National Saving: Current Saving Decisions Have Profound 	 
Implications for Our Nation's Future Well-Being (06-APR-06,	 
GAO-06-628T).							 
                                                                 
The Chairman of the Senate Committee on Finance asked GAO to	 
testify on our nation's low saving and discuss the implications  
for long-term economic growth. 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.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-628T					        
    ACCNO:   A51157						        
  TITLE:     National Saving: Current Saving Decisions Have Profound  
Implications for Our Nation's Future Well-Being 		 
     DATE:   04/06/2006 
  SUBJECT:   Budget deficit					 
	     Economic growth					 
	     Economic policies					 
	     Fiscal policies					 
	     Projections					 
	     National saving					 
	     Savings estimates					 
	     Gross Domestic Product				 

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GAO-06-628T

     

     * The Budget Deficit
     * The Saving Deficit
     * The Current Account Deficit
     * Why Does It Matter?
          * Nation Faces Long-term Fiscal Challenges
          * National Saving Critical for Long-term Economic Growth
     * The Federal Government's Role in National Saving
          * Reduce Federal Deficits
          * Saving Incentives
          * Saving Education
     * Concluding Observations
     * Scope and Methodology
     * Contacts and Acknowledgments
     * Related GAO Products
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs

Testimony

Before the Subcommittee on Long-term Growth and Debt Reduction, Committee
on Finance, United States Senate

United States Government Accountability Office

GAO

For Release on Delivery Expected at 2:30 p.m. EST

Thursday, April 6, 2006

NATIONAL SAVING

Current Saving Decisions Have Profound Implications for Our Nation's
Future Well-Being

Statement of Thomas J. McCool, Director, Center for Economics, Applied
Research and Methods

National Saving

GAO-06-628T

Mr. Chairman, Senator Kerry, and Members of the Subcommittee:

I appreciate the opportunity to talk with you today about national saving
and the central role it plays for our nation's long-term economic growth
and future living standards. 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.

As our 21st century challenges report notes, the United States faces
serious long-term challenges in several areas, some of them unprecedented
in their size, scope, complexity, and potential impact.1 One of the
primary challenges is demographics. The U.S. workforce growth rate is
slowing and will continue to slow. This means that just when increasing
numbers of baby boomers start to retire and draw benefits, there will be
relatively fewer full-time workers to help support these retirees. What's
more, people are living longer. In the very near future, our aging
population will begin to put enormous strains on our nation's pension and
health care systems. Other emerging trends that warrant close scrutiny are
globalization, new security threats, rapidly evolving technology, and a
range of quality-of-life concerns affecting everything from education and
health care to energy and the environment.

Comptroller General Walker has spoken frequently about the fact that our
nation faces a number of deficits, including three that are directly
related to this hearing. These three interrelated deficits are our
nation's budget deficit, a saving deficit, and a current account deficit.
He has noted that our growing fiscal imbalance threatens our future
economic growth, our future standard of living, and even our future
national security. Unfortunately, America has been heading in the wrong
direction on all three deficits in recent years. Nonetheless, we have a
window of opportunity to turn things around, but we need to act and act
soon because the miracle of compounding is currently working against us.

1GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005).

Today's saving and investment decisions have profound implications for the
level of well-being in the future. Increasing personal saving is an
important way to bolster retirement security for current workers and
increasing national saving will allow future workers to more easily bear
the costs of financing federal retirement and health programs while
maintaining their standard of living.

In my testimony today, I will describe these three deficits and why they
raise concerns about our nation's long-term growth and its ability to
finance the health and retirement needs of an aging population. Finally, I
will lay out a few ideas for how the federal government can help increase
national saving.

My remarks are based on our previous work on a variety of issues,
including a report on national saving and GAO's work on the long-term
fiscal challenge.2 These efforts were conducted in accordance with
generally accepted government auditing standards.

                               The Budget Deficit

The first deficit we face is the federal budget deficit (see fig. 1). In
2005 the unified federal budget deficit was around $318 billion or 2.6
percent of gross domestic product (GDP). This figure is an approximation
of what the federal government absorbs from private saving. Although a
single year's federal deficit is not a cause for concern, persistent
deficits are. Federal deficits reduce the amount of national saving
available for investment. They also lead to growing federal debt, on which
net interest payments must be made by current and future generations.

2 GAO, National Saving: Answers to Key Questions, GAO-01-591SP
(Washington, D.C.: June 2001). See also
http://www.gao.gov/special.pubs/longterm/ for information on GAO's most
recent long-term simulations and
http://www.gao.gov/special.pubs/longterm/longtermproducts.html for a
bibliography of GAO's issued work on the long-term fiscal outlook.

