Saving Americans’ Dwindling Savings

Americans are saving less. While the U.S. saving rate has regularly lagged behind its peers, it has yet to return to pre-pandemic levels. Increasingly, people are turning to credit cards to fill the gaps in their budgets.

Garrett Watson, Senior Policy Analyst and Modeling Manager at the Tax Foundation, joins Kyle Hulehan to discuss why the U.S. is struggling to save and what solutions exist within the tax code to help Americans save more.

Links:
https://taxfoundation.org/blog/personal-saving-retirement-taxes/

https://taxfoundation.org/research/all/federal/case-for-universal-savings-accounts/

Transcript

Kyle Hulehan: 0:00

Americans are saving less. While the US has regularly lagged behind its peers in savings, the rate has yet to return to pre pandemic levels. Increasingly, people are turning to credit cards to fill the gaps in their budgets. How did we get to this point? And what solutions exist within the tax code to help Americans save more? Hello, and welcome to The Deduction, a Tax Foundation podcast. I'm your host, Kyle Houlihan, and today we are joined by Garrett Watson, Senior Policy Analyst and Modeling Manager at the Tax Foundation. Garrett, how are you doing today?

Garrett Watson: 0:35

Doing well. Thanks for having me.

Kyle Hulehan: 0:36

Yeah, Garrett, I'm going to be honest with you. I'm a little jealous. You have two titles. I kind of, I'm starting to think maybe next year I should, put that in my, my annual review. I might need to, negotiate for two titles.

Garrett Watson: 0:47

Podcast guru,

Kyle Hulehan: 0:48

Yeah. Yeah. Podcast host. Maybe that'll be it. Maybe that's what I can negotiate for next time. All right. So, so Garrett, things are feeling Really expensive right now. I mean I know for myself I'm kind of continually shocked by how much it costs even go out and get dinner a Few weeks back. I was in New York City, which I know is very expensive But I was in New York City and but at a very normal restaurant and it costs like 25 bucks just to get a singular drink Things are pricey at the moment, and I know that that might not be everything, but, you know, it doesn't surprise me to see that savings have fallen 2. 2 percent below the 2015 2019 average. I'm just wondering, why are Americans saving less now than compared to the time during the pandemic?

Garrett Watson: 1:37

Yeah. I think it's important for us to be able to explain why we're seeing, the savings challenges that we're seeing now to go back and talk about the bigger picture and what happened during the pandemic. Right. So we did see in the years prior to the pandemic over the last 20 years, you know, American savings rates have been. a bit below average compared to other countries, they range somewhere between five and 10%, from 2000 to 2020, right before the pandemic. And what we saw, and you can see this on a lot of the charts, right. Related to this was a huge spike in savings when the pandemic started. And that's because of two main reasons, One is of course, the virus, and efforts to try to contain its spread meant that people stayed at home and spent less on experiences going out to eat, right, vacations. A lot of other things that they normally would and that led to increased savings for folks who still had jobs and then for folks who were out of jobs or needed relief, there was an unprecedented amount of spending, by the federal government to help those folks during the pandemic emergency. and that, started with the CARES Act, most notably in March, 2020, and then continued with a couple of different other, relief packages, including the American Rescue Plan in the spring of 2021. And that led to savings rates spiking way up to over 30 percent at one point, and it amounted to over 2 trillion of What us economists call excess savings, which is basically savings over and above what the normal trend and that led to folks sitting on a lot of, a lot of excess cash and that what's happened since then, you know, as we've had vaccines as the pandemic has abated a bit, as folks have come out, they have sort of spending more of that, that cash and injected it into the economy and that was actually, of course, one Amongst several other drivers of the unprecedented inflation we saw in 2021 and 2022, that's just starting to come down this year a little bit, peaking at over 9 percent in 2022, still staying at about 4 percent right now, overall. And that's led to a giant increase, of course, in the cost of living, as you just mentioned. and, on the flip side, it's meant that the savings rate has come way back down. It's now back down to its pre 2019 level, a bit below that actually, below 5%. As, a lot of this excess cash has been. put into the market as folks have gone back out into vacation, opened up the world and then faced, a lot of this inflation. And now the big policy question is, what do we do next to help folks with their savings in the face of this much more expensive economy?

