio of net foreign
investment to GDP over time as GDP grows. Changes in national saving cause
the ratio of net foreign investment to GDP to move around its longterm
trend. We assume that net foreign investment rises by one- third of any
increase in the national saving rate. Basically, for each additional dollar
saved, about 66. 6 cents are used for domestic investment and 33. 3 cents
are invested abroad. Conversely, each dollar decrease in national saving is
offset by 33.3 cents in foreign investment in the United States. Our
assumption is consistent with the strong correlation between national saving
and domestic investment that persists even in the context of a global
economy. 6 This is a highly stylized representation of the foreign sector of
one country
in isolation. A more sophisticated approach would be to model a changing
international environment in detail. A more detailed approach would confront
major uncertainties concerning the actual course of world economic
development, exchange rates, and rates of return.
Budget and Other Table II. 1 lists the key assumptions incorporated in the
model. Several of Assumptions the assumptions used tend to provide
conservative estimates of the benefit of running surpluses or lower deficits
and of the harm of increasing
deficits. The interest rate on the national debt is held constant, for
example, even when deficits climb and the national saving rate plummets.
Under such conditions, the more likely result would be a rise in the rate of
interest and a more rapid increase in federal interest payments than our
simulations display. Another conservative assumption is that the rate of
total factor productivity growth is unaffected by the amount of investment.
Productivity is assumed to advance 1.5 percent each year through the end of
the simulation period even if investment collapses. Finally, one- third of
any saving decline is assumed to be offset by net inflows of foreign
capital, even in the event of a dramatic saving decline that might set off a
flight of capital from the United States. Such assumptions tend to moderate
the
effect of changes in national saving in our simulations. Sensitivity
analyses reveal that variations in these assumptions generally would not
affect the relative outcomes of alternative policies.
6 See Martin Feldstein and Philippe Bacchetta, ?National Saving and
International Investment,? National Saving and Economic Performance, D.
Bernheim and J. Shoven, eds. (Chicago: University of Chicago Press, 1991)
pp. 201- 226; and Maurice Obstfeld and Kenneth Rogoff, ?The Six Major
Puzzles in International Macroeconomics: Is There a Common Cause?? NBER
Working Paper No. 7777 (July 2000).
Table II. 1: Key Assumptions of the Economic Model Model Inputs Assumptions
Surplus/ deficit (federal saving) CBO?s January 2001 baseline through 2010;
GAO simulations thereafter
Social Security spending (OASDI) 2001 Social Security Trustees? intermediate
projections Medicare spending (HI and SMI) 2001 Medicare Trustees?
intermediate projections Medicaid spending CBO?s October 2000 long- term
projections Other mandatory spending CBO?s January 2001 baseline through
2010; thereafter increases at
the rate of economic growth (i. e., remains constant as a share of GDP)
Discretionary spending CBO January 2001 baseline through 2010; thereafter
increases at the rate of economic growth
Receipts CBO?s January 2001 baseline through 2010; in subsequent years
receipts held constant at 20.2% of GDP on NIPA basis, 20. 4% on unified
budget basis (ratios in 2010) Nonfederal saving: gross saving of the private
sector and state and
16. 1% of GDP local government sector Share of gross national saving change
that flows abroad 33.3% of annual change in gross national saving
Labor: growth in hours worked 2001 Social Security Trustees? intermediate
projections Total factor productivity growth 1. 5% (CBO?s January 2001
assumption for 2000- 2011) Inflation (GDP price index) CBO?s through 2011;
1.9% thereafter (CBO?s projection in 2011) Interest rate (average on net
debt of the federal government) Average rate implied by CBO?s January 2001
baseline interest payment projections through 2005; 5. 4% thereafter (based
on
CBO?s assumption for the average rate on Treasury securities) Note 1: These
assumptions apply to our base simulation, Save the Unified Surpluses. For
alternative fiscal policy simulations, certain assumptions are varied, as
discussed in the alternative paths.
