HOUSE Resolution 67, which is currently waiting for the president’s signature, rolls back a rule that the Labor Department finalised late last year, which would have made it easier for cities and counties to run retirement savings plans for citizens who couldn’t get them through work. It is an odd choice for Republicans to kill plans that would encourage private, voluntary, tax-deferred saving, which they tend to approve of. But a trade group for investment funds opposes the city-run retirement plans. The Democrats on Capitol Hill, beset with other problems, are not picking a fight.
They should. The resolution itself is nothing more than a kick in the shins for the three cities, all run by Democrats, that had considered setting up plans—New York, Philadelphia and Seattle. But it points to a larger problem, which neither party has confronted. The United States has a retirement crisis, which it is treating like a savings crisis. They are not the same thing.
In traditional macroeconomics, all saving serves the same purpose: investment in the capital stock, or new machines to make stuff. Workers either spend from their paychecks on rent and food, or put money away in bonds, shares or savings accounts. Through the magic of capital markets, their savings both return interest and buy machines and tools—capital stock. In turn, this stock becomes component of the basic model for economic growth. These economic models consider only the aggregate sum of all savings: 100,000 funded pensions are worth the same as a single billion-dollar estate.
It is easy to conclude from economics textbooks that more saving is always and everywhere good. Paul Samuelson, the Nobel prizewinner from MIT who also tutored President Kennedy in 1960, wrote the dominant primer on macroeconomics for 20th-century undergraduates. In an edition from 1973, he explains the way countries form capital:
Two kinds of thrift are involved. First, people must resist the temptation to eat up some of the capital amassed in the past; they must “abstain” from consuming more than their current incomes… Second, if there is to be positive net capital formation, the community must usually undergo “waiting”—in the sense of giving up consumption goods now in return for more such goods in the future.
Mr. Samuelson does concede that a country might save so much that it drives down the value of what it has saved, reducing interest rates. But his language—thrift, resisting temptation, abstention—makes it clear that saving is a virtue. Greg Mankiw of Harvard, whose textbook on macroeconomics has replaced Samuelson’s, is even more explicit that there can be too much as well as too little saving. But when discussing what governments can do to change the savings rate, he proposes solutions that all increase it: higher taxes on consumption, for example, or lower taxes on capital gains. So what all policy-makers learned as undergraduates in 1975 or 1995 is that there could be too much capital in theory, but it is unlikely to be a problem that needs fixing.
There is, now, too much capital. Ben Bernanke, then chair of the Federal Reserve, first described a global savings glut in 2005. It is a well-studied and well-known phenomenon; here is Lawrence Summers of Harvard summing it up last year. And, as predicted in both Samuelson and Mankiw, there are not enough investments to accommodate the world’s savings, and interest rates have dropped. Yields for both high-quality corporate bonds and long-term American federal debt are now lower than at any time since 1973 (see chart).
Members of Congress, however, seem to remember only that saving is good. As Washington considers rewriting the tax code, neither party is pushing to raise taxes on dividends, capital gains or estates, all of which could encourage more consumption now and drive down the total level of saving. Republicans have even signalled that they are considering a value-added tax, which discourages consumption.
They continue to ignore the savings crisis that should worry them: Many Americans do not have enough savings ever to be able to retire. Traditional macroeconomics cares only about aggregate levels of capital stock. There is plenty of that. But it is shared among too few people. The median family of retirement age has $12,000 in savings. That is a terrifying figure for a country where Social Security, the state pension, pays out a maximum of roughly $2500 a month, and pensions for both public and private employees are underfunded.
For the median, wage-earning family, the best way to encourage saving is not to lower capital gains taxes or estate taxes, but to give the family access to a retirement plan that delays taxation until retirement. (In his textbook, Mr Mankiw encourages these plans, but only as another way to increase capital investment.) For those who put money into one, median accounts at retirement age rise to about $100,000—still inadequate for a lengthy retirement, but a significant improvement. About 70 percent of Americans have access to these plans through their employers. But just over half use one.
The prospect of a large number of old people living in poverty should be as alarming as insufficient capital investment, not least because federal and state governments may be called upon to fix the problem with more money. The city-run savings plans would have addressed one small piece of the problem—offering plans to some private workers who currently do not have them, and encouraging the workers to use them through automatic enrolment. By rejecting the plan, Congress just made cities’ work more difficult. Macroeconomists do not have to care about the difference between a billion-dollar portfolio or 100,000 funded retirement accounts. But policymakers should put down their Samuelson and learn it.