Figure 1: Federal Surpluses and Deficits (-) as a Percent of GDP
(1930-2005)

                               The Saving Deficit

A budget deficit represents dissaving by the government, but the U.S.
suffers from an even broader national saving deficit. National saving is
the sum of personal saving, corporate saving, and government saving. Last
year, for the first time since 1934, net national saving declined to less
than 1 percent of GDP and the personal saving rate was slightly negative
(see fig. 2).3 Remarkably-and unfortunately-the United States has returned
to saving levels not seen since the depths of the Great Depression.

3Personal saving, as measured in the National Income and Product Accounts
(NIPA), does not include capital gains on existing assets 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. In other words, 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.

Figure 2: Net National Saving and Personal Saving as a Percent of GDP
(1930-2005)

A negative saving rate means that, in the aggregate, households are
spending more than their current income by drawing down past saving,
selling existing assets, or borrowing. No one is sure why the personal
saving rate has declined. One possible explanation is increases in
household wealth, which surged in the late 1990s due to the stock market
boom and more recently due to the run-up in housing prices. Household
wealth relative to income increased from 4.7 in 1990 to 5.8 in 2005 (see
fig. 3). If people feel wealthier, they may feel less need to save.
Continued financial liberalization and innovation have made it easier for
Americans to borrow, particularly against their real estate wealth, which
may have lead to greater consumption.

Figure 3: Personal Saving and the Wealth-Income Ratio (1960-2005)

Clearly, as the Comptroller General has said, many Americans, like their
government, are living beyond their means and are deeply in debt. This
trend is particularly alarming in an aging society such as our own. Those
Americans who choose to save more will certainly live better in
retirement. Those Americans who choose to save less are rolling the dice
on whether they will have adequate resources for a secure retirement.
While Social Security provides a foundation for retirement income, Social
Security benefits replace only about 40 percent of preretirement 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. Though the aggregate
wealth-to-income ratio remains relatively high, it is a misleading
indicator of financial status of the typical household because wealth is
highly concentrated among a few households. While the median net worth of
all families was $93,100 in 2004, the top 10 percent of the families had a
median net worth of over $1.4 million and the bottom quarter of the
families had a median net worth of about $1,700. Moreover, measures of
wealth are largely based on market values, which on occasion can exhibit
substantial swings. This is illustrated by the sharp run-up in stock
prices in the late 1990s and their subsequent decline beginning in 2000.

The only components of national saving that have not shown a long-term
decline are corporate and state and local saving.4 In fact, corporate
saving is actually high by historical standards. After declines in
corporate profits in 2000-2001, corporate saving has rebounded to almost 4
percent of GDP-a level not seen since the late 1960s. The state and local
sector as a whole experienced a deficit from 2002 to 2004 but has since
returned to a slight surplus.

                          The Current Account Deficit

Now let me turn to the third deficit: our current account deficit. The
current account deficit is the difference between domestic investment and
national saving. That is, it is the amount of domestic investment financed
by borrowing from abroad. Over most of the last 25 years, the United
States has run a current account deficit, but in 2005 the current account
deficit hit an all-time record-$782 billion, or over 6 percent of GDP (see
fig.4).5 That is twice what it was only 6 years earlier.

4Corporate saving consists of retained earnings, while state and local
government saving is the difference between the sector's total current
receipts and expenditures.

5This is measured on a NIPA basis. The current account deficit on an
international transaction account basis was $805 billion.

Figure 4: Net National Saving, Net Domestic Investment, and the Current
Account Balance as Percents of GDP (1960-2005)

Funds from overseas have been pouring into the United States. One
explanation for these inflows is that high productivity in the U.S. raised
the perceived return on U.S. assets. Moreover rising federal budget
deficits and declining personal saving rates have necessitated foreign
borrowing to help finance domestic investment. Another possible
explanation for persistent U.S. current account deficits may be the
weakness of foreign demand and the efforts of some countries to support
their exports by keeping their own currencies from strengthening. Also,
other countries' populations are aging more rapidly than the U.S.
population and they may be investing in the U.S. in order to build up a
stock of assets to prepare for their retirement spending.