Note 2: In our work, all CBO budget projections were converted from a fiscal
year to a calendar year basis. The last year of CBO?s projection period is
fiscal year 2011, permitting the calculations of calendar year values
through 2010.
Our Save the Unified Surpluses base simulation reflects CBO?s January 2001 7
assumption that discretionary spending increases at the rate of inflation
over the 10- year budget projection period. 8 After 2010, we
assumed discretionary spending would grow at the same rate as GDP. As a 7
The Budget and Economic Outlook: Fiscal Years 2002- 2011, Congressional
Budget Office (January 2001). 8 In our modeling, all CBO budget projections
were converted from a fiscal year to a calendar year basis. The last year of
CBO?s projection period was 2011, permitting the calculation of calendar
year values through 2010.
result, discretionary spending stays the same as share of GDP from 2011
through the end of the projection period. 9
Mandatory spending includes Old- Age, Survivors, and Disability Insurance
(OASDI, or Social Security), Health (Medicare and Medicaid), and a residual
category covering other mandatory spending. The long- term OASDI spending
path reflects the intermediate projections of the 2001 OASDI Trustees?
Report. 10 Long- term Medicare spending reflects the intermediate
projections of the 2001 HI and SMI Trustees Reports; 11 the long- term
Medicaid spending path reflects CBO?s October 2000 long- term
projections. 12 We assume that current- law benefits are paid in full even
after the projected exhaustion of the OASDI and HI Trust Funds.
Other mandatory spending is a residual category consisting of all non-
Social Security, nonhealth mandatory spending. It is equivalent to CBO?s
NIPA projection for Transfers, Grants, and Subsidies less Health,
OASDI, and other discretionary spending. Through 2010, CBO assumptions are
the main determinant of other mandatory spending, after which it grows at
the same rate as GDP.
In our Save the Unified Surpluses base simulation, receipts follow CBO?s
dollar projections through 2010. Thereafter, receipts remain at 20. 2
percent of GAO?s simulated GDP on a NIPA basis, which is the rate that CBO
projects for 2010. On a unified budget basis, revenues remain at 20.4
percent of GDP after 2010.
9 If spending were to keep pace with population growth and inflation over
the long term, discretionary spending would generally grow slower than the
economy and the long- term budget surplus/ deficit would be improved. For
example, see Analytical Perspectives, Budget of the United States
Government: Fiscal Year 2001, Executive Office of the President, Office of
Management and Budget (February 2000), pp. 30- 31.
10 The 2001 Annual Report of the Board of Trustees of the Federal Old- Age
and Survivors Insurance and Disability Insurance Trust Funds (March 2001).
11 The 2001 Annual Report of the Board of Trustees of the Federal
Supplementary Medical Insurance Trust Fund (March 2001) and The 2001 Annual
Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund
(March 2001).
12 CBO?s long- term health care cost growth assumptions are generally
consistent with those in the 2001 Medicare Trustees? Reports. Both CBO and
the Medicare Trustees generally assume per- beneficiary costs to grow at GDP
per capita plus 1 percentage point over the long- term. See The Long- Term
Budget Outlook, Congressional Budget Office (October 2000) and the 2001 HI
and SMI Trustees Reports.
Our interest rate assumption for 2000 through 2005 is consistent with the
average rate on the debt held by the public implied by CBO?s interest
payment projections in its baseline. To avoid the substantial volatility in
the
implied interest rate after 2005 as a result of declining debt, interest
rates are held constant at 5.4 percent- the average interest rate assumed by
CBO on short- and long- term Treasury securities- from 2005 through the end
of the simulation period. This interest rate is both paid on outstanding
debt
held by the public and earned on nonfederal financial assets acquired by the
government once debt held by the public is eliminated. 13 Our simulation
period- from 2000 through 2075- coincides with the 75- year period used for
the Social Security Trustees? Report where actuaries calculate trust fund
solvency over a long- term horizon that is at least as long as an
individual?s working life.
