United States General Accounting Office
GAO
June 2001
NATIONAL SAVING
Answers to Key Questions
Contents
Preface
9
Summary of Major
Personal Saving and Retirement Security9
National Saving Overview11
National Saving and the Economy12
National Saving and the Government13
18
Section 1
Q1.1. What is the Personal Saving Rate and What Does it
Mean?18
Q1.2. Why Measure Personal Saving?20
Retirement Security
Q1.3. How Has the Personal Saving Rate Changed Over
Time?21
Q1.4. Why Do People Save?22
Q1.5. Why Has the Personal Saving Rate Declined?25
Q1.6. What Is the Relationship Between Personal Saving and
Wealth?27
Q1.7. If Household Wealth Has Increased, Does It Matter if
the
Personal Saving Rate Has Declined?31
Q1.8. How Do Social Security and Personal Saving Compare
as
Sources of Retirement Income?34
Q1.9. What Are the Implications of a Growing Elderly
Population for
Retirement Security?39
47
Section 2
Q2.1. What Is National Saving and How Is It Measured?
Q2.2. How Has U.S. National Saving Changed Over
Time-Both47 Overview
Overall and by Component?49
Q2.3. How Does U.S. National Saving Compare to Other
Major
Industrialized Nations?53
Q2.4. What Are Other Ways of Defining Saving and
Investment?55
Section 3 National Saving and the Economy
58
Q3.1. How Does National Saving Contribute to Investment
and
Ultimately Economic Growth?58
Q3.2. Has the Relatively Low National Saving Rate Affected
Investment and Economic Growth? What Factors Have Fostered
Economic Growth in Recent Years?62
Q3.3. To What Extent Has the United States Supplemented Its
Saving and Investment by Borrowing Saving From Abroad? How
Does
Such Borrowing Affect the Economy?65
Q3.4. What Is the Current Long-Term Economic Outlook
for
Section 4 National Saving and the Government
U.S.
National Saving and Investment? How Would the
Long-Term
Economic Outlook Change With Higher Levels of National
Saving?70
77
Q4.1. How Has Federal Fiscal Policy Affected U.S. National
Saving?77
Q4.2. Why Do Government and Private Saving Tend to Move
in
Opposite Directions?81
Q4.3. What Is the Long-Term Outlook for Federal
Government
Saving/Dissaving?82
Q4.4. How Does Saving Affect Future Budgetary
Flexibility?87
Q4.5. What are the Implications of Current Fiscal Policy
Choices
for Future Living Standards?90
Q4.6. How Does Government Investment Affect National Saving
and
Economic Growth?93
Q4.7. What Policies of the Federal Government Have Been Aimed
at
Encouraging Nonfederal Saving and Investment?95 Q4.8.
Given That Experts Disagree About Whether Retirement
Saving Tax Incentives Are Effective In Increasing Personal
Saving
Overall, How Do These Tax Incentives Affect National
Saving?99
Q4.9. What Is the Federal Government Doing to Educate the
Public
About Why Saving Matters? 104
Q4.10. How Would Social Security Reform Affect National
Saving? 106
Q4.11. How Would Establishing Individual Accounts
Affect
National Saving? 112
Q4.12. How Would Medicare Reform Affect National Saving?
114
119
Section 5
Q5.1. What Are Key Issues in Evaluating National Saving?
119
Current Policy Issues
Appendixes
Appendix I: Objectives, Scope, and Methodolog
122
Appendix II: The Economic Model and Key Assumptions
127
Appendix III: Glossary
135
Appendix IV: Bibliography
142
Appendix V: Related GAO Products
153
Table 4.1:Selected Federal Income Tax Provisions That
Influence
Tables
Personal Saving
Table 4.2:Change in Government and National Saving Resulting
From a $4,000 Tax-Deductible IRA Contribution Under
Alternative Personal Saving Assumptions 100
Table II.1:Key Assumptions of the Economic Model
132
Figure S.1:Personal Saving Rate (1960-2000) 10
Figure S.2:Net National Saving as a Share of GDP (1960-2000)
12
Figure 1.1:Personal Saving Rate (1960-2000) 22Figure
1.2:Comparison of the Personal Saving Rate and the
Wealth-Income Ratio (1960-2000) 28
Figure 1.3:Family Net Worth by Income Level in 1998 33
Figure 1.4:Share of Elderly Households' Income by Source
of
Income, 1998 35 Figure 1.5:Pensions, Income from Accumulated
Assets, and Earnings
Determine Who Had Highest Retirement Incomes, 1998 37 Figure
1.6:Aged Population Nearly Doubles From Today as a Share
of Total U.S. Population (1960-2075) 40
Figure 1.7:Relatively Fewer Workers Will Support More
Retirees
(1960-2075) 41
Figure 1.8:Social Security Trust Fund Faces Insolvency in
2038
(2000-2050) 42 Figure 1.9:Medicare's Hospital Insurance Trust
Fund Faces
Insolvency in 2029 (2000-2050) 44 Figure 1.10:Social Security
and Medicare HI Cost and Income as a
Percentage of Taxable Payroll (2000-2075) 45
Figure 2.1:Gross National Saving as a Share of GDP
(1960-2000) 50
Figure 2.2:Composition of Net National Saving (1960-2000)
51
Figure 2.3:International Trends in Gross National Saving
(1960-1997) 54
Figure 3.1:Overview of Saving, Investment, Output, and
Income
Flows 59
Figure 3.2:National Saving, Domestic Investment, and Net
Foreign
Investment (1960-2000) 66
Figure 3.3:Net U.S. Holdings of Foreign Assets and Net Income
From
Abroad (1977-1999) 68 Figure 3.4:Gross National Saving as a
Share of GDP Under the Save
the Social Security Surpluses Simulation (1990-2075) 72
Figure 3.5:GDP Per Capita Under Alternative Gross
National
Saving Rates (2000-2075) 73
Figure 4.1:The Effect of Federal Surpluses and Deficits on
Net
National Saving (1990-2000) 80 Figure 4.2:Unified Surpluses and
Deficits as a Share of GDP Under
Alternative Fiscal Policy Simulations (2000-2075) 86
Figure 4.3:Composition of Federal Spending as a Share of
GDP
Under the Save the Social Security Surpluses Simulation 89
Figure 4.4:GDP Per Capita Under Alternative Fiscal Policy
Simulations
(1960-2075) 91
Figure 4.5:Medicare HI and SMI Spending as a Share of
GDP
(2000-2075) 116
Text Box 2.1: Gross Domestic Product and Gross National
Product 48Text Box 4.1: How do the NIPA and federal unified
budget concepts of
federal surpluses and deficits differ? 78
Text Box 4.2: Government Saving When Reducing Publicly
Held
Federal Debt is Not an Option 84
Text Box 4.3: Individual Development Accounts for
Low-Income
Savers 102
Abbreviations
Preface
The term "saving" is used both when people discuss their own
finances and when policymakers and economists discuss "national
saving." For people and for the nation, saving means forgoing
consumption today so they can enjoy a better standard of living in
the future. 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. Saving today
increases a nation's capacity to produce goods and services in the
future and, therefore, helps to increase the standard of living for
future generations.
Since the 1970s, combined saving by households and business has
declined. For much of that time, the federal government did not
contribute to saving; instead it was a borrower, its deficits
absorbing a share of the saving pool available for investment. For
the nation as a whole, saving has rebounded somewhat from its low
point in the early 1990s but remains relatively low by U.S.
historical standards. In fiscal year 1998, the federal government
began to contribute to the pool of saving by running its first
surplus since 1969. Federal budget surpluses now are projected for
at least the next decade. But even with the advent of federal
government saving in the late 1990s, national saving available for
new investment remains relatively low, in large part because
personal saving has dramatically declined. The U.S. has been able
to invest more than it saves by borrowing from abroad, but
economists question whether this is a viable strategy for the long
term.
Personal saving plays a dual role, ensuring both individuals'
retirement security and the nation's economic security. While
Social Security provides a foundation for retirement income, saving
through pensions and by individuals on their own behalf contribute
substantially to retirement income. Even as more people are
accumulating balances through employer-sponsored 401(k) saving
plans and individual retirement accounts, personal saving-which
does not reflect gains on existing assets-has declined. The
personal saving rate has plunged, with American households spending
virtually all of their current income. Although aggregate household
wealth has risen in part as a result of the stock market boom over
the 1990s, many individual households have accumulated little, if
any, wealth.
America faces a demographic tidal wave that poses significant
challenges for individuals' retirement security and our economy as
a whole. More people are living longer in retirement, and there
will be relatively fewer workers supporting each retiree in the
future. Without meaningful reform, the Social Security and Medicare
programs face long-term financing problems. Although public
attention usually focuses on the dates by which the trust funds are
projected to become insolvent, the effects associated with
financing cash deficits for these programs will be felt sooner as
the baby boom generation begins to retire. As the population ages,
spending for Social Security and federal health programs will leave
increasingly less room for spending on other national
priorities.
Increasing national saving is an important way to bolster
retirement security for current workers and to allow future workers
to more easily bear the costs of financing federal retirement and
health programs while maintaining their standard of living. As we
have reported in the past, the surest way for the federal
government to affect national saving is through federal fiscal
policy, particularly in what it chooses to do with the budget
surpluses projected over the next decade. Policymakers appear to
have agreed to save the Social Security surpluses, and the fiscal
policy debate has centered on what to do with the balance of the
anticipated surpluses. To the extent that they are used to reduce
federal debt held by the public, surpluses represent an opportunity
to increase national saving. In addition, how surpluses are used
has long-term implications for future economic growth. Policy
debates surrounding Social Security and Medicare reform also have
implications for all levels of saving-government, personal, and,
ultimately, national.
This report is designed to present information about national
saving-as measured in the National Income and Product Accounts-and
its implications for economic growth and retirement security in a
concise and easily understandable manner. In general, this report
is based on widely accepted economic principles, and we identify
those areas where many economists do not agree. Although many
excellent studies and books have been written on national saving
and long-term economic growth, these discussions tend to be complex
and technical. Also, most discussion of the decline in personal
saving focuses on the adequacy of individuals' retirement saving
rather than on the significance of personal saving for the economy
as a whole. For example, one point that is sometimes overlooked is
that low personal saving has consequences for U.S. reliance on
foreign borrowing, long-term economic growth, and standards of
living for future generations.
This report addresses the following questions: (1) What is
personal saving, how is it related to national saving, and what are
the implications of low personal saving for Americans' retirement
security? (2) What is national saving and how does current saving
in the United States compare to historical trends and saving in
other countries? (3) How does national saving affect the economy
and how would higher saving affect the longterm outlook? (4) How
does federal fiscal policy affect national saving, what federal
policies have been aimed at increasing private saving, and how
would Social Security and Medicare reform affect national saving?
And, (5) what are key issues in evaluating national saving? For a
quick overview of the topics discussed in this report, see the
summary section.
For easy access to definitions of key terms, we include a
glossary at the end of this report. Terms contained in the glossary
appear in bold type in the text the first time they are used in the
major sections. For readers who are interested in more detailed
information on the topics covered here, we also include a
bibliography.
This report was prepared under the direction of Paul L. Posner,
Managing Director of Federal Budget Analysis, and Susan J. Irving,
Director of Federal Budget Analysis, who may be reached at (202)
512-9573 if there are any questions.
Paul L. Posner Susan J. Irving Managing Director Federal Budget
Analysis Strategic Issues Director Federal Budget Analysis
Strategic Issues
Summary of Major Sections
Personal Saving and Retirement
Security
The personal saving rate-as measured in the National Income and
Product Accounts (NIPA)-reflects how much households in aggregate
are saving from their current disposable income. In evaluating
personal saving, it is important to distinguish between saving as a
way for an individual household to finance future consumption and
saving as a way to finance the nation's capital formation. Strange
as it may seem to the typical household, capital gains on its
existing assets do not contribute to saving as measured in NIPA.
That is 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. Whereas employer
contributions to pension funds as well as pension funds' interest
and dividend income are part of personal income and contribute to
personal saving, increases in the market value of assets held by
pension funds, for example, are not counted as personal income and
saving. 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.
The personal saving rate has largely declined since the 1980s,
plummeting in recent years to levels not seen since the Great
Depression, as shown in figure S.1. A low personal saving rate
raises questions about whether households have adequate resources
to sustain their rate of spending. A negative saving rate means
that, in aggregate, households are spending more than their current
income by drawing down past saving, selling existing assets, or
borrowing.
1960 1965 1970 1975 1980 1985 1990 1995 2000
Source: Bureau of Economic Analysis, Department of Commerce.
Economists use several theories to explain what motivates people
to save. Despite a great deal of study, economists have found no
single reason that convincingly explains the decline in the
personal saving rate. One possible explanation is that surging
household wealth in recent years contributed to the virtual
disappearance of personal saving. Since the mid 1990s, aggregate
household wealth has swelled relative to disposable personal
income, largely due to increases in the market value of households'
existing assets (see figure 1.2). Yet, despite the stock market
boom of the 1990s, many households have accumulated little, if any,
wealth (see figure 1.3), and half of American households did not
own stocks as of 1998.
While Social Security provides a foundation for retirement
income, Social Security benefits replace only about 40 percent of
pre-retirement 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. Pensions, income from accumulated
assets, and earnings from continued employment largely determine
which households will have the highest retirement income (see
figures 1.4 and 1.5). Pensions are not a universal source of
retirement income, and more than half of those working in 1998
lacked a pension plan. While most families say they recognize the
need to save for retirement,
National Saving Overview
fewer than half of those surveyed in early 2001 had tried to
calculate how much they need to save.
Over the next 75 years, the elderly population will nearly
double as a share of the total U.S. population (see figure 1.6). As
more people live longer, there will be relatively fewer workers
supporting each retiree unless retirement patterns change. While
today there are 3.4 workers for each Social Security beneficiary,
by 2030, there will be only about 2 workers paying taxes to support
each beneficiary (see figure 1.7). Both Social Security and
Medicare face long-term financing problems, and the Social Security
and Medicare's Hospital Insurance trust funds eventually will be
exhausted as the baby boomers draw their benefits (see figures 1.8
and 1.9). Absent reform, Social Security and Medicare costs would
constitute a substantial drain on the earnings of future workers
(see figure 1.10). Anticipating potential benefit cuts, people
could choose to save more now, work longer to delay retirement, or
experience a lower standard of living in retirement. With an aging
population and a slowly growing workforce, saving more today and
increasing the nation's future economic capacity is critical to
ensuring retirement security in the 21st century.
In the NIPA, national saving is the sum of saving by households,
businesses, and all levels of government. Gross national
saving-which reflects resources available both to replace old, worn
out capital goods and to expand the capital stock-has rebounded as
a share of gross domestic product (GDP) from its low in the 1990s
but remains below the level of the 1960s (see figure 2.1).
Depreciation as a share of GDP has increased slightly over the past
4 decades, and net national saving-which excludes
depreciation-remains well below the 1960s average, as shown in
figure
S.2. Through much of the 1980s and early 1990s, federal deficits
absorbed funds saved by households and businesses and reduced
overall national saving available to finance private investment
(see figure 2.2). Even as federal surpluses have contributed to
national saving in recent years, personal saving has steadily
declined as a share of GDP, and personal dissaving in 2000 absorbed
resources that otherwise would have been available for investment.
Although gross national saving in 2000 was low by
U.S. historical standards, U.S. gross national saving has
generally been lower than other major industrialized countries over
the past 4 decades (see figure 2.3).
National Saving and the Economy
14
12
10
8
6
4
2
0
1960 1965 1970 1975 1980 1985 1990 1995 2000
Source: GAO analysis of NIPA data from the Bureau of Economic
Analysis, Department of Commerce.
National saving represents resources available for investment in
the nation's stock of capital goods, such as plant, equipment, and
housing. The nation's human capital and knowledge-forms of
intangible capital-are not part of the NIPA definitions of saving
and investment. Also, NIPA focuses on the incomes arising from
current production of goods and services and, thus, does not count
revaluation of existing assets in national saving. Changes in the
market value of existing tangible and financial assets, such as
land and stocks, reflect expectations about the productive
potential of the underlying capital, but fluctuations in asset
values may not represent real, permanent changes in the nation's
productive capacity.
National saving together with borrowing from abroad provides the
resources for investment that can boost productivity and lead to
higher economic growth and future living standards (see figure
3.1). Investment in new capital is an important way to raise the
productivity of the slowly growing workforce as the population
ages. 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. Economic growth also depends on education to
enhance the knowledge and skills of the nation's work
National Saving and the Government
force-the nation's human capital-as well as research and
development to spur technological advances.
Even though national saving remains relatively low by U.S.
historical standards, economic growth in recent years has been high
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, the
United States was able to invest more than it saved by borrowing
from abroad (see figure 3.2). Persistent U.S. current account
deficits have translated into a rising level of indebtedness to
other countries, i.e., net U.S. holdings of foreign assets (see
figure 3.3). Many other nations currently financing investment in
the United States also will face aging populations and declining
national saving, so relying on foreign savers to finance a large
share of U.S. domestic investment is not a viable strategy for the
long run.
Current saving and investment decisions have profound
implications for the nation's level of well-being in the future.
Our simulations using a longterm economic growth model show that,
even assuming the United States could maintain national saving
constant at its 2000 share of GDP, future incomes would fall short
of the rise in living standards enjoyed by prior generations whose
income generally doubled every 35 years (see figures
3.4 and 3.5). Saving more would improve the nation's long-term
economic outlook, but this requires consuming less now.
Federal fiscal policy affects the amount of federal government
saving and this in turn directly affects national saving. From the
1970s through the mid 1990s, federal deficits absorbed a large
share of private saving and reduced the amount of national saving
available for investment (see figure 4.1). Borrowing to finance
these deficits added to the federal debt held by the public. In
recent years, federal surpluses added to national saving and
increased funds available for investment. So far, the federal
government has used surplus funds to reduce its debt held by the
public. Accumulating nonfederal financial assets, such as stocks,
could be another way that government saving could translate into
resources available for investment, but this idea is controversial.
An additional dollar of government saving and debt reduction does
not automatically increase national saving and investment by a
dollar because changes in saving by households and businesses will
tend to offset some of the change in government saving.
While attention has focused on budget surpluses projected over
the next decade, the federal budget will increasingly be driven by
one certainty-the population is aging and there will be fewer
workers supporting each retiree. In our simulations, saving only
the Social Security surpluses will not be sufficient to accommodate
both the projected growth in Social Security and health
entitlements as well as other important national priorities in the
long term (see figure 4.2). Absent program changes, saving the
Social Security surpluses-and even the Medicare surpluses-is not
enough to ensure retirement security for the aging population
without placing a heavy burden on future generations. Social
Security and health spending alone eventually would exceed total
federal revenue and squeeze out most or all other spending (see
figure 4.3). Even if the entire unified surplus were saved, our
simulations show that the rise in living standards- measured in
terms of GDP per capita-would fall short of the rise enjoyed by
prior generations whose income generally doubled every 35 years
(see figure 4.4). Reforming retirement and health entitlement
programs is critical to putting the federal budget on a more
sustainable footing for the long term and to freeing up future
resources for other competing needs.
Although increasing government saving is the most direct way for
the federal government to increase national saving, budget
surpluses also could be used to finance federal investment intended
to promote long-term economic growth or to encourage personal
saving. Whereas unified budget surpluses increase national saving
available for private investment, increasing federal spending on
national infrastructure, if properly designed and administered, can
be another way to increase the nation's capital stock. In addition,
federal spending on education and research and development-while
not counting as investment in NIPA-can, if properly designed and
administered, promote the nation's long-term productivity and
economic growth. The federal government also has sought to
encourage personal saving both to enhance households' financial
security and to boost national saving. But, developing policies
that have the desired effect is difficult. Tax incentives 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, the personal saving rate has
steadily declined. Economists disagree about whether tax incentives
are 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. In recent years, policymakers
have explored using government matching or creating new individual
accounts to encourage Americans to save more.
Congress found that a leading obstacle to expanding retirement
saving has been that many Americans do not know how to save for
retirement, let alone how much. The Department of Labor maintains
an outreach program to raise public awareness about the advantages
of saving and to help educate workers about how much they need to
save for retirement. Other federal agencies also play a role in
educating the public about saving. 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.
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.
The Medicare program is fiscally burdensome in its current form,
and Medicare spending (see figure 4.5) is expected to drive federal
government dissaving over the long run. Given the aging of the U.S.
population and the increasing cost of modern medical technology, it
is inevitable that demands on the Medicare program will grow. The
current Medicare program lacks incentives to control health care
consumption, and the cost of health care decisions is not
transparent to consumers. Although future Medicare costs are
expected to consume a growing share of the federal budget and the
economy, pressure is mounting to expand Medicare's benefit package
to cover prescription drugs, which will add billions to Medicare
program costs. In balancing health care spending with other
societal priorities, it is important to distinguish between health
care wants, which are virtually unlimited; needs, which should be
defined and addressed; and overall affordability, which has a
limit. Reducing federal Medicare 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.
Key Issues 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, federal
decisionmakers must consider how much of the anticipated budget
surpluses to save, spend, or use for tax reductions. Economic
growth will help society bear the burden of financing Social
Security and Medicare, but it alone will not solve our long-term
fiscal challenge. To participate in the debate over how to reform
Social Security and Medicare, the public needs to understand the
difficult choices the nation faces.
Section 1
Personal Saving and Retirement Security
Q1.1. What is the Personal Saving Rate and
What Does it Mean?
A1.1. The personal saving rate is the most widely cited
statistic about how much households save, but most people do not
know what the rate measures or what it means. First, it is
necessary to distinguish "saving" from "savings." In everyday
terms, "saving" means spending less than your income and "savings"
are the assets accumulated over time. To better distinguish between
these concepts in this report, the term "saving" means the money
set aside from current income for future consumption-i.e., how much
of each period's income is saved rather than spent. The terms
"assets accumulated" and "wealth" are used for the cumulative stock
of resources built over time-what people commonly think of as
"savings."
The personal saving rate, as measured in the National Income and
Product Accounts (NIPA),1 reflects how much American households are
setting aside from current income. Under NIPA, personal saving is
what is left over from personal income after taxes and personal
spending for goods and services. Disposable personal income is the
income available for personal spending and saving after federal,
state, and local taxes as well as Social Security and Medicare
payroll taxes are paid. The NIPA personal saving rate is calculated
as the ratio of personal saving to disposable personal income.
To understand what the personal saving rate means, it is helpful
to understand the NIPA definitions of "persons," personal income,
and personal spending. For NIPA purposes, "persons" include not
only individuals but also nonprofit institutions primarily serving
individuals, pension funds, and private trust funds. NIPA personal
income includes wages and salaries; interest and dividend income;
rental income;2 proprietors' income; government transfer payments,
such as Social Security, veterans, and unemployment benefits; and
employer contributions to pension plans as well as group health and
life insurance plans. Contributions to traditional defined benefit
pension plans and defined contribution plans-such as 401(k)
plans-together with pension
1The national income and product accounts (NIPA) are the
comprehensive set of accounts that show the composition of
production and the distribution of incomes earned in production.
NIPA data reflect production in the United States as well as U.S.
transactions with the rest of the world. NIPA data are prepared by
the Bureau of Economic Analysis of the Department of Commerce. For
more information, see Eugene P. Seskin and Robert P. Parker, "A
Guide to the NIPA's," Survey of Current Business, Vol. 78, No. 3
(March 1998), pp. 26-68.
2NIPA treats the net rental value on owner-occupied housing as
personal income.
funds' interest and dividend income represent an important
component of NIPA personal income and saving.3 Benefits paid by
pension plans are not a component of NIPA personal income, although
pension benefits represent an important means for many retirees to
finance consumption (see Q1.8). NIPA personal spending includes,
for example, food, clothing, rent, utilities, and medical care;
consumer interest payments; and consumer durables, such as cars and
major appliances.4
Strange as it may seem to the average household, changes in the
value of existing assets, such as stocks, bonds, or real estate, do
not contribute to NIPA personal income and saving. That is 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. Under the current NIPA methodology,
realized gains do not count as personal income, but any taxes paid
on such gains reduce disposable personal income and thus personal
saving.
Although the NIPA personal saving rate is the measure most
frequently cited by analysts and the media, an alternative
macroeconomic measure of personal saving is available from the
Federal Reserve's Flow of Funds Accounts (FFA).5 Whereas NIPA
measures saving as what is left over from personal income after
taxes and personal spending, FFA measures saving as the net
increase in households' financial and tangible assets less the net
increase in households' liabilities. Both the NIPA and FFA measures
count household purchases of houses as saving. The FFA personal
saving rate also counts household purchases of consumer durables as
saving and, thus, is somewhat higher than the NIPA personal saving
rate. Both the NIPA and FFA macroeconomic measures focus on saving
from the economy's current production and do not include changes in
the market value of households' existing portfolios. In this
report, we use the NIPA measure of
3A defined benefit pension plan generally provides benefits
based on a specific formula linked to the worker's earnings and
tenure. Typically, a defined benefit plan is funded completely by
the employer, who bears the investment risk of such as arrangement.
Under a defined contribution plan, a percentage of pay is
contributed by the employer to an account for each worker, with the
worker bearing the investment risk. The increasingly popular 401(k)
plans also allow contributions by workers.
4This refers to spending by "persons" in NIPA and not just by
individuals.
5The Flow of Funds Accounts (FFA) measure the acquisition of
physical and financial assets throughout the U.S. economy and the
sources of funds used to acquire the assets. For more information,
see Guide to the Flow of Funds Accounts, Vol. 1, Board of Governors
of the Federal Reserve System (2000).
Q1.2. Why Measure Personal Saving?
personal saving because it more closely represents the resources
available from households for the nation's capital formation.
For the economy as a whole, the personal saving rate provides a
measure of how much households are saving compared to current
disposable personal income. A positive saving rate means that
American households in aggregate are saving. A low personal saving
rate means that households in aggregate are spending virtually all
of their current income. A negative personal saving rate means
that, in aggregate, American households are spending more than
their current income-or "dissaving." Given that the personal saving
rate is an aggregate measure, some individuals might be saving a
lot even while others are drawing down past saving, selling
existing assets, or borrowing to finance their current
consumption.
A1.2. For the economy as a whole, personal saving can be a vital
source of the nation's saving available to finance private and
government investment. NIPA personal saving is widely recognized by
economists as the key measure of the resources that households
contribute to national saving. A low personal saving rate-unless
offset by relatively higher saving by businesses and/or government
or by borrowing from abroad-limits how much the nation can invest
and so ultimately limits future economic growth. A low personal
saving rate can raise questions about whether current generations
are setting aside enough to sustain the nation's productive
capacity, especially if the other components of national saving are
not correspondingly higher. Some analysts are concerned that the
demand for household consumption is in part fueling the U.S. trade
deficit. Section 2 discusses the trend and the components of
national saving, and section 3 explains how saving affects
long-term economic growth and living standards.
The personal saving rate also has implications for Americans'
ability to sustain their current rate of spending. Personal
spending represents about two-thirds of the U.S. economy. A low
personal saving rate raises questions about whether Americans have
adequate resources to withstand a financial emergency such as
unemployment in the event of an economic downturn. In addition,
many policymakers and analysts have questioned whether American
households are saving enough to ensure their retirement
security.
Having said this, it is important to recognize that
macroeconomic measures such as the NIPA personal saving rate do not
provide a complete picture of
Q1.3. How Has the Personal Saving Rate
Changed Over Time?
the finances of individual households. A household's capacity to
consume depends on both its current income and its wealth. One way
to measure households' wealth is net worth, or the difference
between households' assets and their liabilities.6 The change in
households' net worth is broader than the NIPA or FFA measures of
personal saving and includes both the flow of saving from current
income plus any increase (or decrease) in the market value of
existing assets such as houses and stocks. For the economy as a
whole, however, the change in households' net worth due to
revaluation of households' existing assets does not represent
resources available to invest in the nation's capital stock.7
A1.3. Figure 1.1 shows the personal saving rate-expressed as a
percentage of disposable personal income-over the past 4 decades.