Whatever the reason for high current account deficits, policymakers should
be aware of the implications these financial inflows have for the nation's
economic growth and for future living standards. While current account
deficits support domestic investment and productivity growth, they also
translate into a rising level of indebtedness to other countries. Figure 5
shows that the net foreign ownership of U.S. assets grew to more than 20
percent of GDP in 2005. The fact that our net indebtedness to other
nations is rising more rapidly than our income raises concerns that the
U.S. current account balance is on an unsustainable path.

Figure 5: U.S Net International Investment Position and Net Income
Receipts on Assets as Percents of GDP (1976-2004)

Despite the growth of foreign asset holdings in the United States in
recent years, the United States earned more in interest, dividends, and
other investment returns from other countries than it paid on U.S. assets
held by foreigners. This may seem counterintuitive to the notion that U.S.
assets, on average, pay a higher return than foreign assets and thus
attract a large amount of foreign investment. The positive net income
receipts reflect differences in the composition of foreign and U.S.
investment and the higher rate of return that U.S. firms earn on their
direct investments abroad compared to the earnings of foreign companies
from their U.S. subsidiaries.6 A larger share of foreign-owned assets in
the U.S. is held in portfolio investment, such as stocks, bonds, loans,
and bank deposits, which pay a lower yield than U.S. direct investments
abroad. A recent study by the Congressional Budget Office (CBO) attributed
this to three factors.7 First, U.S. subsidiaries abroad have generally
been in business longer than foreign-owned subsidiaries in the U.S., which
contributes to greater profitability. Second, investors of U.S.
subsidiaries abroad may require higher returns because they face greater
political and economic risks than subsidiaries of foreign-owned
corporations. Finally, some observers argue that U.S subsidiaries abroad
may overstate their profits for tax reasons, while foreign-owned
subsidiaries in the United States understate their profits. However, given
the nation's increasingly negative net international investment position,
it is not clear how long the U.S. will continue to earn more on its
foreign investment than it pays on foreign investment in the U.S.

The effect of large foreign borrowing on our economy also 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. Thus, even though
some of the income generated by the investment must be paid to foreign
lenders, the investment-and hence the borrowing that financed it-augments
future income. However, if the borrowing from abroad is used to finance
consumption, this is not true. Short-term well-being is improved but the
ability to repay the borrowing in the future is not.

Both economists and policymakers are concerned about whether the United
States can maintain its reliance on foreign capital inflows to sustain
domestic investment. Investors generally try to achieve some balance in
the allocation of their portfolios, and U.S. assets already represent a
growing and significant share of foreign portfolios (see fig. 6). Although
the United States accounts for 29 percent of global GDP, it received 70
percent of the net saving exported by countries with current account
surpluses in 2004. Observers suggest that the United States' favorable
investment climate, including the potential for high rates of return, may
explain why the U.S. absorbs such a large share of the world's saving.
However, it is probably not realistic to expect ever-increasing foreign
investment in the United States. Imagine what would happen to the stock
and bond markets if these foreign investors began to lose confidence and
lowered their rates of accumulation, or worse yet, started to sell off
their holdings. We would likely face some adverse effects in the form of
higher interest rates, reduced investment, and more expensive imports.

6Direct investment is investment in which a resident of one country
obtains a lasting interest in, and a degree of influence over, the
management of a business enterprise in another country.

7CBO, Why Does U.S. Investment Abroad Earn Higher Returns Than Foreign
Investment in the United States? Economic and Budget Issue Brief
(Washington, D.C.: Nov. 30, 2005).

Figure 6: U.S. Net Borrowing from Abroad as a Percent of Total Worldwide
Net Borrowing (1980-2004)

Note: Calculated as the ratio of the U.S. current account balance to the
sum of the current account balances of all countries that had current
account deficits.

                              Why Does It Matter?

Economic growth in recent years has been high despite the fact that
national saving was low by U.S. historical standards. This is 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, as discussed earlier, the United States was
able to invest more than it saved by borrowing from abroad.

However, we cannot let our recent good fortune lull us into complacency.
While the U.S. has benefited from high levels of foreign investment in
recent years, this is not a viable strategy for the long run. Many of the
nations currently financing investment in the United States face aging
populations and their own retirement financing challenges that may reduce
foreign saving available for U.S. domestic investment. If the net inflow
of foreign investment were to diminish, so too would domestic investment
and potentially economic growth if that saving is not offset by saving
here in the U.S. Also, our nation faces daunting fiscal and demographic
challenges, which may be even more of a reason to address our nation's low
saving rates. Saving and economic growth will be key factors to prepare
future generations to bear the burden of financing the retirement and
health costs of an aging population.