Because our model assumptions are based on current budget projections and
recent long- term actuarial projections for Social Security and Medicare,
our current model assumptions differ somewhat from those used in our earlier
reports. Also, these simulations reflect discretionary spending growing with
inflation after 2001; in our earlier reports, discretionary
spending was assumed to comply with statutory caps in effect through 2002.
As a result, these simulation results should not be compared directly to
those in our earlier reports.
13 Under this interest rate assumption, the level of net interest payments
and net debt would be the same if the government began acquiring nonfederal
financial assets before debt held by the public was eliminated.
Appendi x II I Glossary These definitions are intended to provide assistance
to the general reader. Readers interested in authoritative definitions
should consult documentation on concepts, data sources, and methods
published by the Bureau of Economic Analysis, the Bureau of Labor
Statistics, and the Federal Reserve.
Bequest saving motive Saving in order to build up assets to bequeath wealth
to future generations.
Big- ticket saving motive Relatively short- term saving to accommodate a
mismatch between current income and expenses during the life- cycle. People
may save to pay for bigticket items such as cars, other consumer durables,
or vacations. Some individuals must save in advance because they cannot
borrow, while others may prefer to save and avoid borrowing.
Business saving Net business saving is undistributed corporate profits
(retained earnings). Gross business saving consists of undistributed
corporate profits plus consumption of fixed capital (depreciation).
Capital deepening The process of accumulating capital at a faster rate than
the growth of the labor force, thus increasing the capital/ labor ratio.
Capital widening The process of accumulating capital at a rate sufficient to
provide new workers with the same amount of capital as current workers.
Capital stock Stock of capital goods to be used in further production. In
the national income and product accounts, fixed capital consists of business
and government purchases of equipment, software, and structures, as well as
household purchases of residential dwellings.
Consumer durables Goods that can be stored or inventoried and that have an
average life of at least 3 years, such as cars and major household
appliances.
Consumption of fixed capital A charge for capital goods that have been worn
out or used up in producing goods and services, also called depreciation.
Current account balance The combined balances on trade in goods and
services, income, and net unilateral current transfers.
Debt held by the public Debt issued by the federal government held by
nonfederal investors, including the Federal Reserve System.
Deficit The amount by which outlays exceed revenue in a given period. See
also
government saving and unified budget.
Depreciation See consumption of fixed capital.
Disposable personal income The income available for personal spending and
saving after federal, state, and local taxes as well as Social Security and
Medicare payroll taxes are paid.
Flow of Funds Accounts (FFA) FFA measures the acquisition of financial and
nonfinancial assets throughout the U. S. economy and the sources of funds
used to acquire the assets.
401( k) plan Employer- sponsored plan whereby an employee may elect, as an
alternative to receiving taxable cash, to contribute pretax dollars to a
qualified tax- deferred retirement plan.
GDP price index A measure of the price level for the whole economy covering
the prices of goods and services produced in a country.
Golden rule saving rate The saving rate that leads to the steady state in
which consumption per worker is maximized.
Government saving Net government saving equals government receipts minus
current expenditures. Gross government saving equals net government saving
and consumption of fixed capital (depreciation). Government saving can be
separated into federal saving and state and local government saving.
Although historically generally similar in magnitude, net government saving,
or the NIPA surplus/ deficit, and unified budget surplus/ deficit
measures differ in several ways, including the treatment of investment and
depreciation, lending and financial transactions, geographic coverage, and
timing adjustments. (For the differences between NIPA and unified budget
surplus/ deficits, see text box 4. 1.)
Gross domestic product (GDP) The output of all goods and services produced
by labor and property located in a nation during a given period. GDP serves
as the principal measure of the size of a nation?s economy.
