Raising the Savings Rate

Paper plots out policies that would increase savings by $78 billion per year

A paper released by The Retirement Security Project on November 21 estimates that savings incentives for middle- and low-income workers like automatic enrollment in 401(k) plans, automatic IRAs, expanding and improving the Saver's Credit, and allowing taxpayers to split direct deposit of tax refunds into several accounts could increase net national savings by $78 billion per year--which would be 6% of GDP.

The paper, The Potential Effects of Retirement Proposals on Private and National Saving: Exploratory Calculations, says that the current national savings rate stands at about 2.5% of GDP. The paper examines the five aforementioned savings proposals and their effect on middle- and low-income workers' savings habits. For instance, Peter Orszag, director of The Retirement Security Project and senior fellow at the Brookings Institution, told attendees at the November 21 roundtable discussion announcing the paper's release that implementing automatic enrollment in 401(k) plans would likely result in a $44 billion increase in national savings, while implementing an automatic IRA for workers who aren't offered a qualified plan through work would boost national savings by $8 billion. He also said that making the Saver's Credit refundable (with a uniform 50% rate) would encourage saving among the 50 million lower-income Americans who pay payroll taxes but have no income tax liability; expanding and improving the Saver's Credit, Orszag said, would further increase net national savings by $10 billion. Another $16 billion in savings could come from making split tax refunds a reality in 2007, he said.

When it comes to auto enrollment, Greg Burrows, VP and chief marketing officer for retirement and investor services at Principal Financial Group, said during the roundtable discussion that statistics show that 75% of workers prefer to have someone else manage their money, which means they're in favor of auto enrollment. Brigitte Madrian, Aetna Professor of public policy and corporate management at Harvard University, added that employers should choose a higher default rate (6% and up) for auto enrollment to help employees save more.

The Retirement Security Project (www.retirementsecurityproject.org) is supported by the Pew Charitable Trusts in partnership with Georgetown University's Public Policy Institute and the Brookings Institution.

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