Kyle Hulehan: 3:54

Garrett, you're a seasoned veteran. You're a pro of this. You're setting up my next and future questions. And I very much appreciate that. one thing I do want to step back real quick and just kind of like pinpoint is that when you're talking about the, those stimulus checks, so those stimulus checks, I don't want to say that they provided people artificial money, but they provided people a, a boon that, that maybe just didn't last, it's not long term. Could you emphasize that for me, so people kind of understand that side of things, like why, why there was the spike?

Garrett Watson: 4:23

For sure. So we saw, of course, in, in March, 2020, the first round of stimulus checks that were given as part of the CARES Act that amounted to about 1, 200. per person, if they were below a certain income level, we did a similar round of checks of amounting to about 600, in, in December of 2020, and then another, 1, 400 that was, paid out, in the American Rescue Plan. So that, that's thousands of dollars, often per person, right? So households that have multiple dependents may have gotten checks for 6, 000 or even 8, 000. It's also important to note that in addition to the checks that I think that are the most salient form of relief for a lot of folks during the pandemic, there were additional, sources of saving, additional aid that came, one of which was the expanded aid. Unemployment insurance, which provided, often a top up of amounting to hundreds of dollars per week for folks, that was, over and above what was typically provided through unemployment insurance, there are other forms of aid, including of course, for business owners, the forgivable loans through the PPP program and other tax credits. And so this really did amount to, we actually did a piece on this, about a year and a half ago, for some families, a family of four, over 20, 000 in relief. over the course of that 18 to 24 month period. And for a lot of folks, of course, they used that to stay afloat if they didn't have a job. But for a lot of folks who had jobs, they, they kept that money and held on to it, especially if they weren't going out. what happened was as things opened up, all this money was injected into the system at the same time. And when you combine that with the supply chain issues you were still having and with the war in the Ukraine in February of 22, it led to this big burst of inflation. That folks are still dealing with even now.

Kyle Hulehan: 5:54

And I think, to your point here, I, I think it would really surprise people after hearing everything you said right there, is is that the U. S. is the only developed country right now that has a savings rate that fell below the pre pandemic level. So, why are Americans saving at a lower rate than other countries after the pandemic?

Garrett Watson: 6:15

Yeah, I think this, this is a key question because, both in terms of savings rates and inflation, there's been a lot of analysis on how other countries are doing, right? To pinpoint what the key drivers are. And what we saw is both, countries across, the Western world in particular, saw elevated inflation after the pandemic, for all the reasons we just talked about. because a lot of these countries also spent on, on relief and stimulus programs. They also, of course, dealt with supply chain issues and energy issues from the Ukraine war. But, the U S did see, an elevated amount of inflation relative to other countries. only really the only other country that really exceeded us dramatically was the United Kingdom, which is also in its own tough spot. and the other thing that made us unique was a lot of these countries still have a lot of excess savings from the. Pandemic, the U S so we've actually been unique in that. We've drawn it down very quickly. And, there's a question of, potentially that has to do with, you know, the, the way folks were, feeling culturally coming out of the pandemic in the U S that there was this sense of let's, let's take this money and have experiences that we may have missed out on that might be unique to, to our country rather than other countries. Right. of course there, there were the design of the pandemic relief on our end was a little different than other countries, right. Where it really did emphasize, direct. Individual level relief that was often a bit more widely shared than more targeted. Unemployment related relief that was provided in europe. So that may explain some of it but and the other thing of course is we are in the u. s a bit more or a bit less averse to debt instruments than in other countries. When you look at debt levels right overall, folks are much more interested in that, but using that as a vehicle to consume. And we're seeing this in some of the data, right? Where credit card debt is going back up, vehicle debt in particular, because vehicles got much more expensive. Because of a shortage of both new and used vehicles during the pandemic, if folks are using, debt instruments, particularly longer vehicle loans, higher vehicle payments to keep this consumption afloat. And the big question is how much lower will the savings rate get and how much more debt will be racked up before folks start changing their behavior? in the first few years after this pandemic,