Gross national product (GNP) The output of all goods and services produced
in a given period by labor and capital supplied by residents of a nation,
regardless of the location of the labor and capital. The principal
difference from GDP is that GNP
includes the income that residents earn from investments abroad and excludes
the capital income that nonresidents earn from domestic investments.
Gross national saving See national saving.
Income effect The tendency for a higher interest rate to reduce saving
because in order to obtain a given level of future consumption, it is no
longer necessary to save as much. With a higher interest rate, it is
possible to save less now and consume more both in the present and in the
future. However, higher interest rates also generate a substitution effect
that encourages saving. The net effect of the substitution and income
effects is theoretically ambiguous and can only be resolved through
empirical analysis.
Individual Retirement Account
An IRA is a personal, tax- deferred retirement account that an employed
(IRA)
person can set up with a tax- deductible deposit limited to $2,000 per year
($ 4, 000 for a couple when both work, or $2,250 for a couple when one works
and the other?s income is $250 or less). Besides the tax- deductible
traditional IRA, other retirement saving vehicles also receive preferential
tax treatment. Depending on individual circumstances, people can also choose
from nondeductible traditional IRAs, new Roth IRAs, SEP IRAs for the self-
employed, SIMPLE IRAs sponsored by small employers, and 401( k) employer-
sponsored saving plans.
Investment The purchase of capital goods- plant, equipment, software,
housing, and inventories- by businesses and governments.
Labor productivity Average real output per unit of input. The growth of
labor productivity is the growth of real output that is not explained by the
growth of labor input (e. g., hours worked) alone. Increases in capital per
worker raise labor productivity but not total factor productivity.
Life- cycle saving hypothesis The theory that emphasizes the role of saving
and borrowing in order to smooth consumption over one?s life. A principal
implication of the hypothesis is that a household saves during the pre-
retirement period to maintain consumption during retirement.
National Income and Product
The NIPA are the comprehensive set of accounts that measure the total
Accounts (NIPA)
value of goods and services (gross domestic product, or GDP) produced by the
U. S. economy and the total of incomes earned in producing that output.
National saving National saving is the portion of the nation?s income not
used for consumption during a given period. Gross national saving includes
the saving of all sectors- households, businesses, and government; net
national saving is gross national saving less consumption of fixed capital
(depreciation). See also business saving, government saving, nonfederal
saving, personal saving, and private saving.
Net debt Net debt represents the government?s total financial liabilities,
including debt held by the public, less its total financial assets. The net
debt concept is based on the OECD definition, which consolidates the assets
and liabilities of all levels of government. In this report, the concept is
applied to the federal government.
Net foreign investment U. S. exports of goods and services, receipts of
factor income, and net capital grants received by the United States, less
imports of goods and services by the United States, payments of factor
income, and transfer payments to the rest of the world. It may also be
viewed as the acquisition of foreign assets by U. S. residents less the
acquisition of U. S. assets by foreign residents. It includes the
statistical discrepancy of the balance of payments accounts.
Net international investment
U. S.- owned assets abroad less foreign- owned assets in the United States.
position
The direct investment components may be valued either at current cost or
market value.
Net national saving See national saving.
Net worth Net worth is the amount by which assets exceed liabilities. For an
individual, net worth is the total value of all possessions, such as a
house, stocks, bonds, and other securities, minus all outstanding debts,
such as mortgage and revolving- credit loans.
Nonfederal saving A saving measure used in GAO?s long- term economic model
equal to the sum of personal, business, and state and local government
saving. The separation of national saving into federal and nonfederal
components permits using the model to analyze the federal budget?s effect on
saving and economic growth.
Pay- as- you- go basis A financing structure in which tax revenues are
scheduled to produce enough income to pay for current spending. For example,
the Social Security program is financed largely on a pay- as- you- go basis.
Payroll tax
revenues collected from today?s workers are used to pay the benefits of
today?s beneficiaries. Any excess of revenues over expenditures is credited
to the Social Security trust fund.
