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85 IRET Policy Bulletin i (2001)

handle is hein.taxfoundation/iretpbul0044 and id is 1 raw text is: August 6,2001 S No.85 FIXING THE SAVING PROBLEM: HOW THE TAX SYSTEM DEPRESSES SAVING, AND WHAT TO DO ABOUT IT* EXECUTIVE SUMMARY The personal saving rate in the U.S. is alarmingly low -far too low to meet the retirement needs of the baby boomers. The very low saving rate restricts investment, which in turn retards economic growth. The culprit is the pervasive bias against saving that is built into almost every aspect of the tax code. Removing this bias against saving through tax reform could raise national income by 10 to 15 percent in 15 years. How low is the personal saving rate? In early 2000, despite strength in the stock and bond markets and in the U.S. economy overall, the rate of personal saving - that is, saving as a percent of disposable after-tax income - was nearly zero. This represents a decline from about 9 percent in the mid-1980s and from about 2.5 percent in 1999, just one year earlier. Since business saving has scarcely changed as a share of the economy, this also means that total private saving represents a lesser share of gross national product (GNP). In its potential impact on taxpayers, particularly baby boomers, this very low saving rate is alarming. In 2016, baby boomer retirements will plunge the current Social Security system into deficit. To supplement the system's modest benefits, a retired individual or couple in good health will need - in today's dollars - $20,000 per year, the income one might expect from a retirement annuity of $250,000. Yet extrapolations from the Federal Reserve Board's most recent Survey of Consumer Finances suggests that the typical household retires with less than $50,000, for a possible annuity income of $4,000 per year. * This paper has been prepared in conjunction with the IPI Center for Tax Analysis of the Institute for Policy Innovation, Lewisville, Texas. It is also appearing as part of IPI's The Road Map to Tax Reform'TM series. Institute for IRET is a non-profit, tax exempt 501(c)3 economic policy research and educational Research organization devoted to informing the public about policies that will promote on the economic growth and efficient operation of the market economy. Economics of 1730 K Street, N.W., Suite 910 e Washington, D.C. 20006 Taxation (202) 463-1400 * Fax (202) 463-6199 * Internet www.iret.org