Nation Faces Long-term Fiscal Challenges

Given our nation's long-term fiscal outlook, acting sooner rather than
later to increase national saving is imperative. The federal government's
current financial condition and long-term fiscal outlook present enormous
challenges to future generations' levels of well-being. No one can
forecast with any precision what the next 75 years will look like-that
would require the ability to predict changes in the economy and future
legislation. However, there is a fair amount of certainty in one major
driver of our long-term outlook-demographics. As life expectancy rises and
the baby boom generation retires, the U.S. population will age, and fewer
workers will support each retiree. Over the next few decades, federal
spending on retirement and health programs-Social Security, Medicare,
Medicaid, and other federal pension, health, and disability programs-will
grow dramatically. Absent policy changes on the spending and/or revenue
sides of the budget, a growing imbalance between expected federal spending
and tax revenues will mean escalating and eventually unsustainable federal
deficits and debt that will threaten our future economy and standard of
living. As Comptroller General Walker has said, "Simply put, our nation's
fiscal policy is on an imprudent and unsustainable course."8

Neither slowing the growth in discretionary spending nor allowing the tax
provisions to expire-nor both together-would eliminate the imbalance.
Although revenues will be part of the debate about our fiscal future,
assuming no changes to Social Security, Medicare, Medicaid, and other
drivers of the long-term fiscal gap would require at least a doubling of
taxes-and that seems highly implausible.

8GAO, 21st Century: Addressing Long-Term Fiscal Challenges Must Include a
Re-examination of Mandatory Spending, GAO-06-456T , (Washington, D.C.:
Feb. 15, 2006).

GAO's long-term simulations illustrate the magnitude of the fiscal
challenges associated with an aging society. Indeed, the nation's
long-term fiscal outlook is daunting under many different policy scenarios
and assumptions. For instance, under a fiscally restrained scenario, if
discretionary spending grows only with inflation over the next 10 years
and all existing tax cuts expire as scheduled under current law, spending
for Social Security and health care programs would grow to consume over 80
percent of federal revenue by 2040 (see fig. 7). On the other hand, if
discretionary spending grew at the same rate as the economy in the near
term and if all tax cuts were extended, by 2040 federal revenues may just
be adequate to pay only some Social Security benefits and interest on the
growing federal debt (see fig. 8).

Figure 7: Composition of Spending as a Share of GDP under Baseline
Extended

Notes: In addition to the expiration of tax cuts, revenue as a share of
GDP increases through 2016 due to (1) real bracket creep, (2) more
taxpayers becoming subject to the alternative minimum tax (AMT), and (3)
increased revenue from tax-deferred retirement accounts. After 2016,
revenue as a share of GDP is held constant.

Figure 8: Composition of Spending as a Share of GDP Assuming Discretionary
Spending Grows with GDP After 2006 and All Expiring Tax Provisions Are
Extended

Note: This includes certain tax provisions that expired at the end of
2005, such as the increased AMT exemption amount.

GAO's long-term simulations show the squeeze on budgetary flexibility that
the combination of demographics and health care cost growth will create.
The burden on the budget and on the economy mean that letting current
policy continue will leave few resources for investment in new capital
goods and technology and result in slower income growth.

National Saving Critical for Long-term Economic Growth

There are three key contributors to economic growth-labor force growth,
capital input, and total factor productivity (or increased efficiency in
the use of capital and labor). Figure 9 shows the slowing in labor force
growth (potential hours worked) over the next decade. Indeed, the Social
Security and Medicare trustees project labor force growth to slow after
2010 and be negligible after 2020. Without improvements in managerial
efficiencies or increases in capital formation, low labor force growth
will lead to slower growth in the economy-and to slower growth in federal
revenues at a time when the expenditure demands on federal programs for
the elderly are increasing. This illustrates the imperative to increase
saving and investment and explore other efficiency-enhancing activities,
such as education, training, and R&D.

Figure 9: Contributions to Potential Output Growth (Nonfarm Business
Sector)

Note: Numbers may not add to total due to rounding.

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. While
economic growth will help society bear the burden of financing Social
Security and Medicare, it alone will not solve the long-term fiscal
challenge. Closing the current long-term fiscal gap would require
sustained economic growth far beyond that experienced in U.S. economic
history since World War II. Tough choices are inevitable, and the sooner
we act the better.

                The Federal Government's Role in National Saving

Although there may be ways for the government to affect private saving,
the only sure way for the government to increase national saving is to
decrease government dissaving (the budget deficit). Each generation is a
steward for the economy it bequeaths to future generations, and the
nation's long-term economic future depends in part on today's decisions
about consumption and saving. To address our nation's daunting long-term
fiscal challenges, we must change the path of programs for the elderly and
build the economic capacity to bear the costs of an aging population.