Personal saving Personal saving is the saving by households, proprietors,
pension funds, private trust funds, and nonprofit institutions serving
individuals. It equals disposable personal income minus consumption and
interest payments. (See also personal saving rate.)
Personal saving rate The personal saving rate- expressed as a percentage- is
calculated as the ratio of personal saving to disposable personal income.
See personal saving and disposable personal income.
Precautionary saving motive Saving as a way of protecting against
uncertainty, such as unexpected expenses or emergencies.
Private saving Private saving is the sum of personal saving and business
saving.
Retirement effect Additional personal saving meant to supplement Social
Security retirement benefits, especially when the goal is early retirement.
Ricardian equivalence The theory that debt- and tax- financed government
spending are equivalent in their economic effect because forward- looking
consumers fully anticipate the future taxes implied by government debt. A
debt- financed tax cut leaves consumption unaffected because households save
the extra disposable income to pay the future tax liability that the tax cut
implies.
The increase in private saving offsets the decrease in public saving.
Standard of living The material well- being of the population, often
measured as GDP per capita.
Substitution effect The tendency for a higher interest rate to promote more
saving. A higher interest rate decreases the present cost of purchasing a
dollar of future consumption and encourages the substitution of future
consumption for current consumption. However, higher interest rates also
generate an
income effect that discourages saving. The net effect of the substitution
and income effects is theoretically ambiguous and can only be resolved
through empirical analysis.
Surplus The amount by which revenues exceed outlays in a given period. See
also government saving and unified budget.
Total factor productivity Average real output per unit of input of combined
labor and capital inputs. The growth of total factor productivity is the
growth of real output that is not explained by the growth of labor and
capital and is generally associated with the level of technology and
managerial efficiency.
Trade surplus/ deficit Exports less imports of goods and services.
Unified budget A comprehensive budget in which receipts and outlays from
federal and trust funds are consolidated; generally a cash or cash
equivalent measure in which receipts are recorded when received and
expenditures are recorded when paid, regardless of the accounting period in
which the receipts are earned or the costs incurred.
Wealth Wealth in a broad sense is anything that has a market value and can
be exchanged for money or goods. It can include both fixed assets such as
structures and equipment and financial assets such as stocks and bonds. One
way to measure a household?s wealth is net worth.
Wealth effect The change in consumption and saving associated with a change
in wealth. For example, households may consume more (or save less) in
response to their greater wealth due to rising stock or housing values.
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States at Yearend 1999.? Survey of Current Business, Vol. 80, No. 7 (July
2000).
Schultze, Charles L. Memos to the President: A Guide through Macroeconomics
for the Busy Policymaker. Washington, D. C.: The Brookings Institution,
1992.
Seskin, Eugene P., and Robert P. Parker ?A Guide to the NIPA?s.? Survey of
Current Business, Vol. 78, No. 3 (March 1998), pp. 26- 48. Social Security
Administration. Income of the Population, 55 or Older, 1998. Washington, D.
C.: U. S. Government Printing Office, March 2000. Solow, Robert M. ?
Technical Change in the Aggregate Production Function.? Review of Economics
and Statistics, Vol. 39, No. 3 (1957), pp. 312- 320. As cited in Edwin R.
Dean and Michael J. Harper, ?The BLS Productivity Measurement Program,?
revision of a paper presented at the Research in Income and Wealth
Conference on New Direction in Productivity Analysis, March 20- 21, 1998,
Washington, D. C.: Bureau of Labor Statistics, July 5, 2000.
Starr- McCluer, Martha. ?Stock Market Wealth and Consumer Spending,? Finance
and Economics Discussion Series Paper No. 1998- 20. Washington, D. C.:
Federal Reserve Board of Governors, April 1998. Summers, Lawrence, and Chris
Carroll. ?Why Is U. S. National Saving So Low?? Brookings Papers on Economic
Activity (2: 1987), William C. Brainard and George L. Perry, eds.