Kyle Hulehan: 8:11

I think, one of the things is it's so easy to kind of, you know, rack up debt, you swipe on the credit card, swipe on the credit card, and keep going in that way, but, I think, Saving money is obviously incredibly important. It's, it's something that, you know, we really need to value more in, in the U. S. So, what do you think should change to help Americans save more money?

Garrett Watson: 8:33

So from from the tax angle, taxes are one, of course, many, many factors that folks, you know, in a household may consider when they think about savings, right? I mean, savings are, ultimately deferred consumption, right? It's a decision as to whether or not we consume. And enjoy goods and services today or in the future for what are often very important financial goals for households, right? Be it education, be it retirement, standing up for a big, vehicle or even a memorable family vacation. And so it is important that we have savings for that reason. The other important reason why savings is important from a long run perspective is. Savings is used in our financial system to help support investment. And so it's important from an economic growth perspective that we have that savings available. So the folks who want to deploy productively, who don't have that money on hand themselves can borrow that money and go ahead and invest in opportunities. And we've seen in the long run, that more and more of our investment opportunities have to be funded from folks abroad because domestic savers just haven't saved enough to fund domestic and domestic opportunities. that's not necessarily a purely bad thing. It's good that we still have investment from folks who find our country attractive. But it probably does represent a missed opportunity for folks who could get returns from lending their, their money to folks who can use it productively, investing it in, say, the stock market. and so those are just two major reasons why saving is important. From a tax perspective, it's really, important that we make it as simple as possible for folks to save. And unfortunately, under the current system, we have a raft of accounts that do provide some tax benefits often for retirement or for things like health savings or education, but they are segmented off with a variety of rules, eligibility requirements, contribution limits. And that can make it very complicated and overwhelming for a family who's just trying to navigate their financial life to determine how do I make full use of these accounts. or, and for a lot of folks, it may dissuade them from saving, thinking longer term. So for us, we really emphasize, you know, it's important for policy makers to help simplify that, these accounts, particularly on the retirement side, and make, more and more savings accessible, so that folks do have an incentive, at least when it comes to taxes, to to go ahead and, and save that money for their, their financial goals and help, inject some capital into the, the economy for, from a longer growth perspective.

Kyle Hulehan: 10:44

Garrett, I'm gonna, I'll pull back the veil real quick. I'm 27 and I'm only just really figuring out HSAs, IRAs, there's all these different accounts, there's all these different things, That adults are supposed to know, to save money for retirement. It's, it's very confusing, honestly. And, and you need someone, it feels like you need a class. You need, someone to really walk you through it. So, with all of these different accounts, there's a struggle with the complexity of it for people to understand of it. It's just a, it's a complex system. There's too many accounts. Is, is that kind of what's going on?

