Attorney Authored

Let's Give Americans Incentive to Save. American Banker, April 2009.

April 24, 2009

V. Gerard Comizio

It is easy to ignore a pivotal financial issue that has come to a head: our abysmal lack of individual savings.

We need to change this unfortunate trend and provide a federal tax exemption for interest earned on individual savings accounts.

As early as 2005, U.S. savings rates sank to the lowest since the Great Depression, with Americans spending $42 billion more than they earned, turning the savings rate negative for the first time since 1933. Further, the national savings rate is one of the lowest among all major industrialized countries.

It is vital that Americans understand this is a product of our own economic behavior - basically, an extraordinary high rate of consumption.

Americans stopped saving in recent years for many reasons, but primarily because they did not feel they needed to, as a result of increases in their home values, stock portfolios and reinvestment plan portfolios.

Further, the noted economist Henry Kaufman recently observed that the erosion of savings is chiefly the result of massive debt creation.

A brief review of debt and savings rates since 1960 shows the correlation. From 1960 to 1990, according to the Federal Reserve Board, the growth of nonfinancial debt exceeded that of the nominal GDP by 1.5 times on average, while the savings rate averaged 9% a year. From 1991 to 2009 debt exceeded GDP growth by 1.8 times, while the savings rate averaged 4.7%. Since 2001 debt has grown twice as fast as the GDP, while the savings rate has averaged a mere 1.4%.

Kaufman asserts that the lesson is clear - to increase savings, we must put an end to the "reckless creation of debt." This observation, though very fair, is based on something of an indirect correlation, i.e., less debt automatically equals more savings. How about a more direct, proactive approach to the problem by adopting direct incentives to increased savings?

Alan Garner, an economist at the Federal Reserve Bank of Kansas City, has stressed that savings matters for both individuals and the nation as a whole. He noted that, at the personal level, the purpose of savings is to increase the resources available for future consumption. It also helps protect against an unexpected loss of household income caused, for example, by illness or an unanticipated layoff.

Typically, households invest their savings in financial assets, such as a bank account or mutual fund, or they build equity in a real asset, such as a home. These assets can be redeemed or sold to others in the future to provide the funds needed to buy consumer goods and services.

Personal savings is also important for the nation as a whole. Saving today influences future consumption, because investments in financial assets are channeled into productive investments in or lending to companies to invest in factories, industrial machinery, computers and other kinds of capital. Increases in the capital stock help the nation produce consumer goods and services in the future.

A higher capital stock also raises the productivity of future workers and their wages, providing increased income with which to purchase the increased quantity of consumer goods and services.

Thus, saving is fundamental to the nation's competitive strength and standard of living. In the long term, a nation of savers will be a nation of viable consumers and form the backbone of a bank lending system with low-cost deposit funds to meet corporate, small-business and consumer lending needs, helping revitalize the financial system and the economy.

A long-term solution to the savings problem would be to provide a federal tax exemption for all interest earned on personal savings accounts up to the maximum deposit insurance guarantee of $250,000 per account. This Savings Accounts Viability Exemption would encourage a significant increase in savings in the United States. For example, an individual holding $50,000 in a one-year CD at a rate of 3% would get $1,620 of tax-exempt income.

In accordance with the deposit insurance guarantee provisions, married couples would be able to hold up to four savings accounts. Children and other dependents could have additional accounts.

This exemption would encourage savings by any person or family that puts money in a bank savings account. Potential arguments about any loss of tax revenue are far outweighed by the national economic implications.

This would be the private-sector equivalent of wartime savings bonds. Americans would be helping to build a sound financial future for both themselves and our national economy.

V. Gerard Comizio, a former deputy and acting general counsel of the Office of Thrift Supervision, is a senior partner in the banking and financial institutions practice of Paul, Hastings, Janofsky & Walker LLP.Reprinted with permission from American Banker.