The personal saving rate averaged 8.3 percent over the 1960s and
increased to an average of 9.6 percent over the 1970s. Within each
of those 2 decades, annual saving rates were relatively steady,
although they ranged from a low of 7.2 in 1960 to a high of 10.7
percent in 1974. Over the 1980s, the personal saving rate was
slightly lower than in the 1970s. After peaking at 10.9 percent in
1982, the rate generally declined over the 1980s, dropping as low
as to 7.3 percent in 1987; for the decade, the rate averaged 9.1
percent. The personal saving rate rebounded from 1987 to 1992 when
it reached 8.7 percent. Since then, the personal saving rate has
steadily declined and averaged only 5.9 percent over the 1990s. In
the late 1990s, the personal saving rate dropped below the postwar
low of 4.7 percent in 1947. In 1999, the personal saving rate
plunged to 2.2 percent-an annual rate not seen since the Great
Depression. As shown in figure 1.1, the personal saving rate in
2000 was estimated to be -0.1 percent.8 With the personal saving
rate around zero or negative, economists have questioned how to
interpret the decline; see question 1.7.
6Households' aggregate net worth is available from the Flow of
Funds Accounts' balance sheet for the household sector.
7For further discussion of whether revaluation of existing
assets counts as saving, see questions 1.7 and 2.4.
8The last time the personal saving rate was negative was in 1932
(-0.8 percent) and 1933 (-1.5 percent).
Page 21 GAO-01-591SP National Saving
Q1.4. Why Do People Save?
Figure 1.1: Personal Saving Rate (1960-2000) Percent of
disposable personal income 12 10 8 6 4 2 0 -2 1960 1965 1970 1975
1980 1985 1990 1995 2000
Source: Bureau of Economic Analysis, Department of Commerce.
A1.4. Before trying to answer why people are saving less, let's
start with the question of what motivates people to save. People
save for a variety of reasons such as buying a house, taking a
vacation, providing a college education for their children, or
preparing for their own retirement. They may also save for general
reasons such as for a "rainy day" or to leave money to their heirs.
People with seemingly identical family and income situations may
make different saving choices-some may save a great deal while
others save little, if anything. Economists and other analysts use
several theories in analyzing how individuals and households decide
how much of their current income to save for the future.
The standard theory for explaining personal saving is the
life-cycle model.9 The basic hypothesis is that people save and
accumulate assets to smooth out their consumption and standard of
living over their lifetimes.
9A complementary theory of personal saving is the
permanent-income hypothesis. Generally, people save a greater share
of income when their annual income is higher than their expected
long-run permanent income and save a smaller share when their
income is lower than the expected long-run level.
Page 22 GAO-01-591SP National Saving
Young people entering the workforce, anticipating that their
incomes will increase over their careers, save little and may
borrow to finance current spending. Workers in their peak earning
years save to repay past borrowing and to accumulate assets for
retirement. The life-cycle model predicts that saving is
hump-shaped by age so that wealth accumulation peaks just before
retirement. Upon leaving the workforce, the elderly run down their
wealth-or "dissave." In saving for retirement, individuals
theoretically take into account not only their expected retirement
age and the number of years they expect to live in retirement but
also project their expected income, real returns on assets
accumulated, and inflation over their lifetime.
Although providing for retirement is a powerful motive for
saving, the life-cycle model in its simplest form cannot fully
explain how people decide to save. Faced with the difficulty of
reconciling the standard life-cycle model with available empirical
data, economists have examined other motives that may help explain
saving behavior. While some evidence supports each motive,
economists do not have a unified theory that fully explains how
people choose to save.10 In general, the other major incentives or
reasons why people save are categorized as follows:
•
Precautionary saving motive. This is saving to protect
against unexpected expenses or possible emergencies, such as
unemployment or illness. In particular, individuals who face
greater uncertainty about their income and those who are
risk-averse may tend to save more for a "rainy day." Precautionary
saving may be over-and-above basic life-cycle saving for
retirement. Some people may choose to save enough to maintain a
buffer-stock or contingency reserve during their early working
years and defer retirement saving until their 40s or
50s.11
•
Bequest saving motive. This is saving beyond basic
life-cycle saving for retirement. Some people may choose to save
more in order to bequeath the accumulated wealth to future
generations. The desire to leave a bequest may explain why the
elderly do not fully deplete their wealth and some even continue to
save during retirement. To some
10For a comprehensive review of personal saving literature, see
Martin Browning and Annamaria Lusardi, "Household Saving: Micro
Theories and Micro Facts," Journal of Economic Literature, Vol.
XXXIV, No. 4 (1996), pp. 1797-1855.
11Christopher D. Carroll, "Buffer-Stock Saving and the Life
Cycle/Permanent Income Hypothesis," Quarterly Journal of Economics,
Vol. CXII, No. 1 (1997), pp. 1-56.
Page 23 GAO-01-591SP National Saving
extent, bequests may be unplanned and thus reflect unspent
retirement and precautionary saving.
•"Big ticket" saving motive. This is relatively short-term
saving to accommodate a mismatch between current income and
expenses during the life-cycle. Some people save to pay for
big-ticket items such as cars, other consumer durables, or
vacations. Some must save in advance because they cannot borrow,
while others may prefer to save and avoid borrowing. Another big
ticket is the down payment to buy a home; households largely borrow
to buy homes and later save by repaying their mortgages. Paying for
postsecondary education is a big ticket above and beyond life-cycle
saving for retirement.
Given that people save for different purposes, increasing the
rate of return on saving does not necessarily motivate people to
save more. A higher rate of return has two opposing effects on
personal saving. On the one hand, a higher rate of return may
encourage people to save more because future spending becomes less
costly relative to spending today-the substitution effect. On the
other hand, given a higher rate of return, people need to save less
now to finance a given level of future consumption. This reduced
incentive to save as real rates of return increase is called the
income effect.12 How people react to an increase in the rate of
return depends not only on their preferences about spending today
versus spending in the future but also on the real after-tax rate
of return-that is, the rate expected after taking into account
inflation and taxes.13
Not everyone behaves like a life-cycle saver. Many people plan
over shorter horizons-a few years or even paycheck-to-paycheck.
Instead of trying to forecast lifetime income and economic
conditions in the distant future, people may use simple rules of
thumb, such as saving a fixed share of their income or avoiding
debt.14 Many people are "target savers" who aim for a fixed level
of wealth or ratio of wealth to income in order to achieve
12Textbooks in microeconomics discuss these effects in detail.
For a brief summary of substitution and income effects, see N.
Gregory Mankiw, Macroeconomics, 4th Edition (New York, N.Y.: Worth
Publishers, 2000), pp. 446-447.
13See section 4 for a discussion of federal tax incentives for
personal saving.
14People can save for retirement using rules of thumb, such as
saving a fixed percentage of income in an employer-sponsored
retirement saving plan or saving $2,000 each year in an individual
retirement account (IRA).
Q1.5. Why Has the Personal Saving Rate
Declined?
specific goals such as retirement, college education, a new car,
or a vacation. Once target savers reach their wealth target, they
may feel no need to save more. Individuals may use mental
accounts-and even separate bank accounts-to earmark the money saved
for different uses. To ensure saving discipline, people may use
"contractual" or automatic mechanisms, such as payroll deductions,
to save. A mortgage is a key form of contractual saving in which
the homeowner's commitment to repay the principal borrowed compels
future saving.
Even though economists have various theories to explain why
people choose to save, some people do not save at all.15 Low-income
and even some moderate-income households may feel that they are
unable to save. Others may be unwilling to save. Some people may be
impatient and they may discount the future so heavily that
retirement saving seems irrelevant compared to current
spending.
A1.5. No one is sure why the personal saving rate has declined.
Despite a great deal of study, economists have found no single
reason that convincingly explains the decline. Instead, research
points to a combination of factors that influence the personal
saving rate. These include-but are not limited to-demographics,
government programs for the elderly, credit availability, and
expectations about future income and wealth.16
• Demographics. Under the basic life-cycle model, one would
expect that an increase in the elderly as a percentage of the total
population would reduce the aggregate saving rate. However,
empirical research has found that saving has declined across most
age groups. There is no
15For more information, see Annamaria Lusardi, "Explaining Why
So Many Households Do Not Save," Working Paper Series 00.1,
Dartmouth College and The University of Chicago (January 2000); and
Annamaria Lusardi, Jonathan Skinner, and Steven Venti, "Saving
Puzzles and Saving Policies in the United States," Working Paper
No. 8237 (Cambridge, MA: National Bureau of Economic Research,
April 2001).
16Martin Browning and Annamaria Lusardi, in "Household Saving:
Micro Theories and Micro Facts," Journal of Economic Literature,
Vol. XXXIV, No. 4 (1996), pp. 1797-1855, identified 11 possible
explanations offered for the decline in personal saving. Jonathan
Parker, in "Spendthrift in America? On Two Decades of Decline in
the U.S. Saving Rate," Working Paper No. 7238 (Cambridge, MA:
National Bureau of Economic Research, July 1999), examined seven
possible explanations for the decline.
consensus that the aging of the U.S. population caused the
decline in the personal saving rate.
•
Programs for the elderly. Medicare and Social Security
affect people's incentives to save for their old age.17 Medicare
may reduce the elderly's perceived needs for precautionary saving
to cover medical expenses. Social Security can have opposing
effects on personal saving.18 On the one hand, Social Security
benefits reduce the amount people need to save on their own for
retirement. On the other hand, Social Security may induce personal
saving by encouraging workers to save for earlier retirement-the
retirement effect. In a sense, Social Security makes retirement an
attainable goal and thus can prompt individuals to plan for
retirement. People may save more than they would have otherwise to
supplement their Social Security benefits with additional
retirement income or because they want to retire before they are
eligible for Social Security and Medicare benefits. Nevertheless,
some evidence suggests that the existence of Social Security may
have reduced personal saving, and numerous studies have attempted
to estimate the saving offset.19 However, given that Social
Security was established in 1935 and Medicare in 1965, it seems
unlikely that these programs were major contributors to the decline
in the personal saving rate over the 1980s and 1990s.
•
Credit availability. Improved access to credit reduces
the need to save before big-ticket purchases. Over the last 20
years, credit cards have become widely available, and a smaller
down payment is needed to buy a house. Easier access to credit may
have contributed somewhat to the saving decline. The ability to
borrow together with a rise in the number of two-earner families
may have reduced the perceived need for precautionary
saving.
17Means-tested government programs, such as Medicaid, also may
affect the incentive to save. For example, requirements specifying
low levels of financial assets in order to qualify for government
benefits may discourage personal saving.
18Employer-sponsored pension plans also affect individuals'
incentives to save for retirement on their own. As noted above,
employer pension contributions as well as pension funds' interest
and dividend income are part of NIPA personal income and
saving.
19For more on Social Security, see Congressional Budget Office
Memorandum, Social Security and Private Saving: A Review of the
Empirical Evidence (July 1998).
Q1.6. What Is the Relationship Between
Personal Saving and Wealth?
• Expectations about future income and wealth. People decide how
much to save based not only on their current income but also on
their expectations about their future lifetime income and wealth.
Since March 1991, the United States has enjoyed its longest postwar
economic expansion-unemployment and inflation have remained
relatively low and stable, and the stock market has achieved record
highs. Over the 1990s, the booming economy and stock market may
have lulled people into a sense of complacency that good times were
here to stay. People may have saved less because they were
confident about future income prospects, and households were
wealthier because of gains on their existing assets. As discussed
below in question 1.6, increased household wealth in recent years
appears to have contributed to the plunge in the personal saving
rate over the late 1990s.
A1.6. That Americans save little but households are wealthier is
a paradox that can be confusing. It is widely known that saving
from current income is the way to accumulate assets and repay past
borrowing, thus increasing net worth. The flow of saving is
essential to accumulating a stock of wealth-as a general rule
someone who never saves will have no wealth.20 Conversely,
dissaving-spending more than current income-reduces the stock of
wealth because amounts saved in the past must be drawn down,
existing assets sold, or borrowing increased. Not only does saving
affect the stock of wealth, but wealth in turn influences the
choice to save.
Under the life-cycle model, people save to accumulate assets to
finance future consumption, and attaining their wealth-to-income
target depends in part on the rate of return anticipated. Assets
accumulated can generate income in the form of interest and
dividends that in turn may be saved. Moreover, the change in net
worth not only includes the saving flow from current income but
also reflects changes in the market value of assets accumulated by
households. Economists generally agree that saving and wealth are
inversely related: increased wealth increases an individual's
ability to consume in the future and thus reduces the incentive to
save from current income. In other words, when households' existing
assets increase in value, people can save less from current income
and still achieve their wealth-income target. If households'
existing assets lose value, people have to save more to attain
their wealth-income target. While the idea of wealth
20A nonsaver could get lucky and receive an inheritance or win
the lottery.
targets may seem abstract to the average household, increased
wealth clearly influences personal saving through traditional
defined-benefit pension plans. For example, gains on existing
assets reduce the amount of an employer's contribution necessary to
fund its pension liability.
Figure 1.2 shows that even as the personal saving rate has
fallen, the ratio of aggregate household net worth to disposable
personal income ("the wealth-income ratio") has risen in recent
years. Over most of the last 4 decades, households' wealth-income
ratio did not fluctuate widely from year to year. Over the 1960s
through the mid 1990s, households' aggregate wealth ranged from a
high of 5.3 times households' disposable income in 1961 and 1996 to
a low of 4.3 in 1974. Since 1996, households' wealthincome ratio
has increased rapidly-peaking at 6.4 in 1999. Although the surge in
household wealth contributed to the plunge in the personal saving
rate in recent years, economists agree that increased wealth does
not fully explain the timing or magnitude of the decline over the
1980s and 1990s.
Personal saving percent of Household wealth to disposable
disposable personal income personal income ratio
1960 1965 1970 1975 1980 1985 1990 1995 2000
Personal saving rate Household wealth-to-income ratio
Source: Bureau of Economic Analysis, Department of Commerce, and
GAO analysis of Flow of Funds Accounts data from the Federal
Reserve Board of Governors.
Over the 1990s, aggregate household net worth doubled in nominal
terms. Moreover, the mix of assets held by American households has
changed dramatically. Traditionally, real estate has represented
households' largest asset; while the total value of households'
real estate holdings grew by 50 percent over the 1990s, real estate
steadily declined as a share of households' total assets from 31
percent in 1990 to 23 percent in 1999. Meanwhile, the total value
of households' stock holdings grew more than fourfold over the
1990s, and stocks as a share of households' total assets increased
from 10 percent in 1990 to 28 percent in 1999.21
As figure 1.2 shows, household wealth accumulation has swelled
relative to disposable personal income even as the flow of saving
from current income has dwindled. Recent research estimated that
the growth in households' aggregate net worth over the 1960s and
during the early 1990s was roughly equally divided between
traditional saving and the increase in the nominal value of
existing assets. Over the 1970s and 1980s, the increase in the
nominal value of existing assets was estimated to be about twice as
large as the flow from saving.22 In recent years, nominal gains on
households' assets-particularly financial assets-have dwarfed the
saving flow. For example, in 1999, even though personal saving was
less than $150 billion, households' wealth still grew by $5.2
trillion (14 percent).
As Americans learned in 2000 when the stock market declined from
its peak value, what goes up can come down. Aggregate household
wealth in 2000 declined for the first time since data were
available in 1945. According to the latest estimates, personal
saving in 2000 was -$8.5 billion, but households' wealth declined
by nearly $842 billion (2 percent) largely as a result of the drop
in the market value of households' stock holdings. The total value
of households' stock holdings declined by nearly 18 percent in
2000, and stocks as a share of households' total assets declined to
less than 24 percent. Households' wealth-income ratio dropped from
its 1999 peak of
6.4 to 5.9 in 2000 but remains relatively high compared to the
1960s through the mid 1990s.
The basic life-cycle model of saving holds that people are
trying to smooth their standard of living over their lifetime.
Therefore, life-cycle savers
21Households hold stocks directly as well as indirectly through
mutual funds, pension funds, life insurers, and trusts.
22William G. Gale and John Sabelhaus, "Perspectives on the
Household Saving Rate," Brookings Papers on Economic Activity
(1:1999), pp. 181-224.
Page 29 GAO-01-591SP National Saving
would not treat gains on existing assets as a windfall to spend
today. The theory predicts that anticipated wealth changes would
not affect planned lifetime spending. Likewise, changes in wealth
perceived to be temporary due to fluctuating market values of
assets would not affect planned spending. However, people can
respond to an unexpected increase in wealth that they think will be
permanent by spending more of their current income. This change in
spending in response to a change in wealth is called the wealth
effect. Some people may tap their wealth by selling stocks or
borrowing against their home equity to boost current consumption.
The wealth effect can also work in the opposite direction. A
dramatic drop in household wealth-for example, due to an extended
downturn in the stock market-could eventually dampen household
consumption and lead to an increase in saving.
The increase in spending at any one time due to the wealth
effect would be expected to be small, given a life-cycle saver's
tendency to spread consumption of a significant change in wealth
over time. Researchers estimate that each dollar in increased
wealth increases consumption by a few cents. Estimates of the
wealth effect range from 1 to 7 cents, and the typical estimate is
about 3 to 4 cents. A recent study estimated that a wealth effect
of 3 to 4 cents could explain two-fifths to about half of the
decline in the personal saving rate since 1988.23
23Annamaria Lusardi, Jonathan Skinner, and Steven Venti, "Saving
Puzzles and Saving Policies in the United States," Working Paper
No. 8237 (Cambridge, MA: National Bureau of Economic Research,
April 2001).
Page 30 GAO-01-591SP National Saving
Q1.7. If Household Wealth Has Increased,
Does It Matter if the Personal Saving Rate Has Declined?
A1.7. With the personal saving rate around zero or negative,
economists have questioned the relevance of the NIPA personal
saving measure.24 Wealth measures, which reflect the value of
existing assets based on current market conditions, show a
fundamentally different trend, as illustrated in figure 1.2.25
Although these supplementary measures may explain why individual
households may choose to save less, the NIPA personal saving rate
shows that people are consuming virtually all of their current
income and saving little for the future.
In evaluating the level of personal saving, it is important to
distinguish between saving as a source to finance the nation's
capital formation and saving as a way for individual households to
finance future consumption. A key difference between measuring the
nation's saving and gauging a household's finances is the treatment
of changes in the market value of existing assets. As discussed in
section 2, it is saving from current income-not gains on existing
assets-that is key to financing capital investment and increasing
the nation's capacity to produce goods and services. Although an
individual household can tap the increased value of its assets to
finance additional consumption or accumulate other assets by
selling an asset to another household, the transaction itself
shifts ownership of the existing asset and does not generate new
economic output. Thus, the nation as a whole may not be able to
consume and invest more.26 Moreover, all households may not be able
to simultaneously tap their apparent wealth to finance consumption
because large-scale asset sales could tend to depress market
values.
24To some extent, spending wealth-like spending income-drives
down the reported personal saving rate. As discussed in Q1.1,
realized gains do not count as personal income, but any taxes paid
on such gains reduce disposable personal income and thus saving. If
households then spend a portion of their realized gains, this
spending further reduces the saving residual and the saving
rate.
25For alternative measures including changes in the market value
of households' existing assets, see William G. Gale and John
Sabelhaus, "Perspectives on the Household Saving Rate," Brookings
Papers on Economic Activity (1:1999), pp. 181-224; and Richard
Peach and Charles Steindel, "A Nation of Spendthrifts? An Analysis
of Trends in Personal and Gross Saving," Current Issues in
Economics and Finance, Vol. 6, No. 10 (September 2000).
26However, the sale of assets to foreigners can affect the
nation's ability to consume and invest.
Although the personal saving rate is low, economists do not
agree on whether this is a problem or whether private saving is
inadequate to finance domestic investment. On the one hand, some
economists are concerned that low personal saving is undercutting
national saving and leaving the United States more dependent on
foreign capital inflows to maintain domestic investment.27 On the
other hand, other economists have observed that strong consumer
spending-boosted by low saving and the wealth effect discussed
above-has fueled the surge in business investment and strong
economic growth in the U.S. economy in recent years. Some
economists and analysts are concerned that individual households
are living beyond their means and some may have been counting on
continued high gains on their assets to finance future consumption.
If such expectations are not realized and, for example, there is a
sustained stock market downturn or an economic downturn, households
may have to scale back their consumption. This in turn could
potentially slow economic growth given that household spending
represents about two-thirds of the U.S. economy. However, some
researchers suggest that the risk of a collapse in household
spending that would hurt overall economic growth is exaggerated
because households have greater resources than the personal saving
rate suggests. 28
Although the aggregate wealth-income ratio rose in recent years,
wealth is fairly concentrated and not all households have
experienced gains in the stock market. To gauge the financial
situation of individual households requires going beyond aggregate
household data. The Survey of Consumer Finances provides detailed
data on family net worth and holdings of assets and liabilities.29
Figure 1.3 shows that many households have accumulated little, if
any, net worth. As one might expect, high-income families typically
have accumulated more net worth than low-income families.
27See Jagadeesh Gokhale, "Are We Saving Enough?" Economic
Commentary, Federal Reserve Bank of Cleveland (July 2000).
28Richard Peach and Charles Steindel, "A Nation of Spendthrifts?
An Analysis of Trends in Personal and Gross Saving," Current Issues
in Economics and Finance, Vol. 6, No. 10 (September 2000).
29The Survey of Consumer Finances is a triennial survey of U.S.
families sponsored by the Board of Governors of the Federal Reserve
with the cooperation of the Department of Treasury. For results
from the latest Survey of Consumer Finance, see Arthur B.
Kennickell, Martha Starr-McCluer, and Brian J. Surette, "Recent
Changes in the U.S. Family Finances: Results from the 1998 Survey
of Consumer Finance," Federal Reserve Bulletin (January 2000).
Median family net worth (dollars) 600,000
$510,800
500,000
400,000
300,000
200,000
$152,000
100,000
$60,300 $24,800
$3,600
0 Less than $10K $10K-$25K $25K-$50K $50K-$100K $100K and over
Family income before taxes
Less than $10K $10K-$25K $25K-$50K $50K-$100K $100K and over
Percentage 12.6%
24.8% 28.8% 25.2% 8.6%
of families
Note: Survey of Consumer Finances collects information on total
cash income before taxes for the calendar year preceding the
survey.
Source: Federal Reserve's 1998 Survey of Consumer Finances
(January 2000).
Although a great deal of attention has been paid to the wealth
effect from the stock market boom of the 1990s, half of American
households did not own stocks as of 1998, according to the 1998
Survey of Consumer Finance. For most families, real estate remains
the most important asset-two-thirds of households owned their homes
in 1998. The rise in consumer borrowing over the 1990s has raised
concerns that households are overextended. The ratio of total debt
payments to total income is a common measure of a household's debt
burden. According to one estimate using 1998 Survey of Consumer
Finances data, the aggregate debt burden was nearly 15 percent of
income, but nearly 13 percent of families had debt burdens greater
than 40 percent.30 About 10 percent of households did not
30Arthur B. Kennickell, Martha Starr-McCluer, and Brian J.
Surette, "Recent Changes in the
U.S. Family Finances: Results From the 1998 Survey of Consumer
Finance," Federal Reserve Bulletin (January 2000).
Page 33 GAO-01-591SP National Saving
Q1.8. How Do Social Security and Personal
Saving Compare as Sources of Retirement Income?
even have a checking account. These households might be seen as
outside the financial mainstream and thus unlikely to be
saving.
The key to accumulating wealth for retirement is simply the
choice to save, although investment choices also matter. Some
workers choose to save over their working lives for retirement
while others choose to save little and spend more while working.
Recent research found that even households with similar lifetime
earnings approach retirement with vastly different levels of
wealth.31 Even though many low-income households have accumulated
no wealth as they approach retirement, the researchers found that
some low-income households had managed to accumulate fairly
sizeable wealth. Moreover, the researchers found that a significant
portion of higher-income households save little. Choices about
whether to invest, for example, in the stock market or in less
risky, lower-yielding assets such as a bank saving account also
make a difference. Regardless of income level, those households
that do not save much will have few assets on which to enjoy
gains.
A1.8. Traditionally, retirement income was characterized as a
"three-legged stool" comprising Social Security, employer pensions,
and individuals' own saving for retirement. In 1998, Social
Security benefits contributed 38 percent of the elderly's cash
income. As figure 1.4 shows, saving, both through
employer-sponsored pension plans and by individuals on their own
behalf, provides a significant part of retirement income. Pension
benefits accounted for 19 percent of the elderly's cash income in
1998 and income from individuals' accumulated assets for another 20
percent. In addition, the elderly and their spouses may supplement
their retirement income by continuing to work. As shown in figure
1.4, earnings from continued employment represent a fourth leg on
the retirement-income stool.
31Steven F. Venti and David A. Wise, "Choice, Chance, and Wealth
Dispersion at Retirement," Working Paper No. 7521 (Cambridge, MA:
National Bureau of Economic Research, February 2000).
Page 34 GAO-01-591SP National Saving
Figure 1.4: Share of Elderly Households' Income by Source of
Income, 1998
Note: Elderly households are individuals and married couples
with at least one member aged 65 and older. Aggregate income
represents the sum of cash income from reasonably regular
sources-before taxes and Medicare premiums. This retirement income
definition differs somewhat from the NIPA personal income
definition discussed in Q1.1.
aIncome from accumulated assets includes interest, dividends,
royalties, income from estates and trusts, and rent. Capital gains
(or losses) and lump-sum or one-time payments such as life
insurance settlements are excluded. Cash rental income differs from
NIPA rental income, which includes the imputed net rental value on
owner-occupied housing.
bBenefit payments (not lump-sum payments) from private pensions
or annuities and government employee pensions. NIPA personal income
includes pension contributions by employers in the year income is
earned, and benefits paid at retirement are not a component of NIPA
income.
c"Other" income includes SSI, unemployment and workers'
compensation, alimony, child support, and other public assistance.
Noncash transfers such as food stamps or health care benefits are
not reflected.
Source: GAO analysis of data from Social Security
Administration, Income of the Population 55 or Older, 1998 (March
2000).
Currently, many financial planners advise people that they will
need to replace about 70 to 80 percent of their pre-retirement
income to maintain their pre-retirement living standard.32
According to the Social Security Administration, Social Security
benefits currently replace about 39 percent of pre-retirement
income for a worker with average wages ($32,105 in 2000). Given
Social Security's progressive benefit formula, however, the
replacement rate varies by income. Social Security currently
replaces about 53 percent for low earners and about 24 percent for
those who earned the taxable maximum ($72,600 in 2000).33
While Social Security provides a foundation for retirement
income, pensions, income from accumulated assets, and current
earnings largely determine which households will have the highest
retirement incomes, as figure 1.5 shows. Social Security makes up
over 80 percent of the retirement income for the first (lowest) and
second income quintiles. For the third and fourth quintiles, Social
Security still serves as the most important source of retirement
income. For the highest quintile, pensions are a more significant
income source than Social Security, but pensions represent a
smaller share for this group than either income from accumulated
assets or earnings. It is important to note that these data reflect
in part the fact that pensions are not a universal source of
retirement income as is Social Security. In 1998, about 48 percent
of retirees lacked pension income or annuities, and about 53
percent of those employed lacked a pension plan.34
32The replacement rate can be calculated as a simple percentage
of pretax income. Or, the replacement rate considered to be
adequate can be computed in a more sophisticated way, netting out
Social Security taxes, other taxes, or working expenses that will
not be paid in retirement. Thus, desired or target replacement
rates can vary significantly depending on income level and other
factors.
33These replacement rates are based on applying Social Security
benefit rules to hypothetical retired workers age 65 in 2001 who
had steady earning levels over their careers. The average earner
represents a worker who earned the average of covered workers under
Social Security each year. The low earner earned 45 percent of this
average. The maximum earner had earnings equal to the maximum
taxable amount each year.