Washington, D. C.: Brookings Institution Press, 1987.
Thaler, Richard H. The Winner?s Curse: Paradoxes and Anomalies of Economic
Life. Princeton, N. J.: Princeton University Press, 1992. Thompson,
Lawrence. Older and Wiser: The Economics of Public Pensions. Washington, D.
C.: The Urban Institute Press, 1998.
U. S. Department of Commerce, Bureau of Economic Analysis. ?Gross Domestic
Product as a Measure of U. S. Production.? Survey of Current Business, Vol.
71, No. 8 (August 1991), p. 8.
U. S. Department of Labor, Bureau of Labor Statistics. ?Productivity
Measures: Business Sector and Major Subsectors.? BLS Handbook of Methods,
April 1997. U. S. Trade Deficit Review Commission. The U. S. Trade Deficit:
Causes, Consequences, and Recommendations for Action. Washington, D. C.:
November 2000.
Venti, Steven F., and David A. Wise. ?Choice, Chance, and Wealth Dispersion
at Retirement,? Working Paper No. 7521. Cambridge, MA: National Bureau of
Economic Research, February 2000.
Verma, Satyendra, and Jules Lichtenstein. The Declining Personal Saving
Rate: Is There Cause for Alarm? Washington, D. C.: AARP Public Policy
Institute, March 2000.
Weinberg, Douglas B. ?U. S. International Transactions, Third Quarter 2000.?
Survey of Current Business, Vol. 81, No. 1 (January 2001), pp. 47 55.
Yakoboski, Paul. ?Retirement Plans, Personal Saving, and Saving Adequacy,?
EBRI Issue Brief Number 219. Employee Benefit Research Institute, March
2000.
Websites:
Administration on Aging?s Retirement and Financial Planning: www. aoa. dhhs.
gov/ retirement American Savings Education Campaign: www. asec. org FirstGov
for Seniors? Retirement Planner:
www. seniors. gov/ retirement. html Organisation for Economic Co- operation
and Development, OECD Economic Outlook, No. 68, December 2000, Sources and
Methods: www. oecd. org/ eco/ out/ source. htm Social Security
Administration?s Online Retirement Planner:
www. ssa. gov/ retire U. S. Department of Labor?s Retirement Savings
Education Campaign: www. dol. gov/ dol/ pwba/ public/ pubs/ introprg. htm
U. S. Department of Treasury?s National Partners for Financial Empowerment:
www. npfe. org U. S. Securities and Exchange Commission?s Office of Investor
Education and Assistance: www. sec. gov/ oiea1. htm
Appendi x V
Related GAO Products Long- Term Simulations Long- Term Budget Issues: Moving
From Balancing the Budget to Balancing Fiscal Risk (GAO- 01- 385T, February
6, 2001).
Budget Issues: July 2000 Update of GAO?s Long- Term Fiscal Simulations
(GAO/ AIMD- 00- 272R, July 26, 2000).
Federal Budget: The President?s Midsession Review (GAO/ OCG- 99- 29, July
21, 1999).
Budget Issues: Long- Term Fiscal Outlook (GAO/ T- AIMD/ OCE- 98- 83,
February 25, 1998).
Budget Issues: Analysis of Long- Term Fiscal Outlook (GAO/ AIMD/ OCE98- 19,
October 22, 1997).
Budget Issues: Deficit Reduction and the Long Term (GAO/ T- AIMD- 96- 66,
March 13, 1996).
The Deficit and the Economy: An Update of Long- Term Simulations (GAO/ AIMD/
OCE- 95- 119, April 26, 1995).
Budget Policy: Prompt Action Necessary to Avert Long- Term Damage to the
Economy (GAO/ OCG- 92- 2, June 5, 1992). Other Budget Issues Federal Debt:
Debt Management Actions and Future Challenges (GAO- 01317, February 28,
2001).
