This week I wanted to take a longer look at a single issue: savings rates. Several weeks ago, I received a question about savings rates. This seemed like a good opportunity to shed some light on a subject that is widely talked about by politicians, but I think often misunderstood by them and voters.

Here's an excerpt of the original reader question:

I'm currently researching the importance of increasing personal savings in the United States. I would appreciate your professional opinion on the following:

1. What is the rate of current personal saving in the U.S.?

2. Do you think Americans are saving (investing) enough today for their retirement?

3. What effect do you think the increase of baby boomers reaching retirement and longer life expectancies will have on the U.S. Social Security and Medicare systems?

If you have any comments on the topic of personal savings in the United States, and any relevant information you can refer me to, I would appreciate it.

TB: For years I've read the reports about our poor savings rate compared to other countries'. I have always wondered about these stories because I have never been able to find a detailed explanation of how these comparative results are generated. I've learned that knowing what goes into such studies is essential to knowing what conclusions should be drawn from the results. My knowledge of the general savings rate has come from what I read in the press; therefore, it probably isn't any better than yours.


Based upon my experience with specific individuals, the savings rate of Americans is a mixed bag. Many workers who have the opportunity to save using vehicles such as 401(k), 403(b) and 457 plans are saving enough to achieve a comfortable retirement. However, close to 50 percent of our work force doesn't contribute to such plans. Many of these workers are too young to worry about saving for retirement and many others are part-time employees who are working to supplement other sources of family income. My best guess is that at least 25 percent of workers who are not saving for retirement are in serious trouble as a result of the failure to do so.

Five years ago, I wrote a book entitled Escaping the Coming Retirement Crisis, which covered my concerns about the long-term problems with the Social Security and Medicare systems. Keeping these systems going without some significant changes beyond 2015 will be a challenge, particularly if we suffer a serious economic downturn. We need to sustain a modest rate of economic growth and to keep inflation in check. The current budget surpluses come solely from Social Security and Medicare taxes. These surpluses will be needed later to keep Social Security and Medicare going. It disturbs me when Congress, President Clinton and this year's presidential candidates propose using portions of this surplus for things other than funding the benefits that are promised through these systems. Our elected officials need to either do everything they can to provide the benefits that have been promised or have the guts to change the system. Retaining the future benefit promise and then tampering with the financial security of the system is dishonest.

Certainly continuing to promote savings is desirable. During the early days of 401(k), the attitude of policy makers in Washington was that retirement savings was a big black hole sucking up tax revenue. In fact, an attempt was made by the Reagan Administration to totally kill 401(k) plans. I always felt that such savings help our economy by generating much-needed capital. I don't think it is an accident that the tremendous growth of 401(k) assets during the past decade has also been a period of sustained economic expansion. I wouldn't claim that retirement savings is the sole reason for this economic growth but it is a significant factor. Having individuals saving for their own retirement is better than expecting the government to do so for them.

I recently attended the 5th Anniversary Celebration of the Retirement Savings Education Campaign, which was hosted by the Department of Labor. I spent many years visiting Washington when retirement savings were constantly under attack. Having high-ranking government officials enthusiastically support retirement savings is a huge change.

Treasury Secretary Lawrence Summers said, "Savings are important to the economic well-being of America."

From all indications, retirement savings will continue to receive a high level of national support regardless of which party controls the White House and Congress.

The upshot: Policy makers are now apparently convinced that savings are closely tied to the economic well-being of the country.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every Tuesday. With over 30 years of experience as an employee benefits consultant, Ted is a nationally recognized expert on benefits issues. He has authored two books, Helping Employees Achieve Retirement Income Security and Escaping the Coming Retirement Crisis, and is President of the 401(k) Association. Ted is a frequent speaker at meetings of 401(k) plan sponsors and participants. His articles and comments have appeared in numerous publications, including The New York Times and The Wall Street Journal.

Read Ted Benna's Biography

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The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

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