34Pension Plans: Characteristics of Persons in the Labor Force
Without Pension Coverage
(
GAO/HEHS-00-131, August 22, 2000).
Figure 1.5: Pensions, Income from Accumulated Assets, and
Earnings Determine Who Had Highest Retirement Incomes, 1998
Median elderly household income (dollars)
70,000
$59,685
60,000
50,000
40,000
$28,765
30,000
20,000
$17,965
$11,220
10,000
$6,510
0
First Second Third Fourth Fifth
Income Level (Quintile)
Other
Earnings
Pensions
Income from
accumulated
assets
Social Security
Note: Median incomes for each quintile are GAO estimates. Social
Security income for the highest fifth may be lower than for the
previous fifth because, among other possible reasons, some elderly
workers or their spouses may not yet be collecting benefits.
Elderly households are individuals and married couples with at
least one member aged 65 and older. See notes to figure 1.4 for
descriptions of income types.
Source: GAO analysis of data from Social Security
Administration, Income of the Population 55 or Older, 1998 (March
2000).
Personal saving now can contribute substantially to future
retirement income, as illustrated in figure 1.5. While most
families say they recognize the need to save for retirement, many
do not save in any systematic way. The Congressional Research
Service recently reported that in 1997 nearly 63 percent of workers
between the ages of 25 and 64 replied that they did not own a
retirement saving account, such as an employer-sponsored 401(k) or
an individual retirement account (IRA).35 According to the 2001
Retirement Confidence Survey,36 about 46 percent of American
workers have not tried to calculate how much they need to save for
retirement. The survey also found that many people-particularly
those planning to work the longest-underestimate how long they will
live in retirement. Half of men reaching age 65 can expect to be
alive at age 82 and half of women reaching age 65 can expect to be
alive at age 86; some will live to age 100 and older. Yet, 15
percent of those surveyed expect their retirement will last for 10
years or less, and another 11 percent believe their retirement will
last less than 20 years. In addition, many workers are unaware that
the retirement age for full Social Security benefits is gradually
rising from age 65 to 67. Researchers do not agree on whether baby
boomers and other workers are saving enough for their
retirement.37
Research suggests that individuals who are not financially
literate tend to save less. Many people do not appreciate that
saving even small amounts over time is the way to accumulate
wealth. According to a 1999 opinion survey, low and moderate income
Americans mistakenly believe they have a better chance of
accumulating $500,000 through winning the lottery than through
saving and investing a portion of their income.38 One reason for
this mistaken notion is that most Americans dramatically
underestimate
35Patrick J. Purcell, Retirement Savings and Household Wealth in
1997: Analysis of Census Bureau Data (Washington, D.C.:
Congressional Research Service, April 2001).
36Now in its 11th year, this annual survey gauges the views and
attitudes of working and retired Americans regarding their
preparations for and confidence about various aspects of
retirement. The 2001 survey was cosponsored by the Employee Benefit
Research Institute, the American Savings Education Council, and
Mathew Greenwald and Associates, Inc.
37For a summary of recent studies addressing retirement saving
adequacy, see Paul Yakoboski, "Retirement Plans, Personal Saving,
and Saving Adequacy," Employee Benefit Research Institute, EBRI
Issue Brief No. 219 (March 2000).
38The Consumer Federation of America and Primerica, on October
28, 1999, released results of the public opinion survey conducted
by Opinion Research Corporation International.
Q1.9. What Are the Implications of a
Growing Elderly Population for Retirement Security?
the value of compounding-how money saved can grow over time.39
People might begin to save more if they were aware how much they
need for retirement and that saving regularly over time is the key
to preserving their future standard of living.
A1.9. As we have reported, the United States faces a demographic
tidal wave in the future that poses significant challenges for
Social Security, Medicare, and our economy as a whole.40 More
people are living longer, and they will need more resources to
finance more years of retirement. The
U.S. elderly population-those aged 65 and over-is growing and
accounts for an increasing share of the total population (see
figure 1.6). As a share of the total population, the elderly
population has grown from 9.1 percent to
12.4 percent over the last 4 decades. Over the next 75 years,
the elderly population share will nearly double to 22.5 percent,
according to the Social Security Trustees' intermediate actuarial
projections.41 Although the babyboom generation will contribute
heavily to the growth of the elderly population, increasing life
expectancy and declining fertility rates are also responsible for
the aging of the U.S. population.42
39Compounding can be explained in terms of the "rule of 72." To
find out how fast an amount saved can double, divide the interest
rate into 72. For example, at an interest rate of 5 percent, $100
saved would double to $200 in about 14 years. At a rate of 8
percent, it would take only 9 years to double.
40Medicare and Budget Surpluses: GAO's Perspective on the
President's Proposal and the Need for Reform
(GAO/T-AIMD/HEHS-99-113, March 10, 1999).
41Throughout this report, we relied on data from The 2001 Annual
Report of the Board of Trustees of the Federal Old-Age and
Survivors Insurance and Disability Insurance Trust Funds, hereafter
"the 2001 OASDI Trustees' Report" and The 2001 Annual Report of the
Board of Trustees of the Federal Hospital Insurance Trust Fund,
hereafter "the 2001 HI Trustees' Report." In projecting future
revenues and benefits, actuaries at the Social Security
Administration and Health Care Financing Administration use
alternative assumptions about economic and demographic trends,
including average earnings, mortality, fertility, and immigration.
We used the intermediate assumptions, which reflect the Trustees'
best estimate. Due to the inherent uncertainty surrounding
long-term projections, the Trustees' reports also include two other
sets of assumptions, a high-cost and a low-cost alternative.
42Other nations, both developed and developing, are experiencing
similar and often more pronounced aging of their populations.
Figure 1.6: Aged Population Nearly Doubles From Today as a Share
of Total U.S. Population (1960-2075)
Percent of total population
25
Population aged 65 and over
20
15
10
5
0
1960 1980 2000 2020 2040 2060 2075
Note: Projections based on intermediate assumptions of the 2001
OASDI Trustees' Report. Source: GAO analysis of data from the
Office of the Actuary, Social Security Administration.
As people live longer and have fewer children, there will be
relatively fewer workers supporting each retiree unless retirement
patterns change. As figure 1.7 shows, there were about five workers
supporting each retiree in 1960. Today, there are approximately 3.4
workers for each Social Security beneficiary and by 2030, this
number is projected to fall to 2.1, according to the Trustees'
intermediate actuarial assumptions. Those workers will have to
produce the goods and services to maintain their own standard of
living as well as to finance government programs and other
commitments for the baby boomers' retirement. Even as there are
relatively fewer workers to pay taxes to finance Social Security
and Medicare, these programs will have to provide benefits over
longer periods of time as life expectancies rise.
Figure 1.7: Relatively Fewer Workers Will Support More Retirees
(1960-2075) Covered workers per OASDI beneficiary
6
5
4
3
2
1
0
1960 1980 2000 2020 2040 2060 2075
Note: Projections based on intermediate assumptions of the 2001
OASDI Trustees' Report. Source: Office of the Actuary, Social
Security Administration.
Social Security has a long-term financing problem.43 Social
Security is financed mainly on a pay-as-you-go basis, which means
that payroll taxes of current workers are used to pay retirement,
disability, and survivor benefits for current beneficiaries. Social
Security now collects more in payroll taxes than it pays in
benefits, but just 15 years from now this will be reversed, as
shown in figure 1.8. Beginning in 2016, the program faces cash
deficits as benefit payments are projected to outpace cash revenue.
Absent meaningful reform, the Social Security trust fund will be
exhausted in 2038, and projected tax revenue would be adequate to
pay for only 73 percent of projected benefits thereafter.
43Social Security consists of two separate trust funds: Old-Age
and Survivors Insurance, which funds retirement and survivors
benefits, and Disability Insurance, which provides benefits to
disabled workers and their families. These two accounts are
commonly combined in discussing the Social Security program. For
purposes of this product, any reference to the Social Security
trust fund refers to the combined Old-Age, Survivors, and
Disability Insurance (OASDI) trust funds.
Page 41 GAO-01-591SP National Saving
Billions of 2000 dollars 4000
3000
2000
1000
0
-1000
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Cash surplus/deficit
Trust fund balance
Notes: Projections based on intermediate assumptions of the 2001
OASDI Trustees' Report. The analysis assumes that current-law
benefits are paid in full beyond 2038 through borrowing from the
Treasury. The cash surplus/deficit excludes interest earnings on
trust fund assets and interest expense associated with the assumed
borrowing. Both interest earnings and interest expense are included
in the trust fund balance. Data converted to 2000 dollars using the
consumer price index for all urban consumers.
Source: GAO analysis of data from the Office of the Actuary,
Social Security Administration.
The long-term outlook for Medicare is much bleaker. Medicare's
financial status has generally been gauged by the financial
solvency of the Part A Hospital Insurance (HI) trust fund, which
primarily covers inpatient hospital care and is financed by payroll
taxes. As shown in figure 1.9, Medicare's HI trust fund faces cash
deficits beginning in 2016, and the trust fund will be depleted in
2029. These HI projections do not reflect the growing cost of the
Part B Supplementary Medical Insurance (SMI) component of Medicare,
which covers outpatient services and is financed through general
revenues and beneficiary premiums. SMI accounts for somewhat more
than 40 percent of Medicare spending and is expected to account for
a growing share of total program dollars. As with Social Security,
Medicare spending will swell as the elderly population increases.
Moreover, Medicare costs are expected to increase faster than the
rest of the economy. Projected growth in Medicare reflects the
escalation of health care costs at rates well exceeding general
rates of inflation. Increases in the number and quality of health
care services have been fueled by the explosive growth of medical
technology.
Billions of 2000 dollars
600
400
200
0
-200
-400
-600
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Cash surplus/deficit
HI trust fund balance
Notes: Projections based on intermediate assumptions of the 2001
HI Trustees' Report. The analysis assumes that current-law benefits
are paid in full after 2029 through borrowing from the Treasury.
The cash surplus/deficit excludes interest earnings on trust fund
assets and interest expense associated with the assumed borrowing.
Both interest earnings and interest expense are included in the
trust fund balance. Data converted to 2000 dollars using the
consumer price index for all urban consumers.
Source: GAO analysis of data from the Office of the Actuary,
Health Care Financing Administration.
Although public attention focuses on the trust fund insolvency
dates, the effect of financing Social Security and Medicare will be
felt sooner as the baby boom generation begins to retire. As shown
in figures 1.8 and 1.9, the Social Security and Medicare HI cash
deficits are expected to grow substantially in the near future.
Regardless of whether the trust funds are relying on interest
income or drawing down their balances to pay benefits, the
government as a whole must come up with the cash by reducing
overall budget surpluses, borrowing from the public, increasing
other taxes, or reducing spending for other programs.44
Without reform, the combined financial burden of Social Security
and Medicare on future taxpayers becomes unsustainable. As figure
1.10 shows, the cost of these two programs combined would nearly
double as a share of the payroll tax base over the long term.
Assuming no other changes, these programs would constitute a
substantial drain on the earnings of our future workers.
2000 2025 2050 2075
Note: Projections based on the intermediate assumptions of the
2001 OASDI and HI Trustees' reports.
Source: Office of the Actuary, Social Security Administration,
and Office of the Actuary, Health Care Financing
Administration.
Personal saving plays a dual role in bolstering retirement
security for American workers. For individuals, assets accumulated
by saving provide a key source of retirement income (see Q1.8).
Those who do not save and who do not have pensions will have to
depend largely on Social Security in their old age. According to
the 2001 Retirement Confidence Survey, many
44Q4.10 discusses how the Social Security trust fund, for
example, affects federal government saving and national saving.
Page 45 GAO-01-591SP National Saving
workers are not confident that Social Security (65 percent) and
Medicare (57 percent) will continue to provide benefits equivalent
to those received today. Anticipating potential benefit cuts,
people could save more now to supplement their future retirement
income and to cushion against future health care costs or they
could choose to work longer and delay retirement. Alternatively,
they might not save more or work longer, and they would experience
a lower standard of living in retirement.
For the nation, personal saving provides resources vital to
enhancing the nation's productive capacity. Saving more today, in
turn, can improve the outlook for Social Security and Medicare. As
discussed in section 3, higher saving and investment can boost
worker productivity and lead to greater economic growth. A larger
economy would mean higher real wages for future workers and in turn
more payroll taxes to finance Social Security and Medicare. With an
aging population and a slowly growing workforce, increasing the
nation's future economic capacity is critical to ensuring
retirement security in the 21st century.
Section 2
National Saving Overview
Q2.1. What Is National Saving and How Is
It Measured?
A2.1. Just as for people, saving for the national economy is the
act of setting some of current income aside for the future instead
of spending it for current consumption. In NIPA, saving is measured
as current income less current consumption expenditures. National
saving is the sum of saving by households, businesses, and all
levels of government (federal, state, and local). For the economy
as a whole, national saving is the portion of the nation's income
not used for private and public consumption. The sum of national
saving and saving borrowed from abroad represents the total amount
of resources available for investment, that is, the purchase of
capital goods-plant, equipment, software, houses,1 and
inventories-by businesses and governments.2 Saving and investing
today increase the nation's stock of capital goods to be used in
the future-the capital stock- and thus the nation's capacity to
produce goods and services in the future.
National saving is measured in two ways-gross national saving or
net national saving. Gross national saving is a nation's total
income minus its consumption and represents resources available for
domestic or foreign investment. Some portion of gross national
saving pays for replacing capital goods that have been worn out or
used up in producing goods and services-consumption of fixed
capital in technical terms, or hereafter simply depreciation.3 The
other portion of gross national saving, which is used to add to the
nation's stock of capital goods, is net national saving. Net
national saving is the measure commonly used to gauge whether the
nation's capacity to produce goods and services in the future is
increasing or decreasing.
By itself, the dollar amount of national saving is not a
particularly meaningful indicator of the portion of the nation's
income that is not consumed. National saving is usually expressed
as a share of the nation's
1Investment in owner-occupied residential property is defined as
business investment.
2This represents the current NIPA definition of investment used
throughout this primer unless otherwise stated. Other ways of
thinking about national saving and investment are discussed in Q2.4
and in sections 3 and 4.
3For more information on how depreciation is measured in NIPA,
see Arnold Katz and Shelby Herman, "Improved Estimates of Fixed
Reproducible Tangible Wealth, 1929-95," Survey of Current Business,
Bureau of Economic Analysis, Vol. 77, No. 5 (May 1997), pp. 69-92,
and Barbara M. Fraumeni, "The Measurement of Depreciation in the
U.S. National Income and Product Accounts," Survey of Current
Business, Bureau of Economic Analysis, Vol. 77, No. 7 (July 1997),
pp. 7-23.
current income-or its economic output.4 Because the primary
measure of the nation's economic output is gross domestic product
(GDP), saving is often shown as a percent of GDP. Text box 2.1
compares GDP to another measure of economic output-gross national
product (GNP). In 2000, gross national saving as a share of GDP was
18.3 percent. After subtracting depreciation, which was 12.6
percent of GDP, net national saving was 5.7 percent of GDP.
Text Box 2.1: Gross Domestic Product and Gross National
Producta
GDP is the output of goods and services produced by labor and
property located in the United States, while GNP is the output of
goods and services produced by labor and property supplied by U.S.
residents, regardless of where they are located. The difference
between GDP and GNP is income receipts from the goods and services
produced abroad using labor and capital of U.S. residents less
income payments for the goods and services produced in the United
States using labor and capital supplied by foreign residents.
Because both GNP and national saving include these income receipts,
net of payments, the Bureau of Economic Analysis (BEA) presents
national saving as a share of GNP. However, since 1991, BEA has
featured GDP as the primary measure of economic activity because
GDP is consistent in coverage with indicators such as domestic
investment and productivity. GDP is also the measure cited in
economic trend analyses and for cross-country comparisons by many,
including the President's Council of Economic Advisers, the
International Monetary Fund, and the Organization for Economic
Cooperation and Development (OECD). Because this report deals not
only with national saving but also with other measures such as
investment and the federal budget position, we express saving,
investment, and federal government spending as a share of GDP.
Expressing all of our analysis as a share of GDP provides a
consistent frame of reference for comparing economywide shares for
the United States and for comparing U.S. saving rates to those of
other countries.
In the United States, the difference between GDP and GNP is
small. For example, in 2000, GDP was $9,963 billion and GNP was
$9,959 billion.b Given the relatively small difference between the
two measures, the denominator has little effect on calculating
saving as a share of the economy. Regardless of which measure is
used, saving as a share of the U.S. economy was 18.3 percent in
2000.
a"Gross Domestic Product as a Measure of U.S. Production,"
Survey of Current Business, Bureau of Economic Analysis, Vol. 71,
No. 8 (August 1991), p. 8.
bIn 2000, GNP was less than GDP because income receipts from the
rest of the world were less than U.S. payments to the rest of the
world.
4The nation's income is the sum of all the payments made to
those who produce output. This income equals the total spending on
the economy's output of goods and services; thus, the nation's
income and output are the same.
Page 48 GAO-01-591SP National Saving
Q2.2. How Has U.S. National Saving Changed
Over Time- Both Overall and by Component?
Gross national saving is a good indicator of resources available
both to
(1) replace old, worn-out capital goods with new, and sometimes
more productive, goods and (2) expand the capital stock.5 The share
of gross national saving used to replace depreciated capital has
increased over the past 40 years. This increase in depreciation
reflects a shift in the capital stock's composition from long-lived
assets with relatively low depreciation rates, like steel mills, to
shorter-lived assets such as computers and software. Even if gross
national saving were only sufficient to replace depreciated
capital, the economy could grow to some extent because replacing
worn-out and used capital with new equipment tends to bring
improved technology into the production process. Nevertheless,
national saving beyond the amount necessary to replace depreciated
capital goods is important for increasing the overall size of the
capital stock and the nation's future productive capacity.
A2.2. As figure 2.1 shows, gross national saving rebounded from
a low of
15.6
percent of GDP during the saving slump of the early 1990s
to 18.3 percent in 2000. This rebound is due primarily to increased
government saving that has more than made up for the decline in
personal saving described in section 1. However, despite this
rebound, national saving as a share of GDP is still below the level
of the 1960s-an era characterized by high saving and rapid growth
in productivity and living standards, defined in terms of GDP per
capita. Since the 1960s, depreciation as a share of GDP has
increased slightly (see Q2.1), and net national saving as a share
of GDP has declined more than gross national saving. Net national
saving rose from
3.4
percent of GDP in 1993 to 5.7 percent in 2000 but remains
well below the 1960s average of 10.9 percent.
5As discussed in section 3, a nation can use some of its saving
to invest abroad and can also borrow from abroad to finance
domestic investment.
Page 49 GAO-01-591SP National Saving
Percent of GDP 25
Gross national saving
20
15
10
5
0
1960 1965 1970 1975 1980 1985 1990 1995 2000
Source: GAO analysis of NIPA data from the Bureau of Economic
Analysis, Department of Commerce.
Figure 2.2 breaks net national saving down into components. It
shows both the aggregate trend and how saving by households,
businesses, and governments affected net national saving. As
discussed in section 1, personal saving is the amount of aggregate
disposable personal income left over after personal spending on
goods and services.6 Personal saving averaged 5.7 percent of GDP in
the 1960s and increased to an average of almost 7 percent over the
1970s and 1980s. Since the early 1990s, however, personal saving
has steadily declined to -0.1 percent of GDP in 2000-the lowest
point in over 65 years.
6NIPA personal saving is measured net of depreciation on fixed
assets owned by unincorporated businesses and owner-occupied
residential dwellings. Because household purchases of residential
dwellings are treated as business investment in NIPA, the
depreciation on these assets is included in gross business
saving.
Page 50 GAO-01-591SP National Saving
1960-1969 1970-1979 1980-1989 1990-1999 1990 1991 1992 1993 1994
1995 1996 1997 1998 1999 2000
State and local surplus/deficita
Net business saving
Net personal savingb
Federal surplus/deficitc
Net national saving
aState and local surpluses in 1990 and 1993 and the deficits in
1992 are less than 0.1 percent of GDP.
bNet personal saving was -0.1 percent in 2000.
cAlthough the NIPA federal surplus or deficit is arithmetically
similar to the federal unified budget surplus or deficit, there are
some conceptual differences. Text box 4.1 describes how the NIPA
and unified budget concepts differ.
Source: GAO analysis of NIPA data from the Bureau of Economic
Analysis, Department of Commerce.
Personal and business saving together make up the nation's
private saving. Business saving reflects the earnings retained by
businesses after paying taxes and dividends. These retained
earnings are available to finance investment. For business saving,
it is important to distinguish between net and gross saving. On a
gross basis, businesses have been the biggest savers in recent
years, accounting for over 70 percent of gross national saving in
2000. However, given that a large portion of business saving is
used to replace capital goods worn out or used in the production
process, business saving net of depreciation is a smaller
share-about 47 percent-of net national saving. As shown in figure
2.2, net business saving has averaged about 3 percent of GDP from
1960 to 2000.
Government saving arises when federal, state, and local
government revenue exceeds current expenditures. Government saving,
also called a surplus, adds to the pool of national saving
available to finance investment and allows a government to reduce
its outstanding debt or purchase nongovernment assets. Conversely,
government dissaving, or a deficit, absorbs funds saved by
households and businesses and reduces overall national saving
available to finance private investments. To finance a deficit, a
government has to borrow or sell assets it owns. State and local
government net saving has been relatively small, ranging from a
surplus of
1.1 percent of GDP in 1973 to a deficit of 0.1 percent in
1991.
The federal government's effect on net national saving has
varied widely over the past 40 years. During most of the 1960s, the
federal government was a net saver. However, the federal government
ran large deficits through much of the 1980s and early 1990s, which
reduced the overall level of national saving in the economy.
Federal deficits averaged 3.4 percent of GDP in the 1980s and
reached 4.7 percent in 1992. In 1992 and 1993, federal deficits
absorbed more than half of private saving. Since 1990, deficit
reduction initiatives and economic growth have reduced federal
dissaving. From 1998 through 2000, the federal government achieved
surpluses, shifting from being a drain on net national saving to
become a contributor to it. These surpluses also allowed the
federal government to reduce its outstanding debt held by the
public.7 Section 4 discusses in more detail how federal fiscal
policy affects national saving.
Despite this recent shift in the federal position, net national
saving as a share of GDP remains well below the average level of
the 1960s largely as a result of the decline in personal saving.
Traditionally, personal saving had been a key source of net
national saving available for new investment. Whereas personal
saving represented one-half to three-quarters of average
7For more information on debt reduction, see Federal Debt:
Answers to Frequently Asked Questions-An Update
(GAO/OCG-99-27, May 28, 1999),Federal Debt: Debt
Management in a Period of Budget Surplus (
GAO/AIMD-99-270, September 29, 1999), andFederal Debt:
Debt Management Actions and Future Challenges
(GAO-01-317, February 28, 2001).
Page 52 GAO-01-591SP National Saving
Q2.3. How Does U.S. National Saving
Compare to Other Major Industrialized Nations?
net national saving in the 1960s and 1970s, personal dissaving
absorbed resources that otherwise would have been available for
private investment in 2000.8
A2.3. Although gross national saving as a share of GDP in the
1990s was low by U.S. historical standards, U.S. saving as a share
of GDP has generally been lower than other major industrialized
countries over the past 40 years. Since the 1960s, U.S. gross
national saving as a share of GDP has ranked sixth among a group of
seven major industrialized countries- the G-7. Interestingly, as
figure 2.3 shows, saving as a share of GDP across all of these
countries has declined since the 1960s.
8When federal dissaving peaked in 1992, personal saving as a
share of GDP was nearly double net national saving as a share of
GDP. In a sense, government dissaving consumed much of the personal
saving, leaving relatively little to finance private
investment.
Page 53 GAO-01-591SP National Saving
Percent of GDP 40
35
30
25
20
15
10
5
0 Japan Italy France Germany Canada United United Kingdom States
1960s
1970s
1980s
1990sa
Note: Because depreciation is measured differently across
countries, international saving comparisons are shown on a gross
saving basis.
aCovers 1990-1997.
Source: GAO analysis of data from Standard & Poor's DRI OECD
National Income Accounts database.
It is not surprising that national saving varies across
countries. The increased output resulting from a given level of
saving and investment depends on the investment choices available
and selected in each country. In addition, national saving may vary
across countries due to differences in the price of capital goods,
income levels, growth rates, economic and social policies,
demographics, and even culture. For example, recent research
suggests that capital goods are relatively cheaper in the United
States than in other countries, which means it takes less saving to
buy a given amount
Q2.4. What Are Other Ways of Defining
Saving and Investment?
of capital goods in the United States than in other developed
countries.9 As noted in section 1, Americans may choose to save
less because they have ready access to credit and have been
confident about the future of the U.S.
10
economy.
As figure 2.3 shows, Japan's gross national saving as a share of
GDP has consistently ranked the highest among the G-7 countries.
Japan's high saving rate has been attributed to several factors
including less access to consumer credit and cultural factors. For
example, Japanese households face greater borrowing constraints
than households in the United States and must save a great deal to
purchase a home. In addition, the Japanese are considered to be
more risk-averse and forward-looking than American
11
consumers.
A2.4. In the context of long-term economic growth, the NIPA
saving definition is traditionally used to describe resources
available to sustain and expand the nation's capital stock. Since
its creation in the 1930s, NIPA definitions and measurement have
evolved to better portray the changing
U.S.
economy. NIPA historically recognized tangible
investments and considered other spending to be consumption.12
However, software-a form of intangible capital-has played an
increasingly important role in the
U.S.
economy. Recognizing that software, like other investment
goods, provides a flow of services that lasts more than one year,
NIPA now counts
9Milka S. Kirova and Robert E. Lipsey, "Measuring Real
Investment: Trends in the United States and International
Comparisons," Federal Reserve Bank of St. Louis Review
(January/February 1998), p. 6.
10Norman Loayza, Klaus Schmidt-Hebbel, and Luis Serven, "What
Drives Private Saving Across the World?" Review of Economics and
Statistics (May 2000) and N. Gregory Mankiw, Macroeconomics, 4th
edition (2000), p. 450.
11N. Gregory Mankiw, Macroeconomics (2000), p. 450, and Fumio
Hayashi, "Why Is Japan's Saving Rate So Apparently High?" NBER
Macroeconomics Annual 1986, pp. 147-210.
12NIPA had already recognized mineral exploration as investment,
and in 1996, NIPA reclassified government purchases of plant and
equipment as investment.
software as investment.13 Because saving equals investment in
the economy-a national income accounting identity-reclassifying
software as investment not only raised the measure of investment
but also raised the measure of gross saving and of the nation's
total output.
Although NIPA measurement has evolved, the nation's human
capital and knowledge-also forms of intangible capital-are not part
of the NIPA definitions of investment and saving. This means that,
under NIPA, business computer purchases count as saving and
investment, but spending to train workers to use the new computers
counts as current consumption rather than investment. Many
economists agree that spending both on education and on general
research and development (R&D) enhances future economic
capacity and, conceptually, should be considered investment.
Nonetheless, broadening the NIPA investment definition to include
education and R&D would be difficult because there is no
consensus on which expenditures should be included or how to
measure the depreciation and contribution to output of intangible
capital. Although counting education and R&D as investment
would raise the measured level of investment, this broader measure
of investment has also experienced a downward trend. Federal
Reserve researchers estimated that, as of the early 1990s, U.S.
investment including education and R&D had declined as a share
of GDP since the 1970s.14
A more controversial measure of personal saving would include
changes in the value of existing assets.15 Since NIPA focuses on
the current production of goods and services and on the income
arising from that production, NIPA income and saving do not reflect
changes in the value of existing tangible and financial assets,
such as land, stocks, or bonds. As discussed
13This change was among those made in the 11th comprehensive
revision of the national accounts in 1999. For more information on
the recent NIPA definitional and classificational changes, see
Brent R. Moulton, Robert P. Parker, and Eugene P. Seskin, "A
Preview of the 1999 Comprehensive Revision of the National Income
and Product Accounts," Survey of Current Business, Bureau of
Economic Analysis, Vol. 79, No. 8 (August 1999), pp. 7-20.