Federal Trust and Other Earmarked Funds: Answers to Frequently Asked
Questions (GAO- 01- 199SP, January 2001).
Federal Debt: Debt Management in a Period of Budget Surplus (GAO/ AIMD- 99-
270, September 29, 1999).
Federal Debt: Answers to Frequently Asked Questions- An Update (GAO/ OCG-
99- 27, May 28, 1999). Government Investment U. S. Infrastructure: Funding
Trends and Opportunities to Improve Investment Decisions (GAO/ RCED/ AIMD-
00- 35, February 7, 2000).
Budget Trends: Federal Investment Outlays, Fiscal Years 1981- 2003
(GAO/ AIMD- 98- 184, June 15, 1998).
Budget Structure: Providing an Investment Focus in the Federal Budget
(GAO/ T- AIMD- 95- 178, June 29, 1995).
Budget Issues: Incorporating an Investment Component in the Federal Budget
(GAO/ AIMD- 94- 40, November 9, 1993).
Federal Budget: Choosing Public Investment Programs (GAO/ AIMD- 93- 25, July
23, 1993).
Social Security and Private
Social Security Reform: Implications for Private Pensions (GAO/ HEHS00-
Pensions
187, September 14, 2000). Pension Plans: Characteristics of Persons in the
Labor Force Without Pension Coverage (GAO/ HEHS- 00- 131, August 22, 2000).
Social Security: Providing Useful Information to the Public (GAO/ THEHS- 00-
101, April 11, 2000).
Social Security: The President?s Proposal (GAO/ T- HEHS- AIMD- 00- 43,
November 9, 1999).
Social Security: Evaluating Reform Proposals (GAO/ AIMD/ HEHS- 00- 29,
November 4, 1999).
Social Security: Capital Markets and Educational Issues Associated With
Individual Accounts (GAO/ GGD- 99- 115, June 28, 1999).
Social Security: Criteria for Evaluating Social Security Reform Proposals
(GAO/ T- HEHS- 99- 94, March 25, 1999).
Social Security: Different Approaches for Addressing Program Solvency
(GAO/ HEHS- 98- 33, July 22, 1998).
Social Security Financing: Implications of Government Stock Investing for
the Trust Fund, the Federal Budget, and the Economy (GAO/ AIMD/ HEHS- 98-
74, April 22, 1998)
401( k) Pension Plans: Loan Provisions Enhance Participation But May Affect
Income Security for Some (GAO/ HEHS- 98- 5, October 1, 1997).
Medicare Medicare: Higher Expected Spending and Call for New Benefit
Underscore Need for Meaningful Reform (GAO- 01- 539T, March 22, 2001).
Medicare: 21st Century Challenges Prompt Fresh Thinking About Program?s
Administrative Structure (GAO/ T- HEHS- 00- 108, May 4, 2000).
Medicare Reform: Issues Associated With General Revenue Financing (GAO/ T-
AIMD- 00- 126, March 27, 2000).
Medicare Reform: Leading Proposals Lay Groundwork, While Design Decisions
Lie Ahead (GAO/ T- HEHS/ AIMD- 00- 103, February 24, 2000).
Prescription Drugs: Increasing Medicare Beneficiary Access and Related
Implications (GAO/ T- HEHS/ AIMD- 00- 99, February 15, 2000).
Medicare: Program Reform and Modernization Are Needed But Entail
Considerable Challenges (GAO/ T- HEHS/ AIMD- 00- 77, February 8, 2000).
Medicare Reform: Ensuring Fiscal Sustainability While Modernizing the
Program Will Be Challenging (GAO/ T- HEHS/ AIMD- 99- 294, September 22,
1999).
Medicare Reform: Observations on the President?s July 1999 Proposal (GAO/ T-
AIMD/ HEHS- 99- 236, July 22, 1999).