Garrett Watson: 11:16

So I think there's a couple of things going on there. One is, if we take a look at like the, you know, financial habits and education literature, savings is really much, sort of a habit you just start, ideally start early, but you have to really get into the rhythm of saving. So for a lot of folks, if they aren't used to doing that, particularly when taking advantage of retirement accounts, That if they are overwhelmed at an early age because of the, many different options that are available, right? And all the rules related to how to take advantage of them. The big risk is that they'll end up, losing out on building that habit. And it's much harder when you are further along in your career, right? When you're building a family and you have, your expenses are rising. and lifestyle creep is coming in to start that habit later. of course, it's better, now than, than later, right? So, that doesn't mean it's ever too late to start, but it is easier for you to catch folks early on to start building that habit. And the easiest way to do that is to make these accounts as accessible as possible. because, as we just mentioned, right, there are just a variety of, of hurdles here for folks to, to deal with. something as simple as just what's the difference between a traditional and a Roth style account is very overwhelming. Like, what does that mean for my paycheck? Right. So, for the, for the listeners, the basics of it are a traditional account allows you to, put a contribution in and it's not taxed upfront. So you get a tax deduction, that money that otherwise would be taxed and put in your paycheck is not taxed. And instead you can take that full amount and put it in the market and see it grow. And you're only taxed later on when you withdraw it to live on during retirement. by contrast, a Rothschild account is effectively the reverse tax treatment. So you're going to pay the tax up front, much like you would in your paycheck, normally. but when you invest it and you get a bunch of returns, so you put it into, the stock of a successful company. And so you get 50 percent return over the course of 15 years. when you withdraw, that, that money, those returns are not taxed. so you get the benefit on the back end of things. but as you can see, there's like a lot of steps there, right? And for folks who are not financially attuned or don't understand any of this, that alone requires financial education. When you add on all the other rules about, Hey, you have to be 59 and a half before you can withdraw your retirement accounts. Otherwise, you get taxed and you get a 10 percent penalty. that's a challenge, right? to educate folks on. hey, we have multiple accounts that are tied to your employer, but when you leave you're going to have to take that account and roll it over into a, into an individual retirement account each time. And if you don't, you may have six accounts following you that you may lose track of over the course of a 30 or 40 year career. Right? You can see very quickly how that becomes overwhelming for folks, and they just don't want to deal with it. And that's just scratching the surface, right? Just ain't nothing of other types of accounts. Say a, 529 account, right? That's an education related savings account that gets some tax benefits. But that's restricted to certain types of education spending. Tied often to, minor children. And there are rules related to, if you use that money for other types of spending, you may end up getting penalized. And so, and there's, and the last thing I'll say is these rules are constantly changing. So, Congress in the last few years has changed some of these rules. and they get very confusing because then folks have to remember, Oh, wait, this was the rule from five years ago and not now. so big picture, we just need to simplify all of this. Ideally, we would create what we and others call universal savings accounts, which is basically a one purpose general account for saving that would have, this, what we call a neutral tax treatment. That savings is taxed the same way, equally to, Not saving and consuming the money now, and that would help simplify things. And at least from that perspective could encourage folks to save. So they're not as overwhelmed.

Kyle Hulehan: 14:42

well, first off, Garrett, I, I feel as though we were talking about all those different accounts. First of all, I think that's the best explanation of the difference between, traditional and Roth I've ever heard. I might need to send you a Venmo cause you're my new financial advisor. thank you for breaking that down for myself and the listeners cause that was very educational. and, and when it comes to the, the universal savings accounts that you're talking about, so in effect you're talking about, Something that would be tax free that you could access regularly that maybe that does not have penalty or some of those things. Is that correct?