14Milka S. Kirova and Robert E. Lipsey, "Does the United States
Invest 'Too Little'?" Federal Reserve Bank of St. Louis, Research
Division Working Papers 97-020A (November 1997).
15Whether changes in the market value of existing assets should
be counted as saving is beyond the scope of this report. For a
review of the literature, see William G. Gale and John Sabelhaus,
"Perspectives on the Household Saving Rate," Brookings Papers on
Economic Activity (1:1999), pp. 181-224.
in section 1, economists generally agree that wealth-based
measures that reflect changes in the value of existing assets are
useful for gauging individual households' finances and retirement
preparations. However, it is uncertain whether wealth-based
measures are reliable for gauging the growth in the nation's
capital stock and whether revaluation of existing assets should
count as saving for society as a whole. Some portion of the change
in the market value of existing assets may reflect increased
productive capacity and thus could represent income and saving, but
it is difficult to isolate that portion.16 Most gains and losses
from transferring assets within and between sectors "wash out" at
the national level and may not represent newly available resources
for the economy as a whole.17 For example, when one household sells
an appreciated asset to another household, any gain realized may be
used to finance the seller's consumption, but the transaction does
not increase the nation's income or output. Moreover, the market
value of financial assets is often volatile and may not reflect a
real, permanent change in the productive potential of the
underlying capital assets. Lastly, some of the increased market
value of households' stock holdings may stem from the use of
businesses' retained earnings for investment, which is already
reflected in NIPA saving and investment.
16An asset's market value can change as a result of changes in
tax treatment; investors' perceptions of risk; taste; or
households' expectations of future economic capacity arising from,
for example, the introduction of new technology. Only the last
source, however, may relate to the asset's productive capacity.
17However, gains and losses arising from sale of assets to
foreigners do not "wash out" and could affect national consumption
and investment.
Page 57 GAO-01-591SP National Saving
Section 3
National Saving and the Economy
Q3.1. How Does National Saving Contribute
to Investment and Ultimately Economic Growth?
A3.1. National saving provides the resources for a nation to
invest domestically and abroad. Domestic investment in new
factories and equipment can boost productivity of the nation's
workforce. Increased worker productivity, in turn, leads to higher
real wages and greater economic growth over the long term. U.S.
investment abroad does not add to the domestic capital stock used
by U.S. workers to produce goods and services. U.S. investment
abroad does increase the nation's wealth and will generate income
adding to U.S. GNP. When national saving is lower than domestic
investment, a nation can borrow from foreign savers to make up the
difference.1 The resulting increase in domestic capital would
enhance worker's productivity and wages, but the payments to
foreign lenders flow abroad. In general, saving today increases a
nation's capacity to produce more goods and services and generate
higher income in the future. Increased economic capacity and rising
incomes will be crucial as the population ages because a relatively
smaller workforce will bear the burden of financing Social Security
and Medicare while also seeking to maintain its own standard of
living.
Saving entails a tradeoff because it requires consuming less now
in exchange for consuming more later. While those who sacrifice to
save now can themselves enjoy higher consumption in the future,
some of the resulting increase in the nation's capital stock and
the related income will also benefit future generations. Thus,
current saving and investment decisions have profound implications
for the level of wellbeing in the future, and current generations
are in a sense stewards of the economy on behalf of future
generations.
Figure 3.1 is a flow chart illustrating saving's central role in
providing resources to invest in the capital needed to produce the
nation's goods and services. In this simplified depiction of the
production process, capital and labor are the basic inputs used to
produce goods and services. The resources used for domestic
investment come from saving by households, businesses, and all
levels of government. In addition, a nation can invest more in
domestic capital than it saves by borrowing from other
countries.
1When foreign investment in a nation exceeds that nation's
investment abroad, the nation's net foreign investment will be
negative. Q3.3 discusses the extent to which the United States has
supplemented its saving and investment by borrowing from
abroad.
Page 58 GAO-01-591SP National Saving
The amount of goods and services produced depends not only on
the amount of capital and labor but also on how efficiently these
inputs are used. This is called total factor productivity. Total
factor productivity is the portion of output not explained by the
use of capital and labor and is generally associated with the level
of technology and managerial efficiency.2 Education, training, and
R&D also can potentially increase output; in this simplified
flow chart, these would influence total factor
2The Bureau of Labor Statistics (BLS) publishes an official
measure of output per unit of combined labor and capital
inputs-multifactor productivity. BLS' measure of labor input not
only takes into account changes in the size of the labor force, but
also changes in its composition as measured by education and work
experience. Capital inputs are measured in terms of efficiency or
service flow rather than price or value. For more information on
multifactor productivity, see "Productivity Measure: Business
Sector and Major Subsectors," BLS Handbook of Methods, Bureau of
Labor Statistics (April 1997), pp. 89-98; and Edwin R. Dean and
Michael J. Harper, "The BLS Productivity Measurement Program,"
Bureau of Labor Statistics (July 5, 2000), paper presented to the
NBER Conference on Research in Income and Wealth on New Directions
in Productivity Analysis, March 20-21, 1998.
productivity. A nation's total output of goods and services, or
its GDP, is a function of the hours worked, the capital stock, and
total factor productivity. Adding the net income payments received
from the rest of the world (which can be negative) to GDP yields
the gross national income, or GNP. A portion of the nation's
income, in turn, is saved, allowing for additional investment in
domestic factories, equipment, and other forms of capital that
workers use to produce more goods and services or for investment
abroad.
Investment in the capital stock is a principal source of growth
in labor productivity, or output per hour worked.3 Through its
influence on real wages, labor productivity is the fundamental
determinant of a nation's standard of living. Minimum levels of
investment in a nation's physical and human capital are crucial
just to maintain labor productivity and living standards. Equipment
that wears out must be replaced; younger workers entering the labor
force need to be trained in skills to replace older workers as they
retire. Even as the population ages, the U.S. labor force itself
will continue growing-although slowly, with annual growth in
aggregate hours worked averaging about 0.1 percent after 20204-and
the demand for capital goods is likely to increase. Not only must
capital goods be replaced as they depreciate, but new generations
of workers must be comparably
3According to neoclassical growth theory, the rate of growth of
labor productivity depends on the growth rate in the capital-labor
ratio, weighted by capital's share and the growth rate of total
factor productivity. See Robert M. Solow, "Technical Change in the
Aggregate Production Function," Review of Economics and Statistics,
Vol. 39, No. 3 (1957), cited in Dean and Harper (1998), p. 7.
4The labor force projection reflects the OASDI Trustees' 2001
intermediate assumptions, including those for fertility,
immigration, and labor force participation.
trained and equipped (capital widening).5 Otherwise, output per
worker and living standards may fall.
Beyond the minimum level of investment needed to maintain the
capital stock, additional investment to expand the capital stock is
an important way to increase labor productivity, and thus future
living standards. With the retired population projected to swell
after 2010, investment in new capital is an important way to raise
the productivity of the slowly growing labor force. Investment
boosts labor productivity because workers can produce more per hour
when they have more and better equipment and better skills (capital
deepening). The essence of this point can be illustrated with a
simple example. Consider the transformation of ditch-digging from a
relatively slow and somewhat imprecise process involving several
ordinary shovels, much labor effort, and low skill levels to a
faster and more precise process often involving a single power
digger controlled by a skilled operator. The elements of this
example, repeated across millions of individual tasks, encapsulates
the difference between an advanced industrial economy with a high
standard of living and a less developed country with a low standard
of living.
Growth in output per worker also depends on total factor
productivity growth. A higher rate of technological change and
improved efficiency in using labor and capital can boost GDP and
thus future living standards. Even if there were no net
investment-that is, if gross investment were only enough to replace
depreciated capital-the economy could grow to some extent because
the new capital tends to embody improved technology. However, there
is no agreement on how to raise total factor productivity. Spending
on education and R&D is thought to help because
5While the aging of the population is a commonly voiced argument
for raising national saving, some analysts maintain that the
projected decline in labor force growth will increase the
capital-labor ratio and reduce the return to capital while raising
the productivity of labor. They conclude that, under some
circumstances, saving should actually decline slightly in response
to population aging. Other analysts point out, however, that if the
economy is operating below the optimal saving rate, saving can rise
without overly depressing market rates of return and, therefore,
provide significant improvement to future incomes. In addition,
saving can be invested abroad without lowering the global rate of
return. See Douglas W. Elmendorf and Louise M. Sheiner, "Should
America Save for its Old Age? Fiscal Policy, Population Aging, and
National Saving," Journal of Economic Perspectives, Vol. 14, No. 3,
Summer 2000, pp. 57-74; and Barry Bosworth and Gary Burtless,
"Social Security Reform in a Global Context," in Social Security
Reform Conference Proceedings: Links to Saving, Investment, and
Growth, Steven A. Sass and Robert K. Triest, eds., Federal Reserve
Bank of Boston, Conference Series No. 41, June 1997, pp.
243274.
Q3.2. Has the Relatively Low National
Saving Rate Affected Investment and Economic Growth? What Factors
Have Fostered Economic Growth in Recent Years?
education and training enhance the knowledge and skills of a
nation's work force-the nation's human capital-and R&D can spur
technological improvement. A legal and institutional environment
that facilitates the development and enforcement of contracts and
discourages crime and corruption may also contribute to economic
growth. Thus, economic growth depends not only on the amount of
saving and investment but also on an educated work force, an
expanding base of knowledge, a continuing infusion of innovations,
and a sound legal and institutional environment.
A3.2. Although national saving as a share of GDP remains below
the 1960s average, annual GDP growth in recent years reached levels
similar to the 1960s average of 4.2 percent. After slowing to 3.2
percent over the 1970s and 1980s and further to only 2.4 percent in
the early 1990s, annual GDP growth accelerated to an average of 4.3
percent from 1995 to 2000. This higher growth stemmed, in part,
from the rebound in national saving that was largely attributable
to federal deficit reduction. The U.S. was also able to borrow from
abroad to help finance domestic investment, as discussed further
below. In addition, two domestic investment trends helped promote
growth in GDP and living standards: (1) the price of investment
goods declined relative to other goods and (2) investment in
high-yielding information technology has risen rapidly. Thus, even
though saving as a share of the economy has been low by historical
standards, economic growth has been high because more and better
investments were made.
A dollar of saving buys more investment goods now than in the
past because the price of investment goods has decreased relative
to other goods in recent years. From 1995 to 2000, the price index
for nonresidential investment goods declined 0.9 percent per year
on average, while overall prices as measured by the GDP price index
rose, albeit at a modest annual rate of 1.8 percent. The major
source of the overall decline in investment-good prices was the
over 22 percent average annual decline in the price of computers
and peripheral equipment since 1995. In other words, in each
succeeding year, a dollar spent on computers purchased 22 percent
more computing power on average than it did the previous year.6
6See J. Steven Landefeld and Bruce T. Grimm, "A Note on the
Impact of Hedonics and Computers on Real GDP," Survey of Current
Business, Bureau of Economic Analysis, Vol. 80, No. 12 (December
2000), pp. 17-22.
Page 62 GAO-01-591SP National Saving
Not only has each dollar of saving bought more investment goods
in recent years, but a greater share of that dollar was invested in
information technology, including computers, software, and
communications equipment. From 1990 to 2000, the share of business
fixed investment devoted to information equipment and software rose
from less than 28 percent to 39 percent.
The increasing share of investment going to information
processing equipment and software helped boost overall economic
growth over the 1990s because information technology has appeared
to be highly productive in recent years. This is true even though
rapid depreciation and obsolescence characterize information
technology. For example, computers and related equipment have an
estimated annual depreciation rate of 31 percent,7 and new versions
of software applications are released every few years. Hence, for
investment in information technology to be profitable, its gross
rate of return must be quite high. Its high rate of return combined
with its increasing share of total investment meant that
information technology has been a major contributor to the rapid
economic growth since 1995. Indeed, recent economic research
suggests that investment in information technology explains most of
the acceleration in labor productivity growth-a major component of
overall economic growth-since 1995.8 From 1995 to 2000, labor
productivity growth averaged 2.8 percent per year compared to 1.6
percent from 1970 to 1995 and 2.9 percent during the 1960s.9
7Fixed Reproducible Tangible Wealth in the United States,
1925-94, Bureau of Economic Analysis (August 1999), p. M-29.
8Stephen D. Oliner and Daniel E. Sichel, "The Resurgence of
Growth in the Late 1990s: Is Information Technology the Story?"
Journal of Economic Perspectives, Vol. 14, No. 4 (Fall 2000), pp.
3-22; and Robert J. Gordon, "Does the 'New Economy' Measure Up to
the Great Inventions of the Past," Journal of Economic
Perspectives, Vol. 14, No. 4 (Fall 2000), pp. 49−74.
9Because of difficulties in measuring productivity of farms and
nonmarket activities, the most widely used measure of labor
productivity growth is the rate of increase in nonfarm business
sector output per hour worked.
Economic research suggests investment in information technology
also may have led to faster growth in total factor productivity
since 1995.10 As noted earlier, total factor productivity growth
reflects technological change and new and better ways of organizing
production. Firms producing computers and semiconductors have
achieved substantial operating efficiencies and high rates of
return on capital investments in recent years, despite a large
expansion in their capital stock. These high rates of return seem
to contradict economists' general expectations that increasing the
supply of capital reduces its return and thus seems to indicate a
rise in total factor productivity. Although total factor
productivity growth appears to have risen, the pace of growth may
decelerate. Technological advances generally come in waves that
crest and eventually subside.
Abundant saving alone does not always generate robust growth
because the saving must also be invested well. Japan's economy over
the 1990s demonstrated that high saving can coincide with economic
stagnation. Among the reasons offered for Japan's lengthy slowdown
is poor investment choices due in part to its less developed
financial markets in which savers had fewer options and were left
with low returns. Also, the government's role both in investing in
physical infrastructure and in allocating capital to industrial
borrowers at preferential rates also resulted in many low-yielding
investments. Finally, with its high postwar investment levels,
Japan's production processes became more capital intensive compared
to most other advanced nations. With this greater capital
intensity, diminishing returns to capital have reduced the return
on investment in Japan over the years.11
10However, some economists are concerned that the acceleration
may be concentrated in durable manufacturing rather than widely
disseminated throughout the economy. See Robert J. Gordon, "Does
the 'New Economy' Measure Up to the Great Inventions of the Past,"
Journal of Economic Perspectives, Vol. 14, No. 4 (Fall 2000), pp.
49-74.
11Arthur J. Alexander, "Japan's Economy in the 20th Century,"
Japan Economic Institute Report, No. 3 (January 21, 2000), p.
3.
Page 64 GAO-01-591SP National Saving
Q3.3. To What Extent Has the United States
Supplemented Its Saving and Investment by Borrowing Saving From
Abroad? How Does Such Borrowing Affect the Economy?
A3.3. An economy that is not open to international trade and
investment must rely solely on its own saving to provide the
resources to invest in plant, equipment, and other forms of
capital. In contrast, citizens, companies, and governments in an
open economy such as the United States can finance the gap between
domestic investment and national saving with foreign investment in
the United States. In essence, the U.S. economy can borrow the
saving of other countries to finance more investment than U.S.
national saving would permit. Figure 3.2 shows the difference
between domestic investment and national saving, which is defined
in the NIPA as net foreign investment. Over most of the 1980s and
1990s, the U.S. was able to invest more than it saved by attracting
financing from abroad. This means that the United States has been a
net borrower of saving from other nations.
12In practice, measurement errors create some divergence between
these balances. For a more detailed discussion of the current
account balance, see Douglas B. Weinberg, "U.S. International
Transactions, Third Quarter 2000," Survey of Current Business,
Bureau of Economic Analysis, Vol. 81, No. 1 (January 2001), pp.
47-55; Craig Elwell, The U.S. Trade Deficit in 1999: Recent Trends
and Policy Options, Congressional Research Service (May 22, 2000);
and CBO Memorandum: Causes and Consequences of the Trade Deficit:
An Overview, Congressional Budget Office (March 2000).
When the United States runs a trade deficit, foreigners buy less
than a dollar's worth of U.S. goods and services with every dollar
they earn on their exports sold to the United States. They
generally invest those excess dollars in U.S. assets. Their
willingness to acquire U.S. assets -i.e., to lend to the United
States- allows the United States to run trade deficits. In
fact,
U.S.
trade deficits may be as much due to foreigners'
willingness to acquire
U.S.
assets as to the U.S. desire to acquire foreign goods and
services.
While using foreign investors' saving allows U.S. domestic
investment to exceed national saving, these financial inflows have
implications for the nation's economic growth and for future living
standards. This effect 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. This augments future
income, although a portion of the income generated by the
investment will be paid to foreign lenders. However, if the
borrowing from abroad is used to finance consumption, short-term
wellbeing is improved but the ability to repay the borrowing in the
future will not be enhanced. In this respect, U.S. experience in
the 1990s differs from that of the 1980s. Over the 1980s, mounting
federal deficits and the decline in personal saving reduced the
supply of national saving available for investment. Although
borrowing from abroad helped finance additional investment,
consumption rose more than domestic investment during the 1980s. In
contrast, since 1992 there has been an upward trend in U.S.
national saving while domestic investment has surged. Borrowing
from abroad has allowed the United States to overcome its saving
shortfall and take advantage of productive investment
opportunities. The increased investment has contributed to higher
GDP growth in recent years, and the stronger economy should help in
servicing the debt owed to foreigners.
Persistent U.S. current account deficits have translated into a
rising level of indebtedness to other countries. Figure 3.3 shows
the net U.S. ownership of foreign assets-the net international
investment position13-and net income receipts on net U.S. assets
abroad. Prior to 1986, the United States had been a net creditor
because its holdings of foreign assets exceeded foreign holdings of
U.S. assets. The nation first became a net debtor in
13The net international investment position is presented here
with direct investment positions valued at current cost. BEA also
publishes a measure with direct investment positions measured at
market value. See Russell B. Scholl, "The International Investment
Position of the United States at Yearend 1999," Survey of Current
Business, Bureau of Economic Analysis, Vol. 80, No. 7 (July 2000),
pp. 46-56.
Page 67 GAO-01-591SP National Saving
1986. Although foreign asset holdings in the United States have
swelled in recent years, not until 1998 did the United States pay
more in interest, dividends, and other investment returns to other
countries than it received on the assets it held abroad. The lag
reflects the fact that the rate of return on U.S. assets abroad
consistently exceeded the return on foreign-owned assets in the
United States.14 So far, the net payments from the United States to
foreign lenders have been small as a share of GDP, as shown in
figure 3.3.
Figure 3.3: Net U.S. Holdings of Foreign Assets and Net Income
From Abroad (1977-1999) Net assets (billions) Net income (percent
of GDP) 500
2
0
0
-500
-2
-1000
-4
-1500
-6
1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Net holdings of
foreign assets Net income from the rest of the world Source: GAO
analysis of data from the Bureau of Economic Analysis, Department
of Commerce.
14Raymond J. Mataloni, Jr., "An Examination of the Low Rates of
Return of Foreign-Owned
U.S. Companies," Survey of Current Business, Bureau of Economic
Analysis, Vol. 80, No. 3 (March 2000), pp. 55-73.
Page 68 GAO-01-591SP National Saving
Economists and policymakers are concerned about whether the
United States can continue to increase its reliance on foreign
capital inflows. Investors generally try to achieve some balance in
the allocation of their portfolios, and U.S. assets already
represent a significant share of foreign portfolios. Although the
United States accounts for 30 percent of global GDP, it received
two-thirds of the saving exported by countries with current account
surpluses in 1999.15 Given this, it may not be realistic to expect
ever-increasing foreign investment in the United States, as has
been the case in recent years. Net foreign investment in the United
States might even decrease from the recent high rates if foreign
investors find more attractive opportunities elsewhere. Over the
long term, many other nations currently financing investment in the
United States will themselves be confronted with aging populations
and declining national saving. Thus, continuing to rely on foreign
lenders to finance such a large share of U.S. domestic investment
is not a viable strategy over the long run.
If the net inflow of foreign investment were to diminish, the
United States would no longer be able to invest so much more in the
domestic capital stock than it saves. Although a nation can run
current account deficits for extended periods of time, a low level
of national saving implies a low level of domestic investment over
the long run. According to recent empirical research, current
account deficits eventually have been followed by periods of
declining investment.16 Rather than forgo domestic investment
opportunities that would enhance the nation's future standard of
living, the United States could increase national saving. Any
increase in national
15Donald J. Mathieson and Garry J. Schinasi, eds., International
Capital Markets: Developments, Prospects, and Key Policy Issues
(Washington, D.C.: International Monetary Fund, September 2000),
pp. 9-10.
16Giovanni P. Olivei, "The Role of Savings and Investment in
Balancing the Current Account: Some Empirical Evidence from the
United States," New England Economic Review, (July/August, 2000),
pp. 3-14; and Caroline Freund, "Current Account Adjustments in
Industrial Nations," International Finance Discussion Paper No.
2000-692, (Washington, D.C.: Federal Reserve Board of Governors,
December 2000).
Q3.4. What Is the Current Long-Term
Economic Outlook for
U.S. National Saving and Investment? How Would the Long-Term
Economic Outlook Change With Higher Levels of National Saving?
saving that did not finance domestic investment would increase
net foreign investment and improve the current account
balance.17
A3.4. The current long-term economic outlook for U.S. national
saving and investment is subject to wide ranging uncertainty about
economic changes and the responses to those changes. However, one
certainty is that the U.S. population is aging and there will be
fewer workers supporting each retiree. This demographic shift is
expected to cause a decline in economic growth rates when labor
force growth slows after 2010. Moreover, the aging of the
population may exert negative pressure on national saving. As
discussed in section 1, people tend to draw down their assets in
their retirement years. As government spending on health and
retirement programs for the growing elderly population swells,
government saving is also likely to decline. Q4.3 examines the
long-term outlook for federal government saving/dissaving.
To get a sense of the long-term implications of alternative
national saving paths, we examined the economic outlook over the
next 75 years under two different assumptions: (1) gross national
saving remains constant at its 2000 share of GDP-18.3 percent-and
(2) gross national saving varies depending on how much the federal
government saves.18 One possible fiscal policy, which we used in
our simulation, would be for the federal government to save only
the Social Security surpluses and to spend the non−Social Security
surpluses projected over the first 10 years on some mix of
permanent tax cuts and spending increases. For simplicity, the Save
the Social Security Surpluses simulation assumes that saving by
households, businesses, and state and local governments remains
constant as a share of
17The current account balance would improve to the extent that
the increase in saving is used to increase net foreign investment
rather than domestic investment. Research suggests that for each
additional dollar of saving, perhaps one-third is used to increase
net foreign investment and two-thirds is used to increase domestic
investment. See Martin Feldstein and Philippe Bacchetta, "National
Saving and International Investment," National Saving and Economic
Performance, D. Bernheim and J. Shoven, eds., (Chicago: University
of Chicago Press, 1991) pp. 201-226.
18Long-term simulations are useful for comparing the potential
outcome of alternative national saving paths within a common
economic framework. Such simulations can illustrate the long-term
economic consequences of saving choices that are made today.
Simulations should not be viewed as forecasts of economic outcomes
50 or 75 years in the future. Rather, they should be seen only as
illustrations of the economic outcomes associated with alternative
saving paths based on common demographic and economic assumptions.
See appendix II for a detailed description of the modeling
methodology.
GDP at 16.1 percent-average nonfederal saving as a share of GDP
since 1998.19 As figure 3.4 shows, gross national saving as a share
of GDP remains fairly steady over the next decade under the Save
the Social Security Surpluses simulation. After 2010, as spending
for health and retirement programs mounts, dissaving by the federal
government begins crowding out other saving, and national saving
begins to decline. By 2024, gross national saving as a share of GDP
drops below the mid 15 percent range experienced during the saving
slump in the early 1990s. By 2042, gross national saving would
plunge below 5 percent-lower than during the Great Depression.
Under the Save the Social Security Surpluses simulation, gross
national saving eventually disappears, and the nation begins
dissaving in 2047.
19The 3-year period coincides with federal surpluses and its use
avoids extending the unusually low nonfederal saving rate of 2000
throughout the simulation period.
Page 71 GAO-01-591SP National Saving
Percent of GDP
1990 2000 2010 2020 2030 2040 2050 2060 2075
Note: Actual historical data shown through 2000; simulated data
thereafter.
aGross nonfederal saving is held constant as a share of GDP at
16.1 percent (the ratio in 1999), and federal saving varies. Data
end when the nation begins to dissave in 2047. bGross national
saving was 18.3 percent of GDP in 2000. (Gross national saving
reached a high of
24.6 percent of GDP in 1942.) cGross national saving reached a
low of 5.3 percent of GDP in 1932.
Source: GAO's March 2001 analysis.
The Save the Social Security Surpluses simulation is not
sustainable, but it is useful for illustrative purposes.
Ultimately, this would be a doomsday scenario for the U.S. economy.
National saving would be inadequate to finance even the investment
necessary to maintain the nation's capital stock. Figure 3.5 shows
that, as the nation's capital stock eroded, future living
standards-measured in terms of GDP per capita-inevitably would
fall. However, before such catastrophic effects, low national
saving would probably result in higher interest rates, rising
inflation, and the increasing reluctance of foreign investors to
lend to a weakening U.S. economy. These more immediate consequences
would force action before national saving plunged to the levels
shown in the simulation. The simulation is not a prediction of what
will happen in the future. Rather, it serves as a warning that the
United States must both save more in the near term and reform
entitlement programs for the elderly to put the budget on a more
sustainable footing for the long term.
Figure 3.5: GDP Per Capita Under Alternative Gross National
Saving Rates (2000- 2075)
Per capita 2000 dollars Double 2035 level by 2070a 140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
2000 2010 2020 2030 2040 2050 2060 2075
aHistorically in the United States, GDP per capita has doubled
on average from one 35-year generation to the next. bGross national
saving is held constant as a share of GDP at 18.3 percent, the
ratio in 2000. cGross nonfederal saving is held constant as a share
of GDP at 16.1 percent (the ratio in 1999). Federal non-Social
Security surpluses are eliminated through 2010, and unified
deficits emerge in 2019. This simulation can be run only through
2056 due to elimination of the capital stock.
Source: GAO's March 2001 analysis.
Figure 3.5 is not solely a warning. It also illustrates how
saving more would improve the long-term economic outlook. Just as
we enjoy a higher living standard today than our grandparents did,
future generations of Americans will reasonably expect to enjoy
rising standards of living. Living standards can be compared in
terms of real GDP per capita, which historically in the United
States has doubled every 35 years.20 In considering future living
standards, doubling every 35 years represents a way to gauge
whether future generations will enjoy an improvement comparable to
that enjoyed by previous generations. Suppose the United States
could maintain gross national saving at its 2000 GDP share of 18.3
percent through some combination of personal, business, and
government saving. This constant saving rate is roughly comparable
to saving the Social Security surpluses over the next decade but is
considerably higher after 2010 (as shown in figure 3.4). As shown
in figure 3.5, GDP per capita under the Constant 2000 National
Saving Rate simulation would fall short of doubling every 35 years.
GDP per capita in 2035 would be nearly double the 2000 level
(falling short by about 8 percent), and by 2070, GDP per capita
would fall almost 13 percent short of doubling the 2035 level. Yet,
the Constant 2000 National Saving Rate simulation yields a vast
improvement in future living standards compared to saving the
Social Security surpluses. Although national saving in 2000 was
relatively low compared to past U.S. experience, maintaining that
level (18.3 percent of GDP) over the long run would not be easy as
the population ages. The Constant 2000 National Saving Rate
simulation is intended only to show how saving more results in
higher economic growth over the long term. It should not be
interpreted as a recommendation about how much the United States
needs to save because saving is not free and there are other ways
in which governments, businesses, and individuals can and will
adjust. For example, as people live longer, rather than save more
to finance more years of retirement, individuals could choose to
work longer and postpone retirement.