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 reduce federal deficits. 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.

Reduce Federal Deficits

As the Comptroller General has said,9 meeting our nation's large, growing,
and structural fiscal imbalance will require a three-pronged approach:

o  restructuring existing entitlement programs,

o  reexamining the base of discretionary and other spending, and

o  reviewing and revising existing tax policy, including tax expenditures,
which can operate like mandatory spending programs.

Increased government saving and entitlement reform go hand-in-hand. Over
the long term, the federal government cannot avoid massive dissaving
unless it reforms retirement and health programs for the elderly. Without
change, Social Security and Medicare will constitute a heavy drain on the
earnings of future workers. Although saving more yields a bigger pie,
policymakers will still face the difficult choice of how to divide the pie
between retirees and workers. It is worth remembering that policy debates
surrounding Social Security and Medicare reform also have implications for
all levels of saving-government, personal, and, ultimately, national.

9 GAO-06-456T .

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.

As everyone here knows, health care spending is the major driver of
long-term government dissaving. This is due to both demographics and the
increasing cost of modern medical technology. The current Medicare program
largely lacks incentives to control health care consumption, and the cost
of health care decisions is not readily transparent to consumers. In
balancing health care spending with other societal priorities, it is
important to distinguish between health care wants, needs, affordability,
and sustainability at both the individual and aggregate level. Reducing
federal health care 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 and the extent to which overall
health care spending is moderated. For example, reforms that reduce
federal deficits by merely shifting healthcare spending to state and local
governments or the private sector might not increase national saving on a
dollar-for-dollar basis.

Tax expenditures have represented a substantial federal commitment over
the past three decades. Since 1974, the number of tax expenditures more
than doubled and the sum of tax expenditure revenue loss estimates tripled
in real terms to nearly $730 billion in 2004. On an outlay-equivalent
basis, the sum of tax expenditure estimates exceeded discretionary
spending for most years in the last decade. Tax expenditures result in
forgone revenue for the federal government due to preferential provisions
in the tax code, such as exemptions and exclusions from taxation,
deductions, credits, deferral of tax liability, and preferential tax
rates. These tax expenditures are often aimed at policy goals similar to
those of federal spending programs; existing tax expenditures, for
example, are intended to encourage economic development in disadvantaged
areas, finance postsecondary education, and stimulate research and
development. A recent GAO report calls for a more systematic review of tax
expenditures to ensure that they are achieving their intended purposes and
are designed in the most efficient and effective manner.10

Saving Incentives

The federal government has sought to encourage personal saving both to
enhance households' financial security and to boost national saving.
However, developing policies that have the desired effect is difficult.
Tax incentives may 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 (IRA), the personal saving rate has
steadily declined. For example, although tax benefits seem to encourage
individuals to contribute to these kinds of accounts, the amounts
contributed are not always new saving. Some contributions may represent
saving that would have occurred even without the tax incentives-and may
even be shifted from taxable assets or financed by borrowing. Economists
disagree about whether tax incentives have been or could be 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. The bottom line is
that we have many saving incentives but very little information on whether
they work and how they interact.

Saving Education

A leading obstacle to expanding retirement saving has been that many
Americans do not know how to save for retirement, let alone how much to
save. The need to improve consumers' financial literacy-their ability to
make informed judgments and effective decisions about the management of
money and credit-has become increasingly important. Congress has responded
by passing legislation, such as the Savings Are Vital for Everyone's
Retirement Act of 1997 (SAVER Act). In addition, in the Fair and Accurate
Credit Transactions Act of 2003, Congress created the Financial Literacy
and Education Commission, which is charged with coordinating federal
efforts and developing a national strategy to promote financial literacy.
Also, GAO has identified financial literacy as a 21st century challenge.11

10GAO, Government Performance and Accountability: Tax Expenditures
Represent a Substantial Federal Commitment and Need to Be Examined,
GAO-05-690 , (Washington, D.C.: Sept. 23, 2005).

In a July 2004 Comptroller General forum, we discussed the federal
government's role in improving financial literacy.12 Among other things,
forum participants suggested that the federal government serve as a leader
using its influence and authority to make financial literacy a national
priority. Some federal agencies already play a role in educating the
public about saving. For example, as mandated by the SAVER Act, the
Department of Labor maintains an outreach program in concert with other
public and private organizations to raise public awareness about the
advantages of saving and to help educate workers about how much they need
to save for retirement. Also, 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.