Garrett Watson: 15:14

That's right. The idea behind the universal savings account is that it, it would simplify a lot of the broader contribution rules and rules on how you can spend the money that currently. are very common with these types of accounts. So, you could design a, a universal savings account to be either traditional, where you have a tax deduction upfront and you pay the taxes later. Or a, a Roth style where you pay the taxes upfront and you get your, your tax deduction, later on when you, when you take the money out. So it can be designed either way there. you could have a. a general cap on these, on the amounts in the USA, if you, if you wish. what's really great about USA is it's not totally, a totally new idea or completely invented in a think tank. It's actually, in the real world. So two countries, most notably the United Kingdom and Canada, both have versions of Universal Savings Accounts, that they've implemented over the last 25 years. Both of which are very popular amongst folks across all walks of life and income levels and in different, stages of, of their career or different families. and are used in different ways. And they generally do have caps on the absolute amount you contribute every year. though of course that amount accumulates over time if you continue to keep that money saved and invested. and so they use it as a supplement to their retirement systems. And that could be a good way to start out if policy makers and folks are nervous about completely overhauling the system all at once. is starting with the USA, if it's successful and we get interest, you know, rolling more and more of our existing, savings system into these USAs, I think would be the way to go. and there's lots of ways we can try to do this, incrementally so that folks, find it attractive. The only downside to that, of course, is you're, you know, you're adding in yet another account, folks, to know, to understand, right? So, and the last thing I'll mention, of course, is, The reason why we have penalties in particular for retirement accounts is there's a little bit of, of government paternalism in there, right? The idea is, and it comes from a good place, of course, which is folks will have the temptation to take their retirement savings. and spend it on current consumption or on financial challenges they may have right now. And the idea is that penalty might dissuade them from doing that and they'll keep that money for and their future selves will thank, will be thankful that they did that. the challenge is what we see in the real world is people just catch it out anyway. They may not know there's a penalty or they may not really weigh that penalty all that much. So they end up worse off, sort of the worst of all worlds, right? Where they end up paying the penalty. and they don't, it doesn't end up changing the behavior anyway. So that's something that policy makers may want to re evaluate and we probably wouldn't want associated with the USA's, which really would be used to be much more flexible, right? So that folks could use savings during their working lives if they need it, or hold onto it for later on when they do retire.

Kyle Hulehan: 17:47

Yeah, you make a great point there. I think that the main argument that people seem to use against universal savings Accounts from from my research is something people call leakage And so they're they're worried that people are not actually going to accumulate savings and because there's no penalty They're just constantly going to be pulling from it and they're not really gonna save or build anything And so you need the penalty to incentivize that savings But, but I think from what you're saying is, we need a different account, we need to have something that people can pull from maybe on a, on a more regular basis. And, from what I read in your article and what I've seen in my research is, is it actually tends to help. lower income individuals and families and it's, it's used and benefits everyone, but it can help lift up people who maybe have a harder time saving.

Garrett Watson: 18:32

that's right, and I think it's most powerful if we did, you know, pair it with other, there are other reforms both in the tax system and outside the tax system to help folks with that, of course, with saving more broadly. there have been, of course, attempts and efforts, at the federal level and elsewhere to create what are known as saver's credits, basically a way for, the government to match folks if they do save with a certain amount. there have been experiments on that as a way to help low income folks in particular, because of course it is harder for lower income folks to save than higher income folks. as a general rule and that's another reason why sometimes these accounts are capped so that higher income folks, the concern is that they'll merely, shift savings they otherwise would have, saved up, right? And just move it into these accounts and there's no net increase in the savings. And that is something that is, you know, ambiguous in the data, which is how much will overall savings increase as a result of this. I still maintain based on the evidence from other countries and elsewhere that the single biggest benefit here will be that that simplification which We really good reason to believe does have a big impact on people's savings decisions A related example is folks who, who end up in a system where they automatically are opted in tend to save more or will be more likely to stay in it than if they're automatically opted in versus if they have to opt in, manually. that's something that, some folks have, have looked at. Again, there is a balance there because there's some paternalism there. We want to be careful that folks don't accidentally end up putting part of their paycheck into an account that has limits and, rules. When they didn't intend to, and they need to use that money elsewhere. That's another reason why I think USAs are good, because that wouldn't be as much of an issue. but I think that generally illustrates that if you simplify things and make it more accessible, folks are much more likely, especially, you know, middle class folks, working class folks, to find it attractive to save. Especially if they're not facing that big question of, okay, I'm not going to see this money for 40 years. For some folks, that's just a challenge. Especially when you're just starting out on saving. I think that's the big thing is it's easier to see that bigger picture once you're in the groove of saving. It's harder when you're, just starting out, especially when you're tight on a budget, to say, oh, I'm gonna put this amount of money out of my check every single pay period for something that will happen 40 years from now. Which, for a lot of folks who are just trying to, you know, put food on the table, that might as well be a century from now. So I think that's like, that's the promise, I think, for folks, for USA's. for folks who, who otherwise have to have difficulty saving and navigating the current system.