Clearly, saving more would improve the nation's long-term
economic outlook-but how much more do we need to save? Establishing
a tradeoff between the consumption of current and future
generations entails value judgments that economic theory alone
cannot provide. Initially, increasing saving and investment adds to
the capital stock and boosts worker productivity and the economy's
rate of growth. In the long run, a larger capital stock also
requires more saving just to replace depreciating capital. After
reaching this long-run equilibrium, increased saving and investment
yields a higher level of GDP per capita but does not boost worker
productivity and economic growth. Permanently boosting the rate of
GDP growth would require ever-increasing relative shares of saving
and
20Since World War II, annual growth in GDP per capita has
averaged roughly 2 percent. Of course, growth was faster during
some periods-the 1950s and 1960s, and the second half of the
1990s-and slower during other periods-the 1970s.
Page 74 GAO-01-591SP National Saving
investment. From a macroeconomic perspective, any increase in
saving up to the "golden rule saving rate" allows a nation to
increase consumption in the long run.21 Below the golden rule rate,
saving and investing more today permits increased consumption.
Saving beyond the golden rule rate is counterproductive and would
reduce consumption not only initially but also in the long-term.
However, the nation's saving rate is unlikely to reach the golden
rule level, much less exceed it. Given the steady decline in the
personal saving rate, it is doubtful that Americans would willingly
reduce consumption so much that the nation would be at risk of
saving too much. Estimates based on our long-term growth model
suggest that the golden rule saving rate for the United States
would be more than 30 percent. These estimates also suggest that
increasing U.S. national saving would not substantially decrease
the return to capital and therefore could provide significant
improvement to future incomes and consumption. Although the golden
rule saving rate can be a useful analytical concept in evaluating a
nation's saving, the golden rule is not the best policy for saving.
Maximizing consumption per capita over the long term may not be
socially optimal if people value current consumption more than
future consumption and discount the future.
Another way to gauge national saving is to estimate how much we
need to save to achieve specific national objectives. In simple
terms, the nation could act like a "target saver." For example, a
key target would be saving enough to afford the nation's costs for
supporting the aging population. Boosting saving and GDP is
unlikely to prevent a rise in the share of GDP devoted to
government spending on the elderly because economic growth also
tends to increase health spending and raise retirement benefits-
although with a lengthy lag for the latter. A more realistic goal
would be to increase saving by an amount that would generate a rise
in future GDP equivalent to the increase in spending on the
elderly. Recent economic research estimated that increasing saving
as a share of GDP by one percentage point above the 1999 rate would
boost GDP enough to cover 95 percent of the increase in elderly
costs between now and 2050.22 This is
21The golden rule saving rate maximizes consumption per capita
over the long run. For a more extensive discussion, see N. Gregory
Mankiw, Macroeconomics, Fourth Edition (New York, N.Y.: Worth
Publishers, 2000), pp. 90-97; or Olivier Blanchard, Macroeconomics,
Second Edition (Upper Saddle River, N.J.: Prentice Hall, 2000), pp.
214-220.
22See Barry Bosworth, "Challenges to Capital Flows," CSIS Policy
Summit on Global Aging, Washington, D.C., January 26, 2000.
Page 75 GAO-01-591SP National Saving
equivalent to increasing national saving to 19.3 percent of GDP
from
18.3 percent used in our Constant 2000 Saving Rate
simulation.
While it is unclear just what the right level of saving is, it
is clear that America needs to begin saving more if it is to avoid
severe problems in the future. Saving now is vital because
expanding the nation's productive capacity through national saving
and investment is a long-term process. While saving the Social
Security surpluses is a laudable fiscal policy goal, Americans need
to save more to ensure their own retirement security as well as the
nation's future prosperity. Increased saving by current generations
would expand the nation's capital stock, allowing future
generations to better afford the nation's retirement costs while
also enjoying higher standards of living.
Section 4
National Saving and the Government
Q4.1. How Has Federal Fiscal Policy
Affected
U.S. National Saving?
A4.1. Federal fiscal policy affects the federal surplus or
deficit which, when measured on a NIPA basis, represents the amount
of federal government saving or dissaving, which in turn directly
affects national saving. Federal deficits subtract from national
saving by absorbing funds saved by households, businesses, and
other levels of government that would otherwise be available for
investment. To finance a budget deficit, the federal government
borrows from the public by issuing debt securities, adding to its
debt held by the public.1 Conversely, federal surpluses, as
measured under NIPA, add to national saving and increase resources
available for investment. When a budget surplus occurs, the federal
government can use excess funds to reduce the debt held by the
public.
Text box 4.1 explains how the NIPA surplus or deficit differs
from the federal unified budget surplus or deficit. While the NIPA
measure reflects how government saving affects national saving
available for investment, the unified budget measure is the more
common frame of reference for discussing federal fiscal policy
issues. Given that the two measures are roughly similar as a share
of GDP, in this section we use the unified budget measure unless
otherwise specified.
1Federal debt held by the public is also called "publicly held
debt" but is not the same as "public debt." Debt held by the public
plus debt held by government accounts, such as budget trust funds,
compose gross federal debt. For more information, see Federal Debt:
Answers to Frequently Asked Questions-An Update (GAO/OCG-99-27, May
1999).
Page 77 GAO-01-591SP National Saving
Text Box 4.1: How do the NIPA and federal unified budget
concepts of federal surpluses and deficits differ?
In 2000, the NIPA federal surplus was 2.2 percent of GDP while
the unified budget surplus was 2.4 percent. Although the two
measures are roughly similar, there are some conceptual
differences. The federal unified budget measure is generally a cash
or cash-equivalent measure in which receipts are recorded when
received and expenditures are recorded when paid regardless of the
accounting period in which the receipts are earned or the costs
incurred. Thus, the unified surplus reflects the difference between
federal receipts and all federal government outlays including those
used to purchase capital goods, such as roads, buildings, and
weapons systems. The NIPA federal budget surplus, however, reflects
the current, or operating, account of the federal government and
does not count purchases of capital goods as current spending.
Instead, NIPA includes a depreciation charge ("consumption of
general government fixed capital") in current spending as a proxy
for the contribution of capital to the output of government
services.
The NIPA and federal unified budget measures also differ in
their treatment of federal employees' pension programs. In the
unified budget, federal employee pension benefits are recorded as
outlays when paid in cash; these outlays are offset, in whole or in
part, by the government's and employees' contributions to the
pension programs. NIPA, on the other hand, counts the government's
contribution to the pension programs as an outlay to the household
sector, where the contribution is added to personal income and
saving. The benefits paid by the pension programs are not counted
as government outlays under NIPA but rather as a drawdown of
accumulated household assets.
Other differences between the unified budget and NIPA measures
arise because NIPA focuses on current income and production within
the United States. For example, NIPA excludes capital transfers,
like estate tax receipts, which are recorded as revenue in the
unified budget, and investment grants-in-aid to state and local
governments, which the unified budget records as outlays. Lastly,
revenue and spending related to Puerto Rico, the Virgin Islands,
and other U.S. territories are counted in the federal unified
budget but not in NIPA.
The unified budget measure is useful in explaining annual
changes in the federal debt held by the public. The NIPA measure is
useful in explaining how government saving has affected net
national saving available for investment. Again, these measures
yield roughly similar estimates of the federal government's budget
position as a share of GDP. In order to provide a consistent frame
of reference for discussing federal fiscal policy issues, this
section refers to the unified budget measure unless otherwise
specified.
Note: For more details, see Laura M. Beall and Sean P. Keehan,
"Federal Budget Estimates, Fiscal Year 2001," Survey of Current
Business, Bureau of Economic Analysis, Vol. 80, No. 3 (March 2000),
pp. 16-25; or Budget of the U.S. Government: Fiscal Year 2001,
Analytical Perspectives, Office of Management and Budget (2000),
pp. 361-365.
From the 1970s through the mid 1990s, federal deficits consumed
a large share of increasingly scarce private saving and reduced the
amount of national saving available for investment.2 Since 1990,
the Congress and the President have taken action to eliminate the
annual federal budget deficit through several initiatives including
the Budget Enforcement Act of 1990, the Omnibus Budget
Reconciliation Act of 1993, and the Balanced Budget Act of 1997. As
noted in section 2, the combination of these policy actions and
strong economic growth reduced federal government dissaving over
the 1990s (see figure 4.1). With the swing to surplus in recent
years, federal government saving added to the saving of other
sectors to increase the amount of national saving available for
investment. Unified budget surpluses since 1998 have been the
longest-running surpluses in over 50 years, and federal budget
surpluses are projected for the next decade. So far, the federal
government has used excess funds to reduce debt held by the public,
paying down $223 billion in fiscal year 2000 alone.3
2See figure 2.2 for the composition of net national saving from
1960 to 2000.
3Federal Debt: Debt Management Actions and Future Challenges
(GAO-01-317, February 28, 2001). As discussed further in text box
4.2, if the projected budget surpluses materialize, the federal
government will reach a point at which the projected surpluses will
exceed the amount of federal debt available to be redeemed.
Page 79 GAO-01-591SP National Saving
Percent of GDP
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Net nonfederal saving
Federal surplus/deficit
Net national saving
Note: The saving of households, businesses, and state and local
governments makes up nonfederal saving. National saving data are on
a NIPA basis. The NIPA federal surplus/deficit measure as a share
of GDP is roughly similar to the unified budget measure.
Source: GAO analysis of NIPA data from the Department of
Commerce, Bureau of Economic Analysis.
Although one might expect an increase in federal saving to lead
to an increase in national saving, changes in federal saving do not
flow through to changes in national saving and investment in a
dollar-for-dollar relationship. Figure 4.1 illustrates that federal
and nonfederal saving, which consist mainly of private saving, tend
to be inversely related. In other words, when federal government
saving increases (smaller deficits or larger surpluses), private
saving may decrease somewhat. When federal saving decreases
(smaller surpluses or larger deficits), private saving may
increase. For example in figure 4.1, although federal government
saving increased as a share of GDP by 5.5 percentage points from
1990 to 2000, net national saving increased by only 1.1 percentage
points because private saving as a share of GDP decreased by 4.9
percentage points over the same period.4
4The total change in net national saving from 1990 to 2000 was
also affected by an increase in state and local government saving
of about 0.6 percentage points.
Page 80 GAO-01-591SP National Saving
Q4.2. Why Do Government and Private Saving
Tend to Move in Opposite Directions?
A4.2. Government and private saving tend to move in opposite
directions for several reasons-three of which are discussed here.
First, federal borrowing can be large enough to affect current
interest rates, which in turn may influence private saving and
investment. Government dissaving absorbs funds available for
private investment and puts upward pressure on interest rates.
Higher interest rates both raise the return on saving and reduce
the market value of existing financial assets issued when rates
were lower.5 The combination of higher returns to saving and
reduced wealth might encourage households and businesses to save
more. Conversely, an increase in government saving adds to the
supply of resources available for investment and may put downward
pressure on interest rates. Lower interest rates both reduce the
return on saving and increase the market value of existing
financial assets issued when rates were higher. Lower returns to
saving and increased wealth might dampen private saving.
Second, if federal budget surpluses are achieved, in part,
through higher taxes, those higher taxes reduce households'
disposable personal income. As discussed in section 1, disposable
personal income is the after-tax personal income (including
government transfer payments) available for households' consumption
and saving. Households may choose to save less of their disposable
income and maintain their current level of consumption especially
if they consider the higher tax payments to be temporary. Reduced
personal saving would tend to offset the increased government
saving due to higher taxes.
Third, some economists believe that government saving has some
effect on households' expectations about future tax rates even
across generations. This Ricardian equivalence hypothesis holds
that people are forward-looking and recognize that current
government surpluses or deficits affect government debt and future
tax rates.6 Thus, when the government runs deficits and accumulates
debt, Ricardian consumers would save more to ensure that they or
their descendants can pay the expected higher future taxes.
Alternatively, when the government runs
5For example, market prices of interest-bearing securities, such
as Treasury securities, fluctuate inversely with market interest
rates. The market price of a Treasury security falls when the
current interest rate on Treasury securities of equal maturity
rises.
6Although this view is named after the 19th century economist
David Ricardo who first explored the possible relationship, the
seminal work on this theory is Robert Barro, "Are Government Bonds
Net Wealth?" Journal of Political Economy, Vol. 82, No. 6 (1974),
pp. 1095-1117.
Q4.3. What Is the Long-Term Outlook for
Federal Government Saving/Dissaving?
surpluses and reduces debt held by the public (as in 1998
through 2000), Ricardian consumers would save less in anticipation
of future tax cuts. If all consumers were fully Ricardian, private
saving would fully offset any change in government saving, and
national saving would be unchanged. Economists continue to debate
how well the Ricardian equivalence theory works in practice. People
may be too shortsighted in their saving decisions to look ahead to
the implications of current government debt on future generations.
When federal budget deficits and debt mounted in the 1980s, private
saving declined-the opposite of what the Ricardian equivalence
hypothesis would suggest. However, in recent years, as figure 4.1
illustrates, private saving-which is the major component of
nonfederal saving-declined as federal saving rose-which is
consistent with the Ricardian equivalence hypothesis.
In summary, it is unclear how much each additional dollar of
government saving will ultimately increase national saving.
Evidence shows that changes in saving by households and businesses
tend to offset some of the changes in government saving. While
economists disagree over the magnitude of the private saving
offset, studies generally suggest it is less than one-for-one. This
means that for each additional dollar of government saving,
aggregate private saving falls by less than a dollar. To what
extent the aggregate offset is due to the changes in interest
rates, wealth, disposable personal income, expectations of future
tax rates, or other reasons is ambiguous. Estimating the private
saving offset is complicated by the fact that individuals may
respond differently to changes in government saving.7
A4.3. While media attention has focused on budget surpluses
projected for the next 10 years, the long-term outlook for federal
government saving has received considerably less attention. The
outlook for government saving over the next 75 years is subject to
wide ranging uncertainty due to economic changes and future
legislation. However, one certainty is that as life expectancy
rises and the baby boom generation retires, the U.S. population
will age, and fewer workers will support each retiree. The
7For example, some households live paycheck-to-paycheck and
might spend all of a tax cut, whereas other households might spend
only a portion; a Ricardian household might save all of a tax cut
in anticipation of future tax increases. For further discussion
about accommodating consumer behavior in modeling fiscal policy,
see N. Gregory Mankiw, "The Saver-Spender Theory of Fiscal Policy,"
NBER Working Paper 7571 (February 2000).
Page 82 GAO-01-591SP National Saving
federal budget will increasingly be driven by demographic
trends. Absent changes to current law, government saving is likely
to decline as government health and retirement programs for the
growing elderly population claim a larger share of federal
resources.
Any fiscal policy path in which some portion of the anticipated
budget surpluses is saved ultimately leads to a stronger fiscal
position than annually balancing the budget in each of the next 10
years. But what does it mean to "save the surplus"? If the surplus
is not spent on government programs or used for tax cuts, it is
"saved." Saving some portion of the projected budget surpluses
would allow the federal government to reduce the overhang of
federal debt built over decades of deficit spending. Using
surpluses to reduce debt held by the public results in lower
interest costs today, all other things being equal, and a lower
debt burden for future generations.8 Within this decade, the
projected surpluses may likely exceed the amount of debt held by
the public available to be redeemed. Text box
4.2 discusses government saving in an environment where reducing
federal debt held by the public is not an option.
8For more information on using surpluses to redeem debt held by
the public, see Federal Debt: Answers to Frequently Asked
Questions-An Update (GAO/OCG-99-27, May 28, 1999), Federal Debt:
Debt Management in a Period of Budget Surplus (GAO/AIMD-99-270,
September 29, 1999), and Federal Debt: Debt Management Actions and
Future Challenges (GAO-01-317, February 28, 2001).
Page 83 GAO-01-591SP National Saving
Text Box 4.2: Government Saving When Reducing Publicly Held
Federal Debt is Not an Option
If the projected budget surpluses materialize, the federal
government will reach the point at which the annual surpluses will
exceed the amount of debt available to be redeemed or that can be
bought back at reasonable prices. Although estimates as to when
this point will be reached vary depending on several assumptions,
most analysts agree that it could occur within the decade;
estimates range from the Congressional Budget Office's (CBO)
January 2001 estimate of 2006 to the Office of Management and
Budget's March 2001 estimate of 2008. This point will occur before
the debt held by the public is eliminated, and the resulting
accumulation of cash will require decisions about what to do with
these cash balances. This raises the question of how the federal
government can save if reducing federal debt held by the public is
not an option.
Just as the flow of personal saving affects the stock of
financial assets accumulated by households, government saving
affects the stock of federal debt. The federal government borrows
from the public to finance a deficit. Conversely, when a budget
surplus occurs, the federal government can use excess funds to
reduce the debt held by the public, accumulate cash balances, or
acquire nonfederal financial assets. Holding cash or nonfederal
financial assets would not reduce debt held by the public but would
reduce the net debt of the federal government. Net debt represents
the federal government's total financial liabilities, including
debt held by the public, less its total financial assets. Positive
amounts of net debt reflect how much of the nation's private wealth
has been absorbed to finance federal deficits. Negative amounts of
net debt reflect how much of the nation's private financial assets
have been acquired by the federal government.
Acquiring nonfederal financial assets could be another way to
translate budget surpluses into resources available for investment.
However, the issue of the federal ownership of nonfederal assets is
controversial. Federal Reserve Chairman Greenspan, among others,
has expressed concern that there would be tremendous political
pressure to steer the federal government's asset selection to
achieve economic, social, or political purposes. Although the
governance issues may not be insurmountable, another possible
concern is that the federal government could become the largest
single investor.
There is a growing body of experience by other governments that
might help policymakers address the question of whether and how the
federal government can or should acquire nonfederal financial
instruments. Investing in the financial markets is a standard
practice for state and local government pension funds in the United
States. Also, other nations have decided that the potential risks
of political interference can be managed and are outweighed by what
those nations perceive as the risk of failing to save for the
future or provide a cushion for contingencies. In the future, we
plan to study how other nations invest in nongovernmental assets to
learn more about how they deal with governance and other issues
Note: The net debt concept is based on the OECD definition of
net financial liabilities that can be calculated by subtracting
financial assets from financial liabilities.
In recent years, the fiscal policy debate has focused on the
importance of saving the Social Security portion of projected
unified budget surpluses. While policymakers appear to have
generally agreed to save Social Security surpluses, there is
considerable debate over whether and how to use the non-Social
Security surpluses. After recent years of fiscal discipline and
focus on fiscal responsibility, the anticipated surpluses offer a
chance to meet pent-up demand for discretionary domestic spending,
increase defense spending, cut taxes, shore up Social Security and
Medicare, reduce the debt, or do some combination of these. How the
surpluses are used has long-term implications for federal
government saving, national saving, and ultimately the nation's
future living standards.9
To get a sense of the long-term implications of broad fiscal
policy choices, we examined the fiscal and economic outlook over
the next 75 years under two alternatives: (1) assuming that the
federal government saves only the Social Security surpluses and (2)
assuming that the federal government saves the entire unified
surpluses.10 For simplicity, these fiscal policy simulations assume
that saving by households, businesses, and state and local
governments remains constant as a share of GDP and that the
surpluses saved are used to reduce debt held by the public.11 Once
debt held by the public is eliminated, these simulations assume
excess cash is used to acquire an unspecified mix of nonfederal
assets with a rate of return equivalent to the average interest
rate on Treasury securities.12
9Federal Budget: The President's Midsession Review
(GAO/OCG-99-29, July 21, 1999).
10Since 1992, GAO has provided the Congress with a long-term
perspective on alternative fiscal policy paths. See Budget Policy:
Prompt Action Necessary to Avert Long-Term Damage to the Economy
(GAO/OCG-92-2, June 5, 1992), The Deficit and the Economy: An
Update of Long-Term Simulations (GAO/AIMD/OCE-95-119, April 26,
1995), Budget Issues: Deficit Reduction and the Long Term
(GAO/T-AIMD-96-66, March 13, 1996), Budget Issues: Analysis of
Long-Term Fiscal Outlook (GAO/AIMD/OCE-98-19, October 22, 1997),
Budget Issues: Long-Term Fiscal Outlook (GAO/T-AIMD/OCE-98-83,
February 25, 1998), Budget Issues: July 2000 Update of GAO's
Long-Term Simulations (GAO/AIMD-00-272R, July 26, 2000), and
Long-Term Budget Issues: Moving From Balancing the Budget to
Balancing Fiscal Risk (GAO-01-385T, February 6, 2001).
11As noted in section 3, simulations are illustrative and do not
represent forecasts. See appendix II for a detailed description of
the long-term modeling methodology.
12Acquiring nonfederal financial assets would reduce the
reported unified surplus or increase the unified deficit because,
under current budget scoring rules, such acquisitions would be
treated as spending.
Saving the Social Security surpluses produces unified budget
surpluses for almost 20 years, as shown in figure 4.2, and
eliminates the debt held by the public by 2015. Under the Save the
Social Security Surpluses simulation, the non-Social Security
surpluses are eliminated by an unspecified mix of permanent tax
cuts and spending increases. Under this scenario, unified budget
deficits emerge again in 2019-just as the Social Security and
Medicare programs are being strained by the retiring baby boom
generation. As discussed in section 3, the large deficits and debt
under this simulation imply a substantial reduction in national
saving and investment in the capital stock leading to a decline in
living standards-in terms of GDP per capita. Although policymakers
would likely act to reduce the budget deficits and to promote
higher national saving before facing the economic doomsday implied
under the Save the Social Security Surpluses simulation, this
scenario serves as a reminder to be cautious in committing
surpluses to large permanent tax cuts and spending increases.
Percent of GDP
2000 2010 2020 2030 2040 2050 2060 2075
aData end when deficits reach 20 percent of GDP.
Source: GAO's March 2001 analysis.
Figure 4.2 also shows an alternative fiscal policy path assuming
the federal government saves all of the projected unified
surpluses. Under the Save the Unified Surpluses simulation, federal
budget surpluses would be higher over the next 40 years, but
deficits would emerge in the 2040s. Although the
Q4.4. How Does Saving Affect Future
Budgetary Flexibility?
government would have to borrow again from the public to finance
deficits over the long run, the simulation implies that, absent
policy or economic change, debt held by the public could be fully
eliminated before the end of the decade.13 Just as the Save the
Social Security Surpluses simulation is an implausible doomsday
scenario, the Save the Unified Surpluses simulation can also be
viewed as implausible. Under this simulation, annual federal
surpluses, which peak at 5 percent of GDP, would last longer than
ever before in the nation's history and the government would hold
nonfederal financial assets for over 50 years.
A4.4. Government saving directly affects future budgetary
flexibility through its effect on interest payment spending. In the
past, interest payments contributed to deficits and helped fuel a
rising debt burden. Rising debt, in turn, raised interest costs to
the budget, and the federal government increased debt held by the
public to finance these interest payments. A change from a budget
deficit to a surplus reduces federal debt and replaces this
"vicious cycle" with a "virtuous cycle" in which saving some
portion of the budget surpluses results in lower debt levels. Lower
debt levels lead to lower interest payments-possibly at lower
interest rates. These lower interest payments in turn lead to
larger potential surpluses and/or increased budget flexibility.
Figure 4.3 shows the long-term implications for budgetary
flexibility of saving the Social Security surpluses. Again, this
simulation assumes that nonfederal saving remains constant as a
share of GDP at 16.1 percent, the average nonfederal saving rate
since 1998. Absent program changes, saving the Social Security
surpluses-and even the Medicare surpluses14-is not enough by itself
to finance the retirement and health programs for the elderly. As
figure 4.3 shows, saving only the Social Security surpluses will
not be sufficient to accommodate both the projected growth in
Social Security and health entitlements and other national
priorities in the long term. These programs will eventually squeeze
out most or all other spending. By 2030, saving the Social Security
surpluses results in a
13Although estimates as to when this point will be reached vary
depending on several assumptions, most analysts agree that it could
occur within the decade; see Federal Debt: Debt Management Actions
and Future Challenges (GAO-01-317, February 28, 2001).
14Budget Issues: July 2000 Update of GAO's Long-Term Fiscal
Simulations (GAO/AIMD-00-272R, July 26, 2000).
Page 87 GAO-01-591SP National Saving
"haircut" for spending on programs other than Social Security,
Medicare, and Medicaid. In other words, there is increasingly less
room for other federal spending priorities such as national
defense, law enforcement, and federal investment in infrastructure,
education, and R&D.15 Absent changes in the structure of Social
Security and Medicare, some time during the 2040s, government would
do little but mail checks to the elderly and their health care
providers. Budget flexibility declines drastically so that by 2050,
net interest on the debt would absorb roughly half of all federal
revenue. Furthermore, Social Security and health spending alone
would exceed total federal revenue.
15These fiscal policy simulations do not reflect other federal
commitments and responsibilities not fully recognized in the
federal budget, including the costs of federal insurance programs,
clean-up costs from federal operations resulting in hazardous
wastes, and the demand for new investment to modernize
deteriorating or obsolete physical infrastructure (e.g.,
transportation systems, and sewage and water treatment plants).
Page 88 GAO-01-591SP National Saving
Figure 4.3: Composition of Federal Spending as a Share of GDP
Under the Save the Social Security Surpluses Simulation Percent of
GDP
2000 2030 2050
All other spending Medicare and Medicaid Social Security Net
interest
Note: Revenue as a share of GDP declines from its 2000 level of
20.6 percent as a result of unspecified permanent policy actions.
In this display, policy changes are allocated equally between
revenue reductions and spending increases. The Save the Social
Security Surpluses simulation can only be run through 2056 due to
the elimination of the capital stock.
Source: GAO's March 2001 analysis.
Over the long-term, meaningful Social Security and Medicare
reform will be necessary to avert massive government dissaving,
reduce the economic burden of government spending for an aging
population, and restore budgetary flexibility to address other
national priorities. Q4.10 and Q4.12 discuss the need for Social
Security and Medicare reform more fully.
Just as saving more of the anticipated budget surpluses would
enhance future budgetary flexibility, increasing private saving
would also improve the federal government's budget outlook. As
discussed in section 3, increasing national saving boosts
investment and economic growth. Because the U.S. economy is
essentially the tax base for the federal government, economic
growth in turn increases government revenue. Increased economic
growth, thus, could provide the resources to help
Q4.5. What are the Implications of Current
Fiscal Policy Choices for Future Living Standards?
finance the retirement and health programs for the elderly as
well as increase budget flexibility to pay for other federal
programs and activities.
A4.5. Fiscal policy choices about how much of the surpluses to
save affect not only the level of government saving but ultimately
the nation's longterm economic outlook. Saving the Social Security
surpluses would allow Americans to enjoy higher standards of living
in the future, as figure 4.4 shows. However, under the Save the
Social Security Surpluses simulation, GDP per capita growth slows
and eventually turns negative. Even if the entire unified surplus
were saved, GDP per capita would fall somewhat short of the U.S.
historical average of doubling every 35 years. The implication of
such simulations is that even if government saving is sustained at
unprecedented levels, future generations of workers might not enjoy
a rise in living standards comparable to that enjoyed by previous
generations. Thus, saving Social Security surpluses is not enough
to ensure retirement security for the aging population without
placing a heavy burden on future generations. Q4.10 and Q4.12
discuss how Social Security and Medicare reform might affect
national saving.
Figure 4.4: GDP Per Capita Under Alternative Fiscal Policy
Simulations (1960-2075)
Per capita 2000 dollars Double 2035 level by 2070 140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2075
Note: The Save the Social Security Surpluses simulation can only
be run through 2056 due to the elimination of the capital
stock.