Medicare and Budget Surpluses: GAO?s Perspective on the President?s Proposal
and the Need for Reform (GAO/ T- AIMD/ HEHS- 99- 113, March 10, 1999).
Other Tax Administration: Potential Impact of Alternative Taxes on Taxpayers
and Administrators (GAO/ GGD- 98- 37, January 14, 1998).
(935342) Lett er
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GAO United States General Accounting Office
Page 1 GAO- 01- 591SP National Saving
Contents
Contents Page 2 GAO- 01- 591SP National Saving
Contents Page 3 GAO- 01- 591SP National Saving
Contents Page 4 GAO- 01- 591SP National Saving
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Preface Page 6 GAO- 01- 591SP National Saving
Preface Page 7 GAO- 01- 591SP National Saving
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Summary of Major Sections Page 10 GAO- 01- 591SP National Saving
Summary of Major Sections Page 11 GAO- 01- 591SP National Saving
Summary of Major Sections Page 12 GAO- 01- 591SP National Saving
Summary of Major Sections Page 13 GAO- 01- 591SP National Saving
Summary of Major Sections Page 14 GAO- 01- 591SP National Saving
Summary of Major Sections Page 15 GAO- 01- 591SP National Saving
Summary of Major Sections Page 16 GAO- 01- 591SP National Saving
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Section 1
Section 1 Personal Saving and Retirement Security
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Section 1 Personal Saving and Retirement Security
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Section 1 Personal Saving and Retirement Security
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Section 1 Personal Saving and Retirement Security
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Section 2
Section 2 National Saving Overview
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Section 2 National Saving Overview
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Section 2 National Saving Overview
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Section 2 National Saving Overview
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Section 2 National Saving Overview
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Section 2 National Saving Overview
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Section 2 National Saving Overview
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Section 2 National Saving Overview
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Section 2 National Saving Overview
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Section 2 National Saving Overview
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Section 3
Section 3 National Saving and the Economy
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Section 3 National Saving and the Economy
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Section 3 National Saving and the Economy
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Section 3 National Saving and the Economy
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Section 3 National Saving and the Economy
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Section 3 National Saving and the Economy
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Section 3 National Saving and the Economy
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Section 3 National Saving and the Economy
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Section 3 National Saving and the Economy
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Section 3 National Saving and the Economy
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Section 3 National Saving and the Economy
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Section 3 National Saving and the Economy
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Section 3 National Saving and the Economy
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Section 4
Section 4 National Saving and the Government
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Section 4 National Saving and the Government
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Section 4 National Saving and the Government
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Section 5
Section 5 National Saving and Current Policy Issues
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Section 5 National Saving and Current Policy Issues
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Appendix I
Appendix I Objectives, Scope, and Methodolog
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Appendix I Objectives, Scope, and Methodolog
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Appendix I Objectives, Scope, and Methodolog
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Appendix I Objectives, Scope, and Methodolog
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Appendix II
Appendix II The Economic Model and Key Assumptions
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Appendix II The Economic Model and Key Assumptions
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Appendix II The Economic Model and Key Assumptions
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Appendix II The Economic Model and Key Assumptions
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Appendix II The Economic Model and Key Assumptions
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Appendix II The Economic Model and Key Assumptions
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Appendix II The Economic Model and Key Assumptions
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Appendix III
Appendix III Glossary
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Appendix III Glossary
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Appendix III Glossary
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Appendix III Glossary
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Appendix III Glossary
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Appendix III Glossary
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Appendix IV
Appendix IV Bibliography
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Appendix IV Bibliography
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Appendix IV Bibliography
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Appendix IV Bibliography
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Appendix IV Bibliography
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Appendix IV Bibliography
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Appendix IV Bibliography
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Appendix IV Bibliography
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Appendix IV Bibliography
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Appendix IV Bibliography
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Appendix V
Appendix V Related GAO Products
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Appendix V Related GAO Products
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Appendix V Related GAO Products
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