                            Concluding Observations

Increasing the nation's economic capacity is a long-term process. Acting
sooner rather than later could allow the miracle of compounding to turn
from enemy to ally. This is why the Comptroller General has called for
reimposing budget controls; reforming Social Security, Medicare and
Medicaid; and reexamining the base of all major spending programs and tax
policies to reflect 21st century challenges. As I said before, every
generation is in part responsible for the economy it passes on to the
next. Our current saving decisions have profound implications for the
nation's future well-being.

Mr. Chairman, this completes my prepared statement. I would be happy to
respond to any questions you or other Members of the Subcommittee may have
at this time.

11 GAO-05-325SP .

12GAO, Highlights of a GAO Forum: The Federal Government's Role in
Improving Financial Literacy, GAO-05-93SP , (Washington, D.C.: Nov. 15,
2004).

                             Scope and Methodology

My remarks are based largely on our previous report National Saving:
Answers to Key Questions and other related GAO products. We updated the
information from the National Saving report with the most recent published
data from OMB, BEA, the Federal Reserve Board, CBO and the IMF. We also
reviewed some recently published studies and statements from academic
journals, Federal Reserve officials, the IMF, CBO and other sources.

                          Contacts and Acknowledgments

Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this testimony. For further
information on this testimony, please contact Thomas J. McCool at (202)
512-2700 or [email protected] or Susan J. Irving at (202) 512-9142 or
[email protected] . Individuals making key contributions to this testimony
include Rick Krashevski, Assistant Director; and Melissa Wolf, Senior
Analyst.

                              Related GAO Products

21st Century Challenges: Reexamining the Base of the Federal Government.
GAO-05-325SP . February 2005.

Highlights of a GAO Forum: The Federal Government's Role in Improving
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Federal Debt: Answers to Frequently Asked Questions, An Update.
GAO-04-485SP . August 2004.

National Saving: Answers to Key Questions. GAO-01-591SP . June 2001.

See also http://www.gao.gov/special.pubs/longterm/ for information on
GAO's most recent long-term simulations and
http://www.gao.gov/special.pubs/longterm/longtermproducts.html a
bibliography of GAO's issued work on the long-term fiscal outlook.

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Highlights of GAO-06-628T , a testimony to Subcommittee on Long-term
Growth and Debt Reduction, Committee on Finance, United States Senate

April 6, 2006

NATIONAL SAVING

Current Saving Decisions Have Profound Implications for Our Nation's
Future Well-Being

The Chairman of the Senate Committee on Finance asked GAO to testify on
our nation's low saving and discuss the implications for long-term
economic growth.

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.

What GAO Recommends

GAO does not make any recommendations but lays out a few ideas for how the
federal government can help increase national saving. The only sure way
for the government to increase national saving is to reduce the budget
deficit, which will require a three-pronged approach: restructure existing
entitlement programs, reexamine the base of discretionary and other
spending, and review and revise existing tax policy, including tax
expenditures,  which can operate like mandatory spending programs. The
federal government can also explore saving incentives and education
programs to encourage personal saving.

Our nation faces a number of deficits, including our nation's budget
deficit, a saving deficit, and a current account deficit. Unfortunately,
America has been heading in the wrong direction on all three deficits in
recent years.

           o  In 2005 our nation's budget deficit was around $318 billion or
           2.6 percent of GDP.
           o  For the first time since 1934, net national saving declined to
           less than 1 percent of GDP and the personal saving rate was
           slightly negative in 2005 (see figure).
           o  While the United States has run a current account deficit-or
           borrowed to finance domestic investment-over most of the last 25
           years, the current account deficit hit an all time record- $782
           billion, or over 6 percent of GDP in 2005.

Net National Saving and Personal Saving as a Percentage of GDP (1930-2005)

Despite low national saving in recent years, economic growth has been
high. However, we cannot let our recent good fortune lull us into
complacency. If the net inflow of foreign investment were to diminish, so
too would domestic investment and potentially economic growth if that
saving is not offset by saving here in the U.S. Also, our nation faces
daunting fiscal and demographic challenges, which provide even more of a
reason to address our nation's low saving rates. Greater economic growth
from saving more now would make it easier for future workers to bear the
burden of financing Social Security and Medicare, but economic growth
alone will not solve the long-term fiscal challenge. Tough choices are
inevitable, and the sooner we act the better in order to allow the miracle
of compounding to turn from enemy to ally.
*** End of document. ***