Source: GAO's March 2001 analysis.
It is tempting to push aside gloomy simulation results and to
discount the significance of fiscal constraints several decades in
the future, but recent good news about the budget does not mean
that difficult budget choices are a thing of the past. The history
of budget forecasts should be a reminder not to be complacent about
the certainty that large surpluses will materialize over the next
10 years as projected. Not so long ago the forecasts were for
"deficits as far as the eye can see." Budget projections are
inherently uncertain and even a small change in one assumption can
lead to very large changes in the fiscal outlook over a decade.
The Congressional Budget Office (CBO) describes its projections
as more tentative than usual because the increase in CBO's
productivity growth assumption is based on data only for the past
few years.16 According to CBO, that limited time span is
insufficient to determine whether the rate of
16For more information about potential sources of uncertainty in
CBO's projections, see "The Uncertainties of Budget Projections,"
Chapter 5, The Budget and Economic Outlook: Fiscal Years 2002-2011,
Congressional Budget Office (January 2001), pp. 93-103.
Page 91 GAO-01-591SP National Saving
productivity growth has indeed accelerated or has just
temporarily deviated from underlying historical trends as it has
many times in the past.17 Some observers have declared that the
U.S. economy has entered a new era of more rapid economic growth,
and it is possible that future growth could be even more robust
than CBO's baseline economic projections assume. However, CBO has
pointed out that the recent burst in productivity may prove
temporary if the "new economy" turns out to be just a flash in the
pan.
In addition to the greater-than-usual uncertainty about
productivity growth, it is too soon to tell whether recent boosts
in federal revenue reflect a structural change in the economy or a
more temporary divergence from historical trends. CBO has pointed
out that simply assuming a return to historical trends and slightly
faster growth in health care spending would dramatically reduce the
surpluses projected. Given these uncertainties, lower unified
surpluses and even deficits are possible budget outcomes over the
next decade.
Caution is warranted before committing the anticipated surpluses
to permanent changes on either the revenue or spending side.
Although policymakers appear to have generally agreed to save
Social Security surpluses, there is considerable debate over
whether and how to use the rest of the projected surpluses. Yet,
the amounts available for new tax or spending initiatives may be
considerably less than policymakers and the public anticipate.18
CBO's budget projections are intended to provide estimates of
federal spending and revenue assuming current law related to
taxation and entitlement programs is unchanged. For this reason,
CBO's projections do not reflect the full cost of maintaining
current policies if maintaining those policies would require
enacting new legislation. For example, the budget projections do
not reflect the costs of laws that are regularly extended for a few
years at a time, such as continuing payments to farmers that have
been provided for the last three years or extending tax credits due
to expire. The projections also do not reflect the expected
17See Congressional Budget Office, The Budget and Economic
Outlook: An Update (July 2000), pp. 34-35.
18"How Much of the New CBO Surplus Is Available for Tax and
Program Initiatives," Center on Budget and Policy Priorities (July
18, 2000); and James Horney and Robert Greenstein, "How Much of the
Enlarged Surplus Is Available for Tax and Program Initiatives?
Available Funds Should Be Devoted to Real National Priorities,"
Center on Budget and Policy Priorities (July 7, 2000).
Q4.6. How Does Government Investment
Affect National Saving and Economic Growth?
enactment of a law to alleviate the Alternative Minimum Tax for
middleincome taxpayers. Moreover, CBO's inflated baseline assumes
that discretionary spending-which is controlled through annual
appropriations-will grow after 2002 at the rate of inflation.
However, discretionary spending historically has grown faster than
the rate of inflation.
A4.6. Not only does government saving directly affect national
saving available for private investment, but the federal government
also is a key contributor to the nation's capital stock and
productivity through its own investment spending.19 For example,
the federal government invests in building roads, training workers,
and conducting scientific research. Although unified budget
surpluses increase national saving available for private
investment, increasing federal spending on infrastructure, if
properly designed and administered, can be another way to increase
national saving and investment. Federal spending on education and
R&D- while it does not count as NIPA investment-can, if
properly designed and administered, also promote the nation's
long-term productivity and economic growth. GAO has reported that
well-chosen federal spending for infrastructure, education, and
R&D that is directly intended to enhance the private sector's
long-term productivity can be viewed as federal investment.20
However, CBO has questioned whether increasing federal investment
spending could significantly increase economic growth.21
A sound public infrastructure plays a vital role in the nation's
capacity to produce goods and services in the future. Public
facilities, such as transportation systems and water supplies, are
vital to meeting the
19Fiscal policy choices affect not only how much the government
saves and invests but also affect how businesses and households
save and invest. Q4.7 discusses federal policies aimed at
encouraging private saving.
20For more information about defining federal investment for
long-term economic growth, see Budget Issues: Choosing Public
Investment Programs (GAO/AIMD-93-25, July 23, 1993) and related GAO
products listed in appendix V.
21CBO concluded that increased federal spending on investment in
infrastructure, education and training, and R&D was unlikely to
increase economic growth and could possibly reduce growth.
According to CBO, many federal investments have little net economic
benefit- either because they are selected for political or other
noneconomic reasons or because they displace more productive
private-sector or state and local investments. See The Economic
Effects of Federal Spending on Infrastructure and Other
Investments, Congressional Budget Office (June 1998).
immediate as well as long-term public demands for safety,
health, and improved quality of life. While most infrastructure
spending takes place at the state, local, or private-sector level,
the federal government also invests in infrastructure such as
highways, bridges, and air traffic control.22 As federal unified
deficits declined over the 1990s, federal investment in nondefense
physical assets remained relatively constant as a share of GDP.
Federal spending on education and nondefense R&D, which is
intended to enhance the nation's long-term productivity, also
remained relatively constant as a share of GDP over the 1990s.
At some point, reducing federal unified deficits or maintaining
unified surpluses at the expense of federal R&D and education
spending raises concerns about future workers' skills,
technological advancement, and, thus, economic growth. R&D and
education have long been seen as areas for government activity
given the private sector's inability to capture all of the societal
benefits that such investments provide. The federal government has
played a central role in supporting R&D and thus enhancing the
nation's long-term productivity. One rationale for this has been
that the societal gains from R&D, for example, are often not
felt until far in the future and so might not provide much profit
for an individual firm. The Internet, computers, communications
satellites, jet aircraft, and semiconductors are all examples of
benefits from federal R&D investments over the past 50 years.
Federal R&D investment spending on genetic medicine and
biotechnology has helped lead to the mapping of human genes.
Although the Human Genome Project has been hailed as "the most
important, most wondrous map ever produced by humankind," its full
societal benefits will not be seen for years to come.23
Fiscal policy choices about the allocation of government
spending between consumption and investment are influenced in part
by the federal budget process. The federal government's cash-based
budget process is largely a short-term plan focusing on the short-
to medium-term cash implications of government obligations and
fiscal decisions. The budget seeks to serve
22For more on the federal government's role in infrastructure
investment, see U.S. Infrastructure: Funding Trends and
Opportunities to Improve Investment Decisions
(GAO/RCED/AIMD-00-35, February 7, 2000).
23"Remarks by the President, Prime Minister Tony Blair of
England (Via Satellite), Dr. Francis Collins, Director of the
National Human Genome Research Institute, and Dr. Craig Venter,
President and Chief Scientific Officer, Celera Genomics
Corporation, on the Completion of the First Survey of the Entire
Human Genome Project," The White House, Office of the Press
Secretary (June 26, 2000).
Q4.7. What Policies of the Federal
Government Have Been Aimed at Encouraging Nonfederal Saving and
Investment?
many purposes, but one of its primary functions is to control
obligations up-front before the government commitment is made. As a
result, the budget process tends to view a dollar spent on
consumption the same as a dollar spent on investment because both
represent commitments by the government and represent resources
taken out of the private sector for use by the government. Some
have argued that the budget may actually favor short-term
consumption because the cost of both must be scored up-front as
part of the Budget Enforcement Act process even though most of the
benefits from investment programs accrue in the future.24 In the
past, GAO has suggested that the budget could better facilitate
policymakers' weighing choices between federal investment and
consumption by incorporating an investment component with
agreed-upon levels of investment spending. This could promote the
consideration of spending intended to benefit the economy over the
long term while maintaining overall fiscal discipline.25 As the
Congress moves to modify the federal budget process with the
expiration of the Budget Enforcement Act, attention is warranted as
to how the process considers the long-term implications of
alternative spending choices.
A4.7. Although increasing government saving is the most direct
way for the federal government to increase national saving, the
federal government can also encourage saving and investment by
state and local governments and the private sector. For example,
the federal government provides funding- such as grants, loans, or
loan guarantees-to state and local governments to finance the
construction and improvement of the nation's highways, mass transit
systems, and water systems. The federal government also provides
financial aid to encourage postsecondary education. In addition to
its direct spending, the federal government offers tax incentives
to encourage nonfederal saving and investment. The revenue loss
associated with a tax incentive represents the federal government's
budgetary cost of promoting saving and investment for particular
purposes.
The current income tax system provides preferential
treatment-such as special exemptions, special deductions, and/or
credits, as well as special
24Budget Trends: Federal Investment Outlays, Fiscal Years
1981−2003 (GAO/AIMD-98-184, June 15, 1998).
25Budget Structure: Providing an Investment Focus in the Federal
Budget (GAO/T-AIMD-95-178, June 29, 1995).
Page 95 GAO-01-591SP National Saving
tax rates-for both businesses and individuals. Under current
law, some types of saving and investment are exempt from taxes
while other types are fully taxed; some forms of consumption-in
particular, health care- receive preferential treatment. Although a
comprehensive discussion of income versus consumption taxes is
beyond the scope of this primer, it is helpful to highlight various
federal tax incentives for saving and investment.26
The federal government uses tax incentives to encourage
particular forms of investment. Some tax provisions allow
accelerated depreciation so that businesses can more quickly
recover the costs of investing in certain types of equipment and
structures. Other tax incentives encourage investment in the
nation's infrastructure. For example, interest income on state and
local government bonds, which are used primarily for infrastructure
purposes, are exempt from federal taxes. This tax preference allows
state and local governments to borrow at lower rates to build
highways, schools, mass transit facilities, and water systems. In
addition, tax preferences may encourage particular forms of
infrastructure investment, such as special tax credits for
investments in developing low-income rental housing. Also, special
tax credits and deductions are aimed at spurring private
R&D.
The federal government also has sought to encourage personal
saving both to enhance households' financial security and to boost
national saving. Table 4.1 highlights some tax provisions aimed at
encouraging saving for retirement, buying homes, and investing in
education.27 The largest tax incentive for saving-in terms of the
tax revenue loss-is the preferential tax treatment of
employer-sponsored pension plans; additional tax incentives
encourage retirement saving outside of employer pensions. The
second largest category of tax incentives aimed at encouraging
saving promotes home ownership. Other tax incentives encourage
college and other postsecondary education. While some tax
incentives for education encourage households to accumulate assets
such as U.S. Series EE savings
26For more information about the differences between income and
consumption taxes and the current tax treatment of saving and
investment, see Tax Administration: Potential Impact of Alternative
Taxes on Taxpayers and Administrators (GAO/GGD-98-37, January 14,
1998), pp. 55-77.
27While this discussion focuses on tax incentives encouraging
personal saving, some federal programs and tax provisions may
actually discourage people from saving. As discussed in section 1,
Social Security also affects people's incentives to save for
retirement. Capital gains taxation and estate transfer taxes may
also affect household decisions about saving and asset
accumulation.
bonds or education savings accounts to pay for college, other
provisions, such as the HOPE credit, are aimed more at making
college more affordable.
Table 4.1: Selected Federal Income Tax Provisions That Influence
Personal Saving
(2)
Individual Retirement Accounts (IRAs) $15,200
(3)
Keogh plans $5,500
Encourage home ownership
Deductions for mortgage interest on homes $60,270
Deductions for State and local property taxes on homes
$22,140
Exclusion of capital gains income from home sales $18,540
Encourage personal investment in postsecondary education
HOPE scholarship tax credits for tuition payments for the first
2 years of college $4,210
Deductibility of student-loan interest $360
Exclusion of interest earned on U.S. Series EE savings bonds
when used for qualified education expenses $10
Note: This table does not represent all federal tax provisions
related to personal saving. For a more comprehensive discussion,
see Joint Committee on Taxation, Present Law and Background on
Federal Tax Provisions Relating to Retirement Savings Incentives,
Health and Long-Term Care, and Estate and Gift Taxes (JCX-29-99),
June 15, 1999.
Source: GAO analysis based on information provided in Analytical
Perspectives, Budget of the United States Government, Fiscal Year
2002.
For individual taxpayers, tax incentives increase the after-tax
return on saving for particular purposes or on specific types of
assets accumulated. This would narrow the wedge between the
individual's return on saving and society's return on investment
that results from the taxation of income from saving. As explained
in section 1, higher rates of return may or may not encourage
people to save more. For the federal government, tax incentives
reduce tax revenue and hence government saving. How tax incentives
affect personal saving, and ultimately, national saving is less
certain. The net effect on national saving-discussed further in
Q4.8- depends on the interaction between any additional personal
saving and government dissaving associated with financing the
incentive.
Tax incentives affect how people save for retirement but do not
necessarily increase the overall level of personal saving. Since
the 1970s, preferential tax treatment has been granted to
Individual Retirement Accounts (IRAs) and employer-sponsored 401(k)
pension plans. Even with these retirement saving incentives, the
personal saving rate has steadily declined. Although the tax
benefits indeed seem to encourage individuals to contribute to
these kinds of accounts, the amounts contributed may not be totally
new saving. Some contributions may represent saving that would have
occurred even without the tax incentives or amounts merely shifted
from taxable assets or even financed by borrowing. Economists
disagree about whether tax incentives are effective in increasing
the overall level of personal saving. In a 1996 symposium examining
universal IRAs available in the early 1980s,28 researchers reached
three widely divergent conclusions: (1) yes, most contributions
represented new saving, (2) no, most IRA contributions were not new
saving, and (3) maybe, about 26 cents of each dollar contributed
may have represented new saving.29
Even if tax incentives do not increase personal saving much in
the short term, they may encourage individual households to earmark
resources specifically for retirement. Once the funds are earmarked
in retirement accounts, the prospect of taxes and penalties for
early withdrawals might induce some households to save more outside
of retirement accounts to achieve nonretirement goals. However, if
people can readily withdraw money from tax-preferred accounts for
purposes other than retirement, there is no assurance that tax
incentives would ultimately enhance individuals' retirement
security.
Allowing access to voluntary accounts like IRAs or 401(k) plans
before retirement-through borrowing or early withdrawals to buy a
home or to pay for education or medical expenses-is a double-edged
sword. Access
28The Journal of Economic Perspectives, Vol. 10, No. 4 (Fall
1996) presented three papers representing these viewpoints: James
M. Poterba, Steven F. Venti, and David A. Wise, "How Retirement
Saving Programs Increase Saving," pp. 91-112; Eric M. Engen,
William G. Gale, and John Karl Scholz, "The Illusory Effects of
Saving Incentives on Saving," pp. 113-138; and
R. Glenn Hubbard and Jonathan S. Skinner, "Assessing the
Effectiveness of Saving Incentives," pp. 73-90.
29Researchers have also attempted to estimate the effect of
employer-sponsored 401(k) plans on personal saving. For a recent
summary of this empirical debate, see William Gale, "The Impact of
Pensions and 401(k) Plans on Saving: A Critical Assessment of the
State of the Literature," paper presented at ERISA After 25 Years:
A Framework for Evaluating Pension Reform, Washington, D.C.,
September 17, 1999.
Q4.8. Given That Experts Disagree About
Whether Retirement Saving Tax Incentives Are Effective In
Increasing Personal Saving Overall, How Do These Tax Incentives
Affect National Saving?
provisions may increase saving because more people may choose to
participate and to contribute larger amounts.30 Yet, borrowing and
early withdrawals can ultimately reduce individuals' retirement
income. There would be little benefit to national saving from
allowing early access to mandatory accounts with set contribution
levels-which has been proposed for Social Security (see Q4.10 and
Q4.11).
A4.8. The net effect on national saving depends on whether a tax
incentive induces enough additional saving by households to make up
for the government's revenue loss. To gain a better understanding
of how tax incentives affect national saving, look at one example:
how a tax deduction for a traditional tax-deferred IRA may affect
government and ultimately national saving. For simplicity, consider
a married couple in which neither spouse is covered by an
employer-sponsored pension plan and each contributes $2,000-the
maximum per person per year allowed under current law-to a
traditional IRA. As shown in table 4.2, how much the couple's
$4,000 annual contribution adds to national saving that year
depends on (1) how much their IRA tax deduction costs the
government and (2) whether their contributions represent new saving
or were shifted from existing assets. Further assume, for
simplicity, that our hypothetical couple's marginal tax rate is 28
percent, so their deduction costs the federal government $1,120 (28
percent of $4,000). In other words, government saving decreases by
$1,120 (or government dissaving increases by that amount, depending
on the government's surplus/deficit position for the year). If the
couple would have otherwise spent the $4,000 (i.e., their
contributions represent new saving), national saving would increase
by $2,880-the $4,000 increase in personal saving less the $1,120
decrease in government saving. At the other extreme, if the couple
merely shifted the funds from another account or asset to the IRAs
(i.e., no increase in personal saving), national saving would fall
by the amount of the government's tax loss. The actual change in
national saving probably falls somewhere between these two
examples. Table 4.2 also provides a third scenario-the impact on
national saving if about 26 percent of the couple's contributions
represent new saving. In this case, national saving would drop
slightly, but the couple would have saved more and expressly
earmarked more of their assets for retirement.
30401(k) Pension Plans: Loan Provisions Enhance Participation
But May Affect Income Security for Some (GAO/HEHS-98-5, October 1,
1997).
Page 99 GAO-01-591SP National Saving
Note: This table illustrates a hypothetical couple in which
neither spouse is covered by an employersponsored retirement plan
and each contributes $2,000 to a traditional IRA. Their $4,000 IRA
contributions are fully deductible. If either spouse is covered by
an employer-sponsored plan, their contributions may not be fully
deductible depending on their income.
aChange in personal saving depends on how much of the $4,000 IRA
contribution represents new saving. These assumptions were drawn
from three papers presented in the Fall 1996 Journal of Economic
Perspectives; see footnote 28.
bChange in government saving represents tax revenue loss in
first year due solely to tax deduction for IRA contribution. Amount
does not include revenue forgone as a result of tax-deferral on
investment income. Taxes on contribution and investment income are
deferred until amounts are withdrawn.
cChange in national saving represents the sum of the change in
personal and government saving for a simplified example focused on
one household and one type of IRA. The ultimate effect of any tax
incentive on national saving would depend on how households in
aggregate respond.
Source: GAO analysis based on 1999 individual income tax rates
and IRS publication 590 Individual Retirement Arrangements.
Table 4.2 also shows the effect on national saving of
tax-deductible IRA contributions under different tax brackets. If
our hypothetical couple were in the highest income tax bracket and
their contributions represented all new saving, their $4,000
deduction would cost the government $1,584 and add $2,416 to
national saving. If they were in the lowest tax bracket, their
deduction would cost the government $600 and add as much as $3,400
to national saving. Of course, this simplified example focuses on
one household and one type of IRA.31 The ultimate effect of any tax
incentive on national saving would depend on how households in
aggregate respond. A tax incentive for retirement saving may
encourage some households to save more while encouraging others to
shift their existing balances into tax-preferred accounts.
Again, the net effect of a tax incentive on national saving
depends on whether the tax incentive induces enough additional
personal saving to make up for the government's revenue loss. As
illustrated in table 4.2, deductions for taxpayers in higher tax
brackets are more costly for the government. Although deductions
for lower-income taxpayers appear to yield a greater net increase
in national saving because they are less costly for the government,
they also offer relatively less incentive for lowerincome families
to save. Low- and moderate-income households have fewer resources
and may have less capacity to contribute to an IRA or to earmark
more assets for retirement. Most people saving through taxpreferred
retirement accounts are middle- to upper-income. Although
higher-income households might be encouraged to save more by
increasing the annual contribution limits to IRAs and
employer-sponsored 401(k) plans-currently $2,000 and $10,500,
respectively-increasing contribution limits alone is not likely to
induce more saving from low-income households. Nonrefundable tax
incentives may not be particularly effective in encouraging saving
by lower-income taxpayers, who already owe relatively little or no
federal income taxes.
In recent years, policymakers have explored providing refundable
tax incentives and government matching to encourage Americans to
save more. Text box 4.3 describes two federal initiatives allowing
governmentsubsidized saving accounts for low-income families.
First, the 1996 welfare
31Besides the tax-deductible traditional IRA, other retirement
saving vehicles also receive preferential tax treatment. Depending
on their circumstances, people may also be able to choose from
nondeductible traditional IRAs, new Roth IRAs, SEP IRAs for the
selfemployed, SIMPLE IRAs sponsored by small employers, and the
popular 401(k) employersponsored saving plans. The oddly named
education IRA is not a retirement arrangement.
Page 101 GAO-01-591SP National Saving
reform law allowed states to use Temporary Assistance for Needy
Families (TANF) funds to establish subsidized saving accounts for
TANF recipients. Second, the Assets for Independence Act of 1998
authorized federal funding for a 5-year demonstration project to
evaluate the effectiveness of matching incentives for certain
low-income savers.
Text Box 4.3: Individual Development Accounts for Low-Income
Savers
Individual development accounts (IDAs) are special saving
accounts for low-income families. In theory, IDAs help lowincome
families save, accumulate assets, and achieve economic
self-sufficiency. IDAs are like the better known IRAs in the sense
that the assets accumulated are to be used only for limited
purposes. Whereas IRAs are for retirement, IDAs can be used to buy
a first home, to pay for college or other job training, or to start
a small business. IDAs are special in that low-income savers
receive matching funds from federal and state governments as well
as private sector organizations as an incentive to save. Usually,
IDA account holders must undergo economic literacy training as a
condition of participation.
The 1996 welfare reform law allowed states to use Temporary
Assistance for Needy Family (TANF) funds to establish subsidized
saving accounts for TANF recipients. TANF recipients are to make
contributions from earnings, and state matching funds used for IDAs
count towards a state's maintenance-of-effort spending requirement.
IDA balances generally are not to be considered in determining
eligibility and benefits for means-tested federal programs.
According to the Center for Social Development, as of January 2001,
29 states had passed legislation establishing IDA programs, and 32
states had incorporated IDAs into their TANF plans. Matching rates
and dollar limits vary by state. Matching rates range from
two-to-one in Virginia to three-to-one in Indiana and Missouri.
Limits on IDA balances range from $4,000 in Virginia to $10,000 in
South Carolina and $50,000 in Missouri. Some states restrict IDA
use to paying for education or training.
The Assets for Independence Act of 1998 authorized federal
funding for a 5-year demonstration project to evaluate the
effectiveness of matching incentives for low-income savers. The IDA
demonstration project provides direct federal funding to state and
local governments as well as nonprofit community organizations to
match saving contributions by low-income families eligible for TANF
or the Earned Income Tax Credit. In fiscal years 1999 and 2000, $10
million was appropriated each year for the demonstration project.
In those 2 years, awards totaling $17.7 million were made to 65
grantees sponsoring IDA programs. For fiscal year 2001, $25 million
was appropriated for the IDA demonstration. Because the first
grants were awarded in September 1999, it is too soon in the
demonstration project to fully evaluate the effectiveness of IDAs
as a saving incentive.
Sources: The Center for Social Development, Washington
University in St. Louis, and Vee Burke, Temporary Assistance for
Needy Families and Individual Development Accounts, Congressional
Research Service, January 17, 2001.
Recent proposals have aimed at creating a broader system of
subsidized accounts to encourage more Americans to save for
retirement. For example, President Clinton's 2000 Retirement
Savings Accounts (RSAs) proposal would have provided government
matching on voluntary
Page 102 GAO-01-591SP National Saving
retirement contributions for low- and moderate-income
families.32 Under the RSA proposal, a worker between the ages of 25
and 60 with family earnings of at least $5,000 could contribute up
to $1,000 annually through either an employer-sponsored saving plan
or a tax-deferred individual account.33 A worker earning up to
$12,500 was to receive a two-to-one (200 percent) match on the
first $100 contributed each year and a one-to-one match (100
percent) on additional contributions. The progressive matching
formula was to phase down as income increased. A worker earning
between $25,000 and $40,000 was to receive a 20 percent match on
the first $100 contributed and additional contributions. For
individuals who did not owe federal income taxes, the government
match was to be in the form of a tax credit to the employer or
financial institution holding the taxpayer's account. Although the
RSAs were aimed at accumulating assets for retirement, the proposal
would have allowed limited withdrawals after 5 years for such
purposes as buying a home or paying educational or medical
expenses.
At this time, it is unclear how new tax-subsidized saving
accounts might affect personal saving and ultimately national
saving. Like any tax incentive, matching tax credits would clearly
reduce federal revenue and government saving. The tax credits by
themselves would have no net effect on national saving: absent any
change in household consumption, personal saving would increase by
the amount of the government match, but government saving would
decrease by the same amount. Of course, the purpose of matching is
to change household behavior. Government matching of voluntary
contributions could increase national saving if these incentives
indeed induce people to save more.34 A progressive match- providing
a higher match for low-income workers and eliminating the match for
high-income workers-would serve to target low-income
32President Clinton's 1999 Universal Savings Accounts (USA)
proposal would have created a more costly centralized system of
accounts with a flat annual general tax credit of up to $300 for
low- and moderate-income workers plus a 50 to 100 percent
government match on voluntary contributions. Low-income workers
were to receive a one-to-one match on their contributions, and the
match progressively declined based on income so that higher-income
workers would receive a lower match or none at all.
33Contribution limits and eligibility thresholds for RSAs for a
couple were twice the amount for an individual. For example, a
couple could contribute up to $2,000 annually.
34Depending on the design and implementation, government
matching could potentially reduce national saving. For example, a
household could transfer amounts from existing assets to get the
government match and then increase consumption in response to its
increased wealth.
Q4.9. What Is the Federal Government Doing
to Educate the Public About Why Saving Matters?
workers who now receive little tax benefit from existing
retirement saving incentives. Even with generous matching,
low-income workers may not voluntarily save more for retirement. In
light of the conflicting expert views on how existing tax
incentives affect personal saving, it is unclear how new matching
incentives might affect individuals' saving choices and retirement
security.
A4.9. While a great deal of attention focuses on how much
retirement saving tax incentives cost the government and how much,
if any, new personal saving they generate, what is sometimes
overlooked is that tax incentives remind people to save for
retirement. The existence of IRAs and 401(k)s serves to raise
public awareness about retirement saving opportunities. Advertising
by financial institutions offering IRAs and information about
employer-sponsored 401(k) options serve as reminders about ways to
save for retirement. Yet, even as the tax code provides more
opportunities than ever to save for retirement, Americans may not
understand why saving matters.
In the "Savings Are Vital for Everyone's Retirement Act of 1997"
(SAVER Act), the Congress found that a leading obstacle to
expanding retirement saving is that many Americans do not know how
to save for retirement, let alone how much. According to the 1998
National Summit on Retirement Savings, the nation must do a better
job of educating the public- employers and individuals alike-about
the importance of saving more today to secure the nation's
retirement security.35 Increasing personal saving is vital to
enhancing individual households' retirement security, to increasing
national saving available to invest in the nation's capital stock,
and ultimately to reducing the burden on future generations of
financing government programs for the elderly.
As mandated by the SAVER Act, the Department of Labor maintains
an outreach program to raise public awareness about the advantages
of saving and to help educate workers about how much they need to
save for retirement. The Department of Labor's original Retirement
Savings Education Campaign was launched in 1995 in partnership with
the
35Final Report on The National Summit on Retirement Savings,
Department of Labor (September 1998). This bipartisan summit, held
June 4-5, 1998, was mandated by the SAVER Act. Additional national
summits are to be held in 2001 and 2005.