Kyle Hulehan: 20:43

think you explained that so well. I really appreciate that. And I'll take this moment to really just quickly plug a different article. If people want to really understand a little bit more about universal savings account, something I read before just talking with Garrett today. was the case for universal savings accounts. It's on our tax foundation's website. very helpful, informative. You'll, you'll find out maybe everything you really need to know about the case, in favor and even against, you'll learn more about, you know, the balance of it and what could or couldn't work in universal savings account. but Garrett, we're, we're coming up to a close here. And I have one final question for you about about the future. And I know that you aren't a psychic and you don't have a crystal ball. But if you did have a crystal ball, if you could just pull that out for a second, what what could happen with taxes in 2025 that that might help people save more?

Garrett Watson: 21:31

Yeah, I think we have a big opportunity in 2025. It's both a challenge and an opportunity. The big challenge is the 2017 tax law, which was passed in December of 17 that cut a lot of taxes for folks at the individual level by Lowering tax rates, increasing the standard of deduction, providing an expanding child tax credit will be all at once expiring at the end of 2025 for individual tax provisions. And so that's a big cliff for policymakers to deal with who may be, looking for options as to what the big picture of the tax system will look like after 2025. So they'll be focused a lot on the 2017 tax law, which changed a lot of tax rates and other provisions. Well, there's an opportunity, I think, to re evaluate, in addition to that, how to think about, helping with saving. one way to help with saving, of course, is to ensure that there isn't an overly burdensome tax system. So the broader 2017 discussion is very much related to this. But, there have been efforts on a bipartisan basis in Congress over the last few years to try to think about various ways to design savings accounts, be it USA's or some variant, And so some of that is framed more as savings accounts for children or helping, providing a saver's credit, say, for existing savings. and so there probably is an opportunity, I think, in that discussion in 2025 to, if anything, just experiment with what this might, this USA system may look like, what are policymakers comfortable with as an experiment for that. and to see if that would be, a helpful next step, because I think that's going to be the, the question, which is how do we do this in an incremental way that's effective yet doesn't overturn the entire system because it makes a lot of sense. Folks are sensitive to, changes to their retirement, right? So we want to be careful about that, but I think 2025 is a good time because there's going to be a lot of change anyway to, to think about that big picture discussion and move in a direction towards simplification. Which is, awfully missing in the tax conversation.

Kyle Hulehan: 23:18

Thank you so much, Garrett, for explaining all this and breaking this down very simply for us. It's a complex system, but you made it sound a lot easier than it is and really broke it down for us. So. So, as we're wrapping up here, Garrett, is there anything else, you know, you want to plug while you're here? Anything else you're working on or that's coming out soon that you want to plug for the people?

Garrett Watson: 23:38

We're continuing our work at the, on the federal team on implications for what will happen in 2025. And options to, looking at big picture reforms to the federal tax code. We really, we released a paper on making permanent the 2017 tax law individual provisions a few weeks ago. trying to talk about the trade offs of, hey, it'll cost a lot, but it could have some pro growth effects. of course, help folks keep their taxes down. So feel free to check that out on our website and we're continuing work on. If folks look at other options for 2025, doing some modeling, trying to weigh the trade offs here. that's our big picture, theme, I think, over the next couple of years, as we enter into the 2024 race, which will bring taxes to the, to light again in the 2025 discussion. So check that out, all that out on, on our website at taxfoundation. org.

Kyle Hulehan: 24:22

Thank you, Garrett, for being here on today's show and keep following for all of his work that's coming soon.

Garrett Watson: 24:27

Thank you.

Kyle Hulehan: 24:28

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