Page 104 GAO-01-591SP National Saving
Department of the Treasury and other public and private
organizations.36 The SAVER Act also requires the Department of
Labor to coordinate with similar efforts undertaken by other public
and private organizations. In addition to the Department of Labor's
outreach program, other federal agencies also play a role in saving
education. The Securities and Exchange Commission's Office of
Investor Education and Assistance promotes financial literacy and
seeks to encourage Americans to save wisely and plan for the
future. The Administration on Aging and FirstGov for Seniors also
provide information to educate the public about how they can better
prepare for a more financially secure retirement. In 2000, the
Department of the Treasury launched the National Partners for
Financial Empowerment. This new coalition planned to raise public
awareness about the importance of financial literacy and saving and
to help Americans develop the skills they need to take charge of
their financial future.
Education campaigns to promote financial literacy and retirement
saving represent a potentially valuable tool for encouraging people
to save more. Building on policymakers' efforts to enhance tax
incentives for retirement saving, education campaigns are a means
to convey easy-to-understand information about the variety of
saving vehicles available.37 Efforts such as the Department of
Labor's saving outreach program can serve as a catalyst to educate
employers about pension plan options they can offer to their
employees as well as to encourage individuals to save more on their
own behalf. Public education campaigns are one way to get people
started with retirement planning. The key steps are to calculate
how much income they need to retire, estimate how much retirement
income they can expect from Social Security and employer-sponsored
pensions, and decide how much more they need to save.
Individualized Social Security statements now sent annually by
the Social Security Administration to most workers aged 25 and
older provide important information for personal retirement
planning. The statement provides estimates of potential retirement,
disability, and survivor benefits. It also asks statement
recipients to check their listed earnings to help correct errors
and ensure benefits are correct when workers retire, become
disabled, or die. The newly revised statement more successfully
36These public-private partnerships were a catalyst in 1995 for
forming the American Savings Education Council. This coalition of
public and private entities undertakes initiatives aimed at raising
public awareness about personal finance and retirement
planning.
37Appendix IV includes a list of educational websites on
saving.
Page 105 GAO-01-591SP National Saving
Q4.10. How Would Social Security Reform
Affect National Saving?
meets its purpose of providing basic information to individual
workers, but further improvement is always possible.38 For example,
readers may not understand that the "current dollar" estimates
provided reflect today's price level, not the price level that will
exist when they actually start to receive benefits. The Social
Security Administration will need to continue to review and
streamline the statement to make it clearer and easier to
understand.
Individualized Social Security statements also explain that
Social Security benefits were not intended to be the only source of
retirement income, and the statements encourage workers to
supplement their benefits with pensions and personal saving. Once
they know their Social Security benefits promised under current
law, workers can calculate how much they can expect from
employer-sponsored pension plans and how much they need to save on
their own for retirement.39 Knowing more about Social Security's
financial status would help workers to understand how to view their
personal benefit estimates. As discussed in section 1, Social
Security benefits are projected to exceed the program's cash
revenue in 2016, and the trust fund will be depleted in 2038. At
that time, Social Security revenue would only be sufficient to pay
for roughly 73 percent of promised benefits. The individualized
statements disclose that, absent a change in the law, only a
portion of the benefits estimated may be payable. Knowing this can
help workers understand that some combination of revenue increases
and benefit reductions will be necessary to restore the program's
long-term solvency.
A4.10. Restoring Social Security to sustainable solvency and
increasing saving are intertwined national goals. Saving more today
would alleviate the burden of financing Social Security
commitments. Increased saving and investing can lead to greater
economic growth, and a larger economy in turn would mean higher
real wages, resulting in more government revenue to pay benefits.
Social Security reform-depending on the elements of the reform
package and the timing of implementation-could foster saving
and
38Social Security: Providing Useful Information to the Public
(GAO/T-HEHS-00-101, April 11, 2000).
39The Social Security Administration also offers an online
retirement planner with calculators to help workers understand how
much they can expect from Social Security under different
retirement scenarios.
Page 106 GAO-01-591SP National Saving
provide resources for capital formation and economic growth.
Prompt action is vital because economic growth is a long-term
process. A bigger economic pie would make it easier for future
workers to meet the dual challenges of paying for the baby boomers'
retirement while achieving a rising standard of living for
themselves.
For individuals and the nation as a whole, saving more means
forgoing consumption today in order to consume more in the future.
However, this trade-off between today's consumption and tomorrow's
consumption is somewhat different for an individual than for the
nation. When an individual delays retirement saving, that
individual enjoys the additional consumption in the early years and
then personally bears the burden of saving larger amounts later,
working longer, or accepting a lower standard of living in
retirement. From the nation's perspective, if current generations
forgo saving for their retirement costs, they also forgo investment
opportunities and the economic growth that would result. Therefore,
their saving choices affect not only their own retirement income
but also potentially affect the standard of living for future
workers. Greater economic growth from saving more now could
alleviate the burden that a slow-growing workforce will bear in
producing the goods and services to be consumed by a society with a
large retired population that consumes but does not work.
In other respects, saving for the nation's retirement costs is
analogous to an individual's retirement preparations. The sooner we
begin, the less we have to save per year and the greater our
benefit from compounding growth. The conventional measure of Social
Security solvency is gauged in terms of the actuarial balance of
the program's trust fund over a 75-year period. According to the
Social Security Trustees' 2001 intermediate projections, restoring
the program's actuarial balance over the next 75 years would
require a combination of reform options equal to 1.86 percent of
taxable payroll. In simple terms, increasing payroll taxes by 1.86
percent (a 15percent increase over the 2001 rate paid by employers
and workers) now could head off a Social Security shortfall for 75
years. Delaying reform until Social Security's insolvency is
imminent would necessitate drastic changes over a shorter period.
Absent reform, by 2038, Social Security's annual deficit would
require cutting benefits by about a quarter (26 percent) or raising
payroll taxes by about a third (35 percent) just to restore balance
for that year.
Restoring Social Security's long-term solvency will require some
combination of increased revenues and reduced expenditures. Various
options are available within the current structure of the program
including raising the retirement age, reducing the cost-of-living
adjustment, altering the benefit formula, increasing payroll taxes,
and investing trust fund surpluses in higher-yielding assets. In
addition, some proposals would fundamentally alter the program
structure by setting up individual retirement accounts.
Before trying to explore how various reform options might affect
national saving, it is useful to highlight how the current Social
Security program affects personal saving, the Social Security trust
fund, and government saving.
•
Personal saving. As discussed in Q1.5, some evidence
suggests that the existence of Social Security may have reduced
personal saving. The retirement benefits promised under current law
reduce the amount people believe they need to save on their own for
retirement. Although some may view their payroll tax contributions
as a form of retirement saving, workers need to understand that
their contributions are not deposited into interest-bearing
accounts for each individual but are largely used to finance
current benefits.
•
Social Security trust fund. In the federal budget, a
"trust fund" is simply an accounting mechanism to record earmarked
receipts and expenditures.40 From Social Security's perspective,
its annual cash surpluses are saved in the trust fund, and the
trust fund balance represents resources accumulated to help pay
future benefits. However, the accumulation and exhaustion of the
trust fund's balance does not reflect how Social Security finances
affect federal government and national saving. The extent to which
cash surpluses "saved" in the Social Security trust fund translate
into increased national saving depends on federal saving as a
whole. Although the trust fund appears solvent until 2038, Social
Security will begin dissaving at the point that program cash
deficits emerge in 2016 (shown in figure 1.8).
•
Government saving. For the years since the 1983 reforms
until 1998, Social Security surpluses partially offset a deficit in
all other
40For more information about trust funds in the federal budget,
see Federal Trust and Other Earmarked Funds: Answers to Frequently
Asked Questions (GAO-01-199SP, January 2001).
Page 108 GAO-01-591SP National Saving
government accounts within the unified budget.41 In effect,
Social Security surpluses reduced the magnitude of government
dissaving and the government's need to borrow from the public.
Since 1998, when the federal government began running unified
surpluses, policymakers appear to have agreed to using the Social
Security surpluses to reduce federal debt held by the public, and
these amounts would translate dollar-for-dollar into government
saving. When the trust fund begins running cash deficits in 2016,
the government as a whole must come up with the cash to finance
Social Security's cash deficit by reducing any projected non-Social
Security surpluses, borrowing from the public, raising other taxes,
or reducing other government spending. The Save the Social Security
Surpluses simulation illustrates the magnitude of fiscal challenges
associated with our aging society. Absent reform, Social Security
deficits would contribute to government dissaving (shown in figure
4.2) and greatly constrain budgetary flexibility over the long run
(shown in figure 4.3).
In evaluating reform proposals, it is important to consider
whether a reform package will truly increase national saving and
"grow the economic pie." From a macroeconomic perspective,
increasing the trust fund's balance, without underlying reform,
does nothing to enhance the government's fiscal capacity to finance
future benefits. For example, crediting additional securities to
the trust fund or increasing the interest rate paid on the trust
fund's securities would commit additional future general revenue to
the Social Security program but does not increase the government's
overall revenue or reduce its costs.
Reforms that reallocate the composition of the nation's saving
and asset portfolio may serve only to redistribute the existing
pie. For example, individual accounts-discussed more fully in
Q4.11-affect the contributions of government and personal saving
relative to national saving. Investing Social Security surpluses in
the stock market affects the government's asset holdings but does
not directly increase national saving. As we reported in 1998,
potentially higher returns-albeit with greater risk-on the
government's stock holdings could boost Social Security's financing
and reduce the size of other revenue increases or benefit
41During the late 1970s and early 1980s, Social Security's
expenditures regularly exceeded revenues, causing a rapid decline
in the trust fund's balance and raising concerns about the
program's solvency. In response, the Congress passed reforms in
1977 and 1983 that together were intended to assure Social
Security's solvency for a 75-year period.
Page 109 GAO-01-591SP National Saving
reductions needed to restore solvency.42 Acquiring stocks or
other nonfederal financial assets would have approximately the same
effect on national saving as using the same amount of money to
reduce debt held by the public. If reducing federal debt held by
the public is not an option, as discussed in text box 4.2,
investing in nonfederal financial assets on behalf of the Social
Security trust fund could be another way for government saving to
provide resources for private investment.
Most traditional reform options involve workers paying more for
promised benefits or getting lower benefits. From the government's
perspective, increasing payroll taxes or reducing benefits would
improve Social Security's finances and increase government
saving-assuming no other changes in government spending or taxes.
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. The way in which Social Security is reformed will
influence both the magnitude and timing of any increase in national
saving. To illustrate the complexities in evaluating how
traditional program reforms might affect national saving, let's
examine two basic options that would directly improve Social
Security's financial imbalance-increasing payroll taxes and
reducing benefits.
• Payroll tax increases. At first glance, increasing payroll
taxes appears to be a straightforward way to increase saving now to
take advantage of compounding growth. Payroll tax increases are
easy to implement and directly improve the trust fund's finances.
However, the extent to which payroll tax increases would translate
into increased government saving depends on whether the cash
generated by the payroll tax increase is used to finance new
spending or a general tax cut. Thus, increased Social Security
surpluses will not necessarily increase government saving. Even if
the federal government saves all of the increased Social Security
surpluses, national saving would not increase dollar-for-dollar.
Changes in personal saving may counterbalance any increase in
government saving resulting from higher taxes. Higher payroll taxes
may depress personal saving to the extent that households have less
disposable income to save. How people adjust their saving in
response to payroll tax increases may also depend on the form of
the increase.
42Social Security Financing: Implications of Government Stock
Investing for the Trust Fund, the Federal Budget, and the Economy
(GAO/AIMD/HEHS-98-74, April 22, 1998).
Page 110 GAO-01-591SP National Saving
Raising the payroll tax rate would affect all workers whereas
increasing the maximum taxable earning level would affect
high-income earners.
• Benefit reductions. Options reducing initial benefits or
raising the retirement age take time to implement or phase in,
allowing time for people to adjust their retirement plans. Reducing
future benefits obviously reduces future spending for Social
Security retirement benefits and stems government dissaving. At
first glance, reducing future benefits promised to current workers
would not seem to increase resources available to invest now.
However, changes in personal saving may complement any increase in
government saving resulting from benefit reductions. If Social
Security reform reduces anticipated retirement income, many
analysts expect that workers might, to some degree, want to offset
this effect by increasing their saving outside the Social Security
system. If people adjust their retirement plan to reflect benefit
reductions, increased personal saving today could provide new
resources to invest. For example, raising the retirement age
reduces benefits and could induce some individuals to save more now
in order to retire before they are eligible for Social
Security.
In evaluating a Social Security reform proposal, it is important
to consider that increasing national saving is one criterion in
assessing the extent to which the proposal achieves sustainable
solvency. Beyond weighing how a proposal would affect the federal
budget and the economy, policymakers need to consider the balance
struck between the twin goals of income adequacy (level and
certainty of benefits) and individual equity (rates of return on
individual contributions).43 Reform elements that could increase
national saving may not satisfy these adequacy and equity goals.
For example, benefit cuts, depending on how they are structured,
could leave those most reliant on Social Security with inadequate
retirement income. Also, increasing payroll taxes reduces the
implicit rate of return for future beneficiaries. It is crucial to
evaluate the effects of an entire reform package considering
interactions between individual reform elements as well as how the
package as a whole achieves policymakers' most important goals for
Social Security.
43For more information about the analytical framework for
assessing Social Security reform proposals offered by GAO, see
Social Security: Criteria for Evaluating Social Security Reform
Proposals (GAO/T-HEHS-99-94, March 25, 1999) and Social Security:
Evaluating Reform Proposals (GAO/AIMD/HEHS-00-29, November 4,
1999).
Page 111 GAO-01-591SP National Saving
Q4.11. How Would Establishing Individual
Accounts Affect National Saving?
A4.11. Evaluating the potential effect of proposals to establish
individual accounts can be confusing. Various proposals have been
advanced that would create a new system of individual accounts as
part of comprehensive Social Security reform, while other proposals
would create new accounts outside of Social Security. Individual
account proposals also differ as to whether individuals'
participation would be mandatory or voluntary. As we have
previously reported, the extent to which individual accounts would
affect national saving depends on how they are financed, how the
program is structured, and how people adjust their own saving
behavior in response to individual accounts.44
To understand how individual accounts might affect national
saving, it is necessary to examine the first-order effects
accounting for how the government might fund the accounts and then
to consider how people might adjust their saving in response to a
new account program.
One important determinant of the effect on national saving is
the funding source for the individual accounts. Shifting funds from
the federal government would affect the relative contributions of
the federal government and households to national saving. For
instance, diverting funding from the Social Security trust
fund-such as a carve-out from current payroll taxes-would likely
reduce government saving by the same amount that the accounts
increase personal saving. Although national saving would be
unchanged, financing of the Social Security program- absent other
changes-would be worsened. If accounts are funded outside of the
Social Security system using general revenues, the effect on
national saving is unclear and would depend on what would have been
done instead with the general funds.
• If the general funds would have been used to redeem federal
debt held by the public or acquire nonfederal financial assets,
national saving initially would be unchanged because personal
saving would increase by the amount that government saving
decreases. In a sense, individual accounts could serve as a way to
channel saving through the government into resources for private
investment while avoiding issues associated with government
ownership of nonfederal assets.
44See Social Security: Capital Markets and Educational Issues
Associated With Individual Accounts (GAO/GGD-99-115, June 28,
1999).
Page 112 GAO-01-591SP National Saving
•
If the general funds would have been spent on additional
government consumption, then any increase in personal saving due to
the individual accounts would represent an increase in national
saving. If the general funds would have been used for
infrastructure investment, national saving would be unchanged but
more funds would be available for private investment.
•
If the general funds would have been used for a general
tax cut, then national saving would initially increase because
personal saving would increase by the amount of individual accounts
whereas some portion of a tax cut would be consumed.
National saving also would be affected by how households and
businesses respond to individual accounts. Regardless of the
financing source, the effect of individual accounts would be to
raise, at least to some extent, the level of personal saving unless
households fully offset the new accounts by reducing their other
saving. Households for whom individual accounts closely resemble
401(k)s and IRAs and who are currently saving as much as they
choose for retirement would probably reduce their own saving in the
presence of individual accounts. The extent of the behavioral
effects would depend in part on the structure of the individual
account program and any limits on accessing the funds. For
instance, mandatory account proposals are more likely to increase
private saving because such a program would require households that
do not currently save-such as many low-income individuals or
families-to place some amount in an individual account.
Prohibitions or restrictions on borrowing or other forms of
pre-retirement distributions could limit the ability of some
households to reduce their other saving in response to individual
accounts. In addition to the effects on household saving choices,
individual accounts may also affect the relationship and
interactions between Social Security and private pensions.45
45Social Security Reform: Implications for Private Pensions
(GAO/HEHS-00-187, September 14, 2000).
Page 113 GAO-01-591SP National Saving
Q4.12. How Would Medicare Reform Affect
National Saving?
A4.12. As we have reported, the current Medicare program,
without improvements, is ill-suited to serve future generations of
Americans.46 The program is fiscally unsustainable in its current
form, and growing Medicare spending is expected to drive federal
government dissaving over the long run. Despite this looming
financial problem, pressure is mounting to update Medicare's
outdated benefit design. Given the aging of the U.S. population and
the increasing cost of modern medical technology, it is inevitable
that demands on the Medicare program will grow.
In addition to the aging population and the increasing cost of
modern medical technology, the current Medicare program lacks
incentives to control health care consumption. The actual costs of
health care are not transparent, and third-party payers generally
insulate consumers from the cost of health care decisions. In
traditional Medicare, for example, the effect of cost-sharing
provisions designed to curb the use of services is muted because
many Medicare beneficiaries have some form of supplemental health
care coverage-such as Medigap insurance-that pays these costs. For
these reasons, among others, Medicare presents a great fiscal
challenge over the long term.
In the past, Medicare's fiscal health has generally been gauged
by the solvency of the HI trust fund projected over a 75-year
period. Although the HI trust fund is viewed as solvent through
2029, HI outlays are predicted to exceed HI revenues beginning in
2016. According to the Medicare Trustees' 2001 intermediate
assumption, restoring the HI program's actuarial balance over the
next 75 years would require a combination of reform options equal
to 1.97 percent of taxable payroll. In other words, averting a HI
shortfall for 75 years now would require an increase in payroll
taxes by 1.97 percent (a 68-percent increase over the 2001 rate
paid by employers and workers47), a cut in HI spending by 37
percent, or some combination of the two. According to the Office of
the Actuary at the Health Care Financing Administration, the
estimated net present value of future additional resources needed
to fund HI benefits alone over the 75 years is $4.6 trillion.
46Medicare: Higher Expected Spending and Call for New Benefit
Underscore Need for Meaningful Reform (GAO-01-539T, March 22,
2001). See appendix V for other GAO products related to Medicare
financing and reform.
47Medicare payroll taxes are paid on all earnings whereas Social
Security payroll taxes apply to earnings up to an annual
maximum-$76,200 in 2000.
Page 114 GAO-01-591SP National Saving
But, these estimates do not reflect the growing cost of the SMI
component, which accounts for somewhat more than 40 percent of
Medicare spending.
When viewed from the perspective of federal saving and the
economy, the growth in total Medicare spending will be become
increasingly burdensome over the long run. According to the
Medicare Trustees' 2001 intermediate estimates, Medicare costs will
grow at 1 percentage point above the growth in GDP per capita each
year.48 As shown in figure 4.5, total Medicare spending (Part A HI
and Part B SMI combined) is expected to consume 5 percent of GDP by
2035-more than double today's share of 2 percent. By 2075, Medicare
would consume over 8 percent of GDP, according to the Medicare
Trustees' 2001 intermediate estimates.49 Under the Save the Social
Security Surpluses simulation, federal health care spending will
greatly constrain budgetary flexibility (shown in figure 4.3).
Absent cost containment reforms, Medicare spending would contribute
to federal dissaving over the long term even if the unified
surpluses projected over the next decade are saved.
48These latest actuarial projections incorporate more realistic
assumptions about long-term health care spending, and as result,
Medicare spending is expected to grow faster than previously
estimated. For further discussion of the Medicare Trustees' 2001
estimates, see
Medicare: Higher Expected Spending and Call for New Benefit
Underscore Need for Meaningful Reform (GAO-01-539T, March 22,
2001).
49Including federal Medicaid spending, federal health care
spending would grow to 14.5 percent of GDP compared to today's 3.5
percent.
Percent of GDP
10
8
6
4
2
0
2000 2010 2020 2030 2040 2050 2060 2075
Notes: Medicare gross outlay projections based on intermediate
assumptions of the 2001 HI and SMI Trustees' reports.
Source: GAO analysis of data from the Office of the Actuary,
Health Care Financing Administration.
Although future Medicare costs are expected to consume a growing
share of the federal budget and the economy, pressure is mounting
to expand Medicare's benefit package to cover prescription drugs,
which will add billions to Medicare program costs. It is a given
that prescription drugs play a far greater role in health care now
than when Medicare was created. Today, Medicare beneficiaries tend
to need and use more drugs than other Americans. Overall, the
nation's spending on prescription drugs has been increasing about
twice as fast as spending on other health care services, and it is
expected to keep growing. Adding a prescription drug benefit to
Medicare will be costly, but the cost consequences ultimately
depend on choices about the benefit's scope and financing. Any
option to expand Medicare's benefit package-absent other
reforms-runs the risk of exacerbating the program's fiscal
imbalance and increasing government dissaving. Any substantial
benefit reform should be coupled with adequate and effective cost
containment measures to avoid worsening Medicare's long-range
financial condition.
Ultimately, we will need to look at broader health care reforms
to balance health care spending with other societal priorities. It
is important to note the fundamental differences between health
care wants, which are virtually unlimited; needs, which should be
defined and addressed; and overall affordability, which has a
limit. Realistically, reforms to address Medicare's huge long-range
financial imbalance will need to proceed incrementally. To avoid
more painful and disruptive changes once the baby boomers begin
retiring, the time to begin these difficult but necessary steps is
now.
Reform options that reduce Medicare's growth rates or strengthen
the program's underlying sustainability would raise future levels
of government saving (assuming no other changes in government
spending and taxes). However, the effect of reduced federal
Medicare spending on national saving depends on how the private
sector responds to the reductions. For example, greater private
spending for elderly health care-by beneficiaries themselves or by
employers and insurers on beneficiaries' behalf-could offset some
or all of the improvement in government saving in the short run.
Over time, personal saving could increase if individuals choose to
save more to pay for health care in their old age.
Section 5
National Saving and Current Policy Issues
Q5.1. What Are Key Issues in Evaluating
National Saving?
A5.1. 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.
The federal government has gone from the budget deficits of recent
decades to surplus as a result of a growing economy and difficult
decisions to reduce deficits . We appear-at least for the near
future-to have slain the deficit dragon. However, today's fiscal
good fortune will not survive over the long run. If the prospect of
surpluses over the next decade lulls us into complacency, the
nation could face daunting demographic challenges without having
changed the path of programs for the elderly or having built the
economic capacity to bear the costs of the programs as currently
structured.
Economic growth will help society bear the burden of financing
Social Security and Medicare, but it alone will not solve the
long-term fiscal challenge. Increasing the nation's economic
capacity is a long-term process. Thus, saving now and making
meaningful Social Security and Medicare reform sooner rather than
later are important. Because every generation is in part
responsible for the economy it passes on to the next, today's
fiscal policy choices must be informed by the long-term. Common
sense tells us that the nation needs to save more when it has a
healthy economy, sufficient resources to meet some current needs
while still building our capacity for the future, and a relatively
large workforce. National saving pays future dividends-but we need
to begin soon to permit compounding to work for us.
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
save some portion of its anticipated budget surpluses. 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.
In considering how much of the anticipated budget surpluses to
save, policy choices must balance today's unmet needs and
tomorrow's fiscal challenges. Saving the surpluses would allow the
federal government to reduce the debt overhang from past deficit
spending and enhance future budgetary flexibility. Choices about
federal spending for infrastructure, education, and R&D as well
as tax incentives for private saving and investment also have
implications for future economic growth.
Increased government saving and entitlement reform go
hand-in-hand. Over the long term, the federal government cannot
avoid massive dissaving without reforming retirement and health
programs for the elderly. Increasing national saving and thus
long-term economic growth is crucial to the long-term sustainable
solvency of Social Security and Medicare. Since the economy
provides the tax base for the government, economic growth increases
government revenue, which helps finance these programs as well as
other federal programs and activities, and increases budget
flexibility. But saving and economic growth alone cannot solve the
looming demographic challenges. Saving the Social Security
surpluses-and even the Medicare surpluses-is not enough by itself
to finance the government's commitments to the elderly. Program
reform is needed as well, or Social Security and Medicare will
constitute a heavy drain on the earnings of future workers. In a
sense, saving more yields a bigger pie, but policymakers will still
face the difficult choice of how to divide the pie between retirees
and workers.
The federal government can also undertake steps to encourage
personal saving. Saving education campaigns are one tool to
encourage people to save more for their own retirement. To
participate in the debate over how to reform Social Security and
Medicare, the public needs to understand the difficult choices the
nation faces. Announcing any benefits changes sooner rather than
later would make it easier for individuals to plan for retirement
and to adjust their saving behavior accordingly. The federal
government can explore how to design tax incentives that induce
households to save enough to make up for the government's revenue
loss and the lower government saving that would result.
Appendix I
Objectives, Scope, and Methodology
Personal Saving, Household Wealth, and
Retirement Security
This report is designed to present information about national
saving and its implications for economic growth and retirement
security. Specifically, this report addresses the following
questions: (1) What is personal saving, how is it related to
national saving, and what are the implications of low personal
saving for Americans' retirement security? (2) What is national
saving and how does current saving in the United States compare to
historical trends and saving in other countries? (3) How does
national saving affect the economy and how would higher saving
affect the longterm outlook? (4) How does federal fiscal policy
affect national saving, what federal policies have been aimed at
increasing private saving, and how would Social Security and
Medicare reform affect national saving? And, (5) what are key
issues in evaluating national saving?
Because this report focuses on the macroeconomic implications of
saving and investment, we used saving data from the National Income
and Product Accounts (NIPA) compiled by the Bureau of Economic
Analysis (BEA).1 This report presents the trend in the personal
saving rate as measured on a NIPA basis. As a comparison point, we
also examined an alternative personal saving rate available from
the Federal Reserve's Flow of Funds Accounts (FFA).2 Because FFA
counts household purchases of consumer durables as saving, the FFA
personal saving rate is somewhat higher than the NIPA personal
saving rate but also shows a downward trend. Both the NIPA and FFA
measures focus on saving as a flow from the economy's current
production and do not include changes in the market value of
households' existing portfolios. For information about the stock of
wealth accumulated by households, we obtained net worth data from
the FFAs' balance sheet aggregated for the household sector. In
addition to
1The NIPA data presented throughout this report reflect changes
made in the 11th comprehensive revision of the national accounts in
1999, including the reclassification of software purchases as
investment, which is discussed in Q2.5. Historical NIPA data were
downloaded from BEA's website (www.bea.doc.gov/bea.dnl.htm) and
reflect recent data presented in Survey of Current Business, Bureau
of Economic Analysis, Vol. 81, No. 4 (April 2001).
2Historical FFA data were downloaded from the Federal Reserve
Board website: www.federalreserve.gov/releases/Z1/Current/data.htm
and reflect data presented in Flow of Funds Accounts of the United
States: Flows and Outstandings, Fourth Quarter 2000
(Board of Governors of the Federal Reserve System, March 9,
2001).
National Saving and Investment
these macroeconomic data, we used results from the Federal
Reserve's 1998 Survey of Consumer Finance to present a snapshot of
individual households' net worth by income level.3
Fully exploring the dynamics of personal saving behavior and
gauging the adequacy of retirement saving are beyond the scope of
this national saving report. The literature attempting to explain
why and how people save-or do not save as the case may be-is
extensive, and the empirical research is conflicting. For this
report, we provide an overview of the major theories about why
people save and describe various factors associated with the
decline in personal saving. Appendix IV lists the major references
used in preparing this report.
For demographic trends and the financial outlook for the Social
Security and Medicare Hospital Insurance programs, we used the
intermediate actuarial projections, which reflect the best estimate
of the Social Security and Medicare Boards of Trustees. We also
examined income sources and amounts for those aged 65 and older
using the Social Security Administration's Income of the
Population, 55 or Older, 1998.4
We also used NIPA data to describe historical trends in (1) U.S.
national saving by component, (2) domestic and foreign investment
in the United States, and (3) the U.S. net international investment
position. To provide a long-term perspective we focused on saving
trends over the last 4 decades-from 1960 to 2000. We also compared
U.S. national saving to the saving of other major industrialized
nations. Specifically, we relied on national saving data for the
G-7 nations-Canada, France, Germany, Italy,
3The Survey of Consumer Finances is a triennial survey of U.S.
families sponsored by the Board of Governors of the Federal Reserve
with the cooperation of the Department of the Treasury. For results
from the latest Survey of Consumer Finance, see Arthur B.
Kennickell, Martha Starr-McCluer, and Brian J. Surette, "Recent
Changes in U.S. Family Finances: Results from the 1998 Survey of
Consumer Finances," Federal Reserve Bulletin (January 2000).
4Social Security Administration, Income of the Population, 55 or
Older, 1998, (Washington, D.C.: U.S. Government Printing Office,
March 2000). This biennial report presents information combined for
the population aged 55 and older as well as separately for those
aged 65 and older. The report reflects U.S. Census Bureau data from
the Current Population Survey.
Long-Term Simulations
Japan, the United Kingdom, and the United States-compiled by the
Organization for Economic Cooperation and Development.5
Our national saving trend analysis is based on current NIPA
definitions of saving and investment. We also examined literature
that presents other ways of thinking about national saving. For
example, a broader saving and investment measure might encompass
spending on education as well as research and development. These
are not included in the conventional NIPA measures but are related
to long-term productive capacity.
We used our long-term economic growth model to simulate
alternative fiscal policies and national saving rates. Long-term
simulations are useful for comparing the potential outcomes of
alternative saving rates within a common economic framework. Such
simulations can help policymakers assess the long-term consequences
of fiscal policy and saving choices made today.
While long-term simulations provide a useful perspective, they
should be interpreted carefully. Given the range of uncertainty
about future economic changes and the responses to those changes,
the simulation results should not be viewed as forecasts of
budgetary or economic outcomes 50 or 75 years in the future.
Rather, they should be seen only as illustrations of the different
budget and economic outcomes associated with alternative fiscal
policy and saving paths based on common demographic and economic
assumptions.
In our simulations, we used a model originally developed by
economists at the Federal Reserve Bank of New York that relates
long-term economic growth-measured in terms of gross domestic
product (GDP)-to economic and budget factors. The key interaction
between the budget and the economy is the effect of the federal
deficit/surplus on the amount of national saving available for
investment.6 Conversely, the rate of economic growth helps
determine the overall federal surplus or deficit through its effect
on federal revenue and spending. In our model, the level of
national saving affects investment and, in turn, GDP growth.
5OECD National Income Account data were downloaded from Standard
and Poor's DRI database.
6Text box 4.1 explains how the NIPA surplus or deficit differs
from the federal unified budget surplus or deficit. Both measures
are roughly similar as a share of GDP.
Page 124 GAO-01-591SP National Saving
In general, federal deficits measured on a NIPA basis represent
dissaving-they subtract from national saving by absorbing
nonfederal funds that otherwise would be used for investment.
Conversely, federal surpluses add to national saving. While the
NIPA measure of government saving directly affects national saving,
the unified budget measure is the more common frame of reference
for discussing federal fiscal policy issues. Our simulation results
reflect unified budget deficits/surpluses.
Our simulations are based on the Congressional Budget Office's
(CBO) January 2001, 10-year budgetary and economic projections7
through calendar year 2010.8 Beyond that, we used long-term
actuarial projections for Social Security and Medicare.9 We assume
that current-law benefits are paid in full (i.e., we assume that
all promised Social Security benefits are paid even after the
projected exhaustion of the OASDI Trust Funds in 2038). For
Medicaid in the out-years, we used the growth rates from CBO's
October 2000 long-term analysis.10 Interest spending is determined
by interest rates-which are held constant over the long-term-and
the level of federal debt held by the public, which depends on the
path of budget deficits/surpluses within each simulation. All other
spending as well as federal revenue are assumed to grow at
essentially the same rate as the economy. In other words, other
spending and revenue both remain constant as shares of GDP.
Appendix II presents a more detailed description of the model and
the assumptions we used.
We present two fiscal policy simulations: (1) Save the Unified
Surpluses and (2) Save the Social Security Surpluses. The Save the
Unified Surpluses simulation assumes the entire unified surpluses
are saved and used to reduce federal debt held by the public. The
Save the Social Security
7The Budget and Economic Outlook: Fiscal Years 2002-2011,
Congressional Budget Office (January 2001).
8In our modeling, all CBO budget projections were converted from
a fiscal year to a calendar year basis. The last year of CBO's
projection period was 2011, permitting the calculation of calendar
year values through 2010.
9The 2001 Annual Report of the Board of Trustees of the Federal
Old-Age and Survivors Insurance and Disability Insurance Trust
Funds (March 2001), The 2001 Annual Report of the Board of Trustees
of the Federal Supplementary Medical Insurance Trust Fund (March
2001), and The 2001 Annual Report of the Board of Trustees of the
Federal Hospital Insurance Trust (March 2001).
10The Long-Term Budget Outlook, Congressional Budget Office
(October 2000). See appendix II for more details about the Medicaid
assumption.
Surpluses simulation assumes that only the Social Security
surpluses are saved and used to reduce federal debt held by the
public. Unspecified policy actions-spending increases and/or tax
cuts-are taken that eliminate the non-Social Security surpluses
through 2010. These unspecified policy actions are left in place
through the end of the simulation period. For simplicity, we
assumed nonfederal saving-saving by households, businesses, and
state and local governments-would remain constant as a share of GDP
in both fiscal policy simulations.
As a reference point, we also simulated a path assuming that
national saving remains constant at the 2000 level of 18.3 percent
of GDP. The Constant 2000 National Saving Rate simulation reflects
an unspecified mix of saving by households, businesses, and all
levels of government. To provide a useful perspective on how
alternative levels of national saving affect future living
standards, we also compared our simulation results to a historical
benchmark. In the United States, GDP per capita has doubled about
every 35 years. Since World War II, annual growth in GDP per capita
has averaged roughly 2 percent. Of course, growth was faster during
some periods-the 1950s and 1960s, and the second half of the
1990s-and slower during other periods-the 1970s. Doubling GDP per
capita every 35 years represents a way to gauge whether future
generations will enjoy a rise in living standards comparable to
that enjoyed by previous generations.
While this report discusses the potential consequences of
alternative saving paths, it does not suggest any particular course
of action. The choice of the most appropriate fiscal policy path is
a policy decision to be made by the Congress and the President.
While fiscal policy is the most direct way to increase national
saving, how much the nation saves also depends on the saving
choices of households and businesses.
We did our work in accordance with generally accepted government
auditing standards from December 1999 through May 2001 in
Washington,
D.C. We requested comments from BEA, OMB, and several subject
matter experts. Staff from BEA and OMB and the experts we consulted
provided technical and clarifying comments, which we incorporated
in this report where appropriate.
Appendix II
The Economic Model and Key Assumptions
In this report, we simulated the effect of different saving
rates on the nation's standard of living using a standard model of
economic growth originally developed by economists at the Federal
Reserve Bank of New York. The major determinants of economic growth
in the model are changes in the labor force, capital formation, and
the growth in total factor productivity. To analyze the effect of
fiscal policy on saving and growth, we modified the original model
to include a set of relationships that describe the federal budget
and its links to the economy, using the framework of the National
Income and Product Accounts (NIPA). To isolate the effect of
changes in saving on growth, we varied the saving rate while using
the same assumptions for the growth in the labor force and total
factor productivity.
The model is helpful for exploring the long-term implications of
national saving and fiscal policy and for comparing alternative
paths within a common economic framework. Since 1992, GAO has
provided the Congress with a long-term perspective on alternative
fiscal policy paths.1 The results provide illustrations rather than
precise forecasts of the economic outcomes associated with
alternative policy or saving rate assumptions. The model depicts
the links between saving and the economy over the long term and
does not reflect their interrelationships during short-term
business cycles. We have made several simplifying assumptions such
as holding interest rates and total factor productivity growth
constant, but sensitivity analyses suggest that variations in these
assumptions generally would not affect the relative outcomes of
alternative policies. These simulations are not predictions of what
will happen in the future as policymakers would likely take action
to prevent damaging out-year fiscal and economic consequences.
Overview of the Model In the model, GDP is
determined by the labor force, capital stock, and total factor
productivity. GDP in turn influences nonfederal saving, which
1See Budget Policy: Prompt Action Necessary to Avert Long-Term
Damage to the Economy (GAO/OCG-92-2, June 5, 1992), The Deficit and
the Economy: An Update of Long-Term Simulations
(GAO/AIMD/OCE-95-119, April 26, 1995), Budget Issues: Deficit
Reduction and the Long-Term (GAO/T-AIMD-96-66, March 13, 1996),
Budget Issues: Analysis of Long-Term Fiscal Outlook
(GAO/AIMD/OCE-98-19, October 22, 1997), Budget Issues: Long-Term
Fiscal Outlook (GAO/T-AIMD/OCE-98-83, February 25, 1998), Budget
Issues: July 2000 Update of GAO's Long-Term Simulations
(GAO/AIMD-00-272R, July 26, 2000), and Long-Term Budget Issues:
Moving From Balancing the Budget to Balancing Fiscal Risk
(GAO-01-385T, February 6, 2001).
consists of the saving of the private sector and state and local
government surpluses or deficits. Through its effects on federal
revenues and spending, GDP also helps determine the NIPA federal
budget surplus or deficit. Nonfederal and federal saving together
compose national saving, which influences investment and the next
period's capital stock. Capital combines with labor and total
factor productivity to determine GDP in the next period, and the
process continues.
The model allows us to focus on the contribution of national
saving to output and living standards through the linkage between
saving and the capital stock. In particular, the model provides a
useful framework for assessing the long-term implications of
alternative budget policies through their effect on national
saving. Our model does not differentiate between tax policy changes
and spending changes. The aggregate effect on the amount of federal
government saving is what affects the level of national saving and
economic growth. Federal surpluses increase national saving while
deficits reduce national saving, and higher saving translates into
higher GDP. Higher GDP in turn lessens the share of the nation's
output dedicated to government transfer programs in our modeling
because we use a simplifying assumption that such programs do not
simply keep pace with overall economic growth.2
In our simulations, we make the simplifying assumption that the
combined saving rate of the household, business, and state and
local government sectors will remain constant throughout the
simulation period at 16.1 percent of GDP-average nonfederal saving
as a share of GDP since 1998.3 Future saving rates of these sectors
will of course vary in response to a variety of influences, such as
demographics, expectations, and changes in preferences.
Nonetheless, this simplifying assumption allows us to assess the
effect of budget policy on saving, investment, and output in the
future.
Labor Input Economic growth is partly
dependent on how much labor is employed. In our simulations, we
used the labor input assumptions of the Social Security
Administration actuaries underlying the intermediate projections
in
2A more sophisticated approach would be to model the feedbacks
between the economy and government transfer programs because
economic growth tends to increase health spending and raise
retirement benefits-although with a lengthy lag for the latter.
3The 3-year period coincides with federal surpluses and its use
avoids extending the unusually low nonfederal saving rate of 2000
throughout the simulation period.
Page 128 GAO-01-591SP National Saving
Total Factor Productivity
The 2001 Annual Report of the Board of Trustees of the Federal
Old-Age and Survivors Insurance and Disability Trust Funds. The
intermediate projections, which reflect the Trustees' best
estimate, reflect changes in the working age population,
particularly the increasing rate of retirement by the baby boom
generation after 2010. They also reflect projections of labor force
participation rates, unemployment rates, and weekly hours worked.
The demographic and economic assumptions imply a sharp drop in the
average annual growth of aggregate hours worked from 0.7 percent
through 2010 to 0.2 percent from 2020 through 2075.
The three sources of economic growth in the model are increased
labor input, capital accumulation, and the advance of total factor
productivity.4 The latter is a catch-all category reflecting
sources of growth not captured in straightforward measures of
aggregate labor input and aggregate physical capital employed.
These include not only the improvements in products and processes
yielded by advancing technology but also the improved quality of
labor and capital inputs, reallocation of inputs to uses where they
are more productive, and improvements in physical and social
infrastructure.
Our simulations assume that total factor productivity growth in
the nonfarm business sector will average 1.5 percent annually over
the 75-year period. Basically, we used the productivity assumption
underlying CBO's January 2001, 10-year budget projections. In its
most recent long-term modeling report, CBO assumed total factor
productivity growth of 1.7 percent beyond 2010.5 The intermediate
projections in the 2001 OASDI Trustees' report assume that labor
productivity for the entire economy will increase 1.5 percent
annually over the next 75 years. The Trustees' longterm assumption
reflects the average labor productivity growth over the
4The Bureau of Labor Statistics (BLS) publishes an official
measure of output per unit of combined labor and capital
inputs-multifactor productivity. BLS' measure of labor input not
only takes into account changes in the size of the labor force, but
also changes in its composition as measured by education and work
experience. Capital inputs are measured in terms of efficiency or
service flow rather than price or value. For more information on
multifactor productivity, see "Productivity Measure: Business
Sector and Major Subsectors," BLS Handbook of Methods, Bureau of
Labor Statistics (April 1997), pp. 89-98; and Edwin R. Dean and
Michael J. Harper, "The BLS Productivity Measurement Program,"
Bureau of Labor Statistics (July 5, 2000), paper presented to the
NBER Conference on Research in Income and Wealth on New Directions
in Productivity Analysis, March 20-21, 1998.
5The Long-Term Budget Outlook, Congressional Budget Office
(October 2000).
International Financial Flows
last 30 years and would correspond to a lower assumption for
total factor productivity growth than CBO's most recent assumption.
Our use of CBO's January 2001, 10-year assumption for total factor
productivity growth throughout the 75-year simulation period places
our long-term assumption between the Trustees' and CBO's current
long-term assumptions.
There are also important links between national saving and
investment and the international sector. In an open economy such as
the United States, an increase in saving due to, for example, an
increase in the federal budget surplus may not result in an
equivalent increase in domestic investment. Instead, part of the
increased saving may flow abroad in the form of an increase in U.S.
net foreign investment. The income earned on U.S.-owned foreign
assets adds to the nation's income (GNP). The portion of an
increase in national saving used for domestic investment adds to
the capital stock available for workers to produce goods and
services in the United States (GDP).
The model incorporates a simple representation of net financial
flows between the U.S. economy and the rest of the world.
Essentially the rest of the world is treated as analogous to a bank
where the United States can make deposits or withdrawals or draw on
a credit line. Every year there are income flows to or from this
bank corresponding to interest received on deposits or paid on
advances. The amount corresponding to the bank balance (positive or
negative) is called the net international investment position
(NIIP) of the United States, which generates a net flow of income
receipts.
A key model assumption affecting international flows is the
allocation of gross saving between its foreign and domestic
investment uses. Over the long run, we assume that market forces
such as adjustments in exchange rates, interest rates, and prices
will tend to move net foreign investment and the current account
balance towards zero. To reflect this tendency to move towards
equilibrium, we hold net foreign investment constant at the nominal
dollar level in 2000. This reduces the ratio of net foreign
investment to GDP over time as GDP grows. Changes in national
saving cause the ratio of net foreign investment to GDP to move
around its longterm trend. We assume that net foreign investment
rises by one-third of any increase in the national saving rate.
Basically, for each additional dollar saved, about 66.6 cents are
used for domestic investment and 33.3 cents are invested abroad.
Conversely, each dollar decrease in national saving is offset by
33.3 cents in foreign investment in the United States. Our
Budget and Other Assumptions
assumption is consistent with the strong correlation between
national saving and domestic investment that persists even in the
context of a global
6
economy.
This is a highly stylized representation of the foreign sector
of one country in isolation. A more sophisticated approach would be
to model a changing international environment in detail. A more
detailed approach would confront major uncertainties concerning the
actual course of world economic development, exchange rates, and
rates of return.
Table II.1 lists the key assumptions incorporated in the model.
Several of the assumptions used tend to provide conservative
estimates of the benefit of running surpluses or lower deficits and
of the harm of increasing deficits. The interest rate on the
national debt is held constant, for example, even when deficits
climb and the national saving rate plummets. Under such conditions,
the more likely result would be a rise in the rate of interest and
a more rapid increase in federal interest payments than our
simulations display. Another conservative assumption is that the
rate of total factor productivity growth is unaffected by the
amount of investment. Productivity is assumed to advance 1.5
percent each year through the end of the simulation period even if
investment collapses. Finally, one-third of any saving decline is
assumed to be offset by net inflows of foreign capital, even in the
event of a dramatic saving decline that might set off a flight of
capital from the United States. Such assumptions tend to moderate
the effect of changes in national saving in our simulations.
Sensitivity analyses reveal that variations in these assumptions
generally would not affect the relative outcomes of alternative
policies.
6See Martin Feldstein and Philippe Bacchetta, "National Saving
and International Investment," National Saving and Economic
Performance, D. Bernheim and J. Shoven, eds. (Chicago: University
of Chicago Press, 1991) pp. 201-226; and Maurice Obstfeld and
Kenneth Rogoff, "The Six Major Puzzles in International
Macroeconomics: Is There a Common Cause?" NBER Working Paper No.
7777 (July 2000).
Page 131 GAO-01-591SP National Saving
Table II.1: Key Assumptions of the Economic Model
Note 1: These assumptions apply to our base simulation, Save the
Unified Surpluses. For alternative fiscal policy simulations,
certain assumptions are varied, as discussed in the alternative
paths.
Note 2: In our work, all CBO budget projections were converted
from a fiscal year to a calendar year basis. The last year of CBO's
projection period is fiscal year 2011, permitting the calculations
of calendar year values through 2010.
Our Save the Unified Surpluses base simulation reflects CBO's
January 20017 assumption that discretionary spending increases at
the rate of inflation over the 10-year budget projection period.8
After 2010, we assumed discretionary spending would grow at the
same rate as GDP. As a
7The Budget and Economic Outlook: Fiscal Years 2002-2011,
Congressional Budget Office (January 2001).
8In our modeling, all CBO budget projections were converted from
a fiscal year to a calendar year basis. The last year of CBO's
projection period was 2011, permitting the calculation of calendar
year values through 2010.
Page 132 GAO-01-591SP National Saving
result, discretionary spending stays the same as share of GDP
from 2011 through the end of the projection period.9
Mandatory spending includes Old-Age, Survivors, and Disability
Insurance (OASDI, or Social Security), Health (Medicare and
Medicaid), and a residual category covering other mandatory
spending. The long-term OASDI spending path reflects the
intermediate projections of the 2001 OASDI Trustees' Report.10
Long-term Medicare spending reflects the intermediate projections
of the 2001 HI and SMI Trustees Reports;11 the long-term Medicaid
spending path reflects CBO's October 2000 long-term projections.12
We assume that current-law benefits are paid in full even after the
projected exhaustion of the OASDI and HI Trust Funds.
Other mandatory spending is a residual category consisting of
all non-Social Security, nonhealth mandatory spending. It is
equivalent to CBO's NIPA projection for Transfers, Grants, and
Subsidies less Health, OASDI, and other discretionary spending.
Through 2010, CBO assumptions are the main determinant of other
mandatory spending, after which it grows at the same rate as
GDP.
In our Save the Unified Surpluses base simulation, receipts
follow CBO's dollar projections through 2010. Thereafter, receipts
remain at 20.2 percent of GAO's simulated GDP on a NIPA basis,
which is the rate that CBO projects for 2010. On a unified budget
basis, revenues remain at 20.4 percent of GDP after 2010.
9If spending were to keep pace with population growth and
inflation over the long term, discretionary spending would
generally grow slower than the economy and the long-term budget
surplus/deficit would be improved. For example, see Analytical
Perspectives, Budget of the United States Government: Fiscal Year
2001, Executive Office of the President, Office of Management and
Budget (February 2000), pp. 30-31.
10The 2001 Annual Report of the Board of Trustees of the Federal
Old-Age and Survivors Insurance and Disability Insurance Trust
Funds (March 2001).
11The 2001 Annual Report of the Board of Trustees of the Federal
Supplementary Medical Insurance Trust Fund (March 2001) and The
2001 Annual Report of the Board of Trustees of the Federal Hospital
Insurance Trust Fund (March 2001).
12CBO's long-term health care cost growth assumptions are
generally consistent with those in the 2001 Medicare Trustees'
Reports. Both CBO and the Medicare Trustees generally assume
per-beneficiary costs to grow at GDP per capita plus 1 percentage
point over the long-term. See The Long-Term Budget Outlook,
Congressional Budget Office (October 2000) and the 2001 HI and SMI
Trustees Reports.
Our interest rate assumption for 2000 through 2005 is consistent
with the average rate on the debt held by the public implied by
CBO's interest payment projections in its baseline. To avoid the
substantial volatility in the implied interest rate after 2005 as a
result of declining debt, interest rates are held constant at 5.4
percent-the average interest rate assumed by CBO on short- and
long-term Treasury securities-from 2005 through the end of the
simulation period. This interest rate is both paid on outstanding
debt held by the public and earned on nonfederal financial assets
acquired by the government once debt held by the public is
eliminated.13
Our simulation period-from 2000 through 2075-coincides with the
75year period used for the Social Security Trustees' Report where
actuaries calculate trust fund solvency over a long-term horizon
that is at least as long as an individual's working life.
Because our model assumptions are based on current budget
projections and recent long-term actuarial projections for Social
Security and Medicare, our current model assumptions differ
somewhat from those used in our earlier reports. Also, these
simulations reflect discretionary spending growing with inflation
after 2001; in our earlier reports, discretionary spending was
assumed to comply with statutory caps in effect through 2002. As a
result, these simulation results should not be compared directly to
those in our earlier reports.
13Under this interest rate assumption, the level of net interest
payments and net debt would be the same if the government began
acquiring nonfederal financial assets before debt held by the
public was eliminated.
Page 134 GAO-01-591SP National Saving
Appendix III
Glossary
Wealth effect The change in consumption and saving associated
with a change in wealth. For example, households may consume more
(or save less) in response to their greater wealth due to rising
stock or housing values.
Appendix IV
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Appendix V
Related GAO Products
Long-Term Simulations
Long-Term Budget Issues: Moving From Balancing the Budget to
Balancing Fiscal Risk
(GAO-01-385T, February 6, 2001).
Budget Issues: July 2000 Update of GAO's Long-Term Fiscal
Simulations
(GAO/AIMD-00-272R, July 26, 2000).
Federal Budget: The President's Midsession Review
(GAO/OCG-99-29,
July 21, 1999).
Budget Issues: Long-Term Fiscal Outlook (
GAO/T-AIMD/OCE-98-83,
February 25, 1998).
Budget Issues: Analysis of Long-Term Fiscal Outlook
(GAO/AIMD/OCE-
98-19, October 22, 1997).
Budget Issues: Deficit Reduction and the Long Term
(GAO/T-AIMD-96-66,
March 13, 1996).
The Deficit and the Economy: An Update of Long-Term
Simulations
(GAO/AIMD/OCE-95-119, April 26, 1995).
Budget Policy: Prompt Action Necessary to Avert Long-Term Damage
to the Economy
(GAO/OCG-92-2, June 5, 1992).
Other Budget Issues
Federal Debt: Debt Management Actions and Future Challenges
(GAO-01-317, February 28, 2001).
Federal Trust and Other Earmarked Funds: Answers to Frequently
Asked Questions (
GAO-01-199SP, January 2001).
Federal Debt: Debt Management in a Period of Budget Surplus
(GAO/AIMD-99-270, September 29, 1999).
Federal Debt: Answers to Frequently Asked Questions-
An Update
(GAO/OCG-99-27, May 28, 1999).
Government Investment U.S. Infrastructure:
Funding Trends and Opportunities to Improve Investment Decisions
(GAO/RCED/AIMD-00-35, February 7, 2000).
Page 153 GAO-01-591SP National Saving
Social Security and Private Pensions
Budget Trends: Federal Investment Outlays, Fiscal Years
1981-2003
(GAO/AIMD-98-184, June 15, 1998).
Budget Structure: Providing an Investment Focus in the Federal
Budget
(GAO/T-AIMD-95-178, June 29, 1995).
Budget Issues: Incorporating an Investment Component in the
Federal Budget (
GAO/AIMD-94-40, November 9, 1993).
Federal Budget: Choosing Public Investment Programs
(GAO/AIMD-93-25,
July 23, 1993).
Social Security Reform: Implications for Private Pensions
(GAO/HEHS-
00-187, September 14, 2000).
Pension Plans: Characteristics of Persons in the Labor Force
Without
Pension Coverage (GAO/HEHS-00-131, August 22,
2000).
Social Security: Providing Useful Information to the Public
(GAO/T-
HEHS-00-101, April 11, 2000).
Social Security: The President's Proposal
(GAO/T-HEHS-AIMD-00-43,
November 9, 1999).
Social Security: Evaluating Reform Proposals
(GAO/AIMD/HEHS-00-29,
November 4, 1999).
Social Security: Capital Markets and Educational Issues
Associated With Individual Accounts
(GAO/GGD-99-115, June 28, 1999).
Social Security: Criteria for Evaluating Social Security Reform
Proposals (
GAO/T-HEHS-99-94, March 25, 1999).
Social Security: Different Approaches for Addressing Program
Solvency
(GAO/HEHS-98-33, July 22, 1998).
Social Security Financing: Implications of Government Stock
Investing for the Trust Fund, the Federal Budget, and the
Economy
(GAO/AIMD/HEHS-98-74, April 22, 1998)
Medicare
401(k) Pension Plans: Loan Provisions Enhance Participation But
May Affect Income Security for Some
(GAO/HEHS-98-5, October 1, 1997).
Medicare: Higher Expected Spending and Call for New Benefit
Underscore Need for Meaningful Reform
(GAO-01-539T, March 22, 2001).
Medicare: 21st Century Challenges Prompt Fresh Thinking About
Program's Administrative Structure
(GAO/T-HEHS-00-108, May 4, 2000).
Medicare Reform: Issues Associated With General Revenue
Financing
(GAO/T-AIMD-00-126, March 27, 2000).
Medicare Reform: Leading Proposals Lay Groundwork, While Design
Decisions Lie Ahead
(GAO/T-HEHS/AIMD-00-103, February 24, 2000).
Prescription Drugs: Increasing Medicare Beneficiary Access and
Related Implications
(GAO/T-HEHS/AIMD-00-99, February 15, 2000).
Medicare: Program Reform and Modernization Are Needed But Entail
Considerable Challenges
(GAO/T-HEHS/AIMD-00-77, February 8, 2000).
Medicare Reform: Ensuring Fiscal Sustainability While
Modernizing the Program Will Be Challenging
(GAO/T-HEHS/AIMD-99-294, September 22,
1999).
Medicare Reform: Observations on the President's July 1999
Proposal
(GAO/T-AIMD/HEHS-99-236, July 22, 1999).
Medicare and Budget Surpluses: GAO's Perspective on the
President's Proposal and the Need for Reform
(GAO/T-AIMD/HEHS-99-113, March 10,
1999).
Other Tax Administration: Potential Impact
of Alternative Taxes on Taxpayers and Administrators
(GAO/GGD-98-37, January 14, 1998).
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