Beyond our means
We all know that saving more and borrowing less is critical for our financial health. Considering how harsh the last couple of years have been on so many people -- from young adults looking for work to retirees watching their pensions vaporize -- it's doubtful that old profligate habits will reassert themselves. Memories aren't that short.
The pressure to take financial responsibility isn't going away, either. Employers insist that workers take a do-it-yourself approach toward funding retirement (think 401(k)s). Colleges expect parents and students to come up with more tuition dollars (think student loans). Families are forced to reach deep into their pockets to pay health care bills (think high-deductible health insurance). For millions of Americans, their jobs and careers are insecure, turning everyday bill paying into a juggling act (think pink slip).
The good news is that despite stagnant wages, so many people are trying to do with a little less to save more.
Problem is, when it comes to restoring a better balance between spending and savings, we're largely on our own. We live in a DIY savings world. It's your fault if you didn't set money aside for an emergency, your kid's college education and your retirement. Yet there are very few resources that make it easy for small savers to set aside small amounts of money.
The rest of the world is different. In large parts of Europe and Asia, nationally based institutions encourage small savings, often offering incentives for even very small sums of money. In sharp contrast, the incentives in the U.S. are geared toward encouraging borrowing. "People who save also spend, and they borrow to buy homes and finance education," writes Sheldon Garon, professor of history and East Asian studies at Princeton University in his new book, Beyond Our Means: Why America Spends While the World Saves. "The key, as Japanese and Europeans have long argued, is the need for balance. From a global perspective, the United States dangerously departed from that balance over the past two to three decades."
"Dangerously departed" from thrift is right. Certainly, our public policies have encouraged borrowing rather than savings. For instance, we've lavished tax breaks on borrowing to own a home, including the mortgage interest deduction. In sharp contrast, Germany hasn't actively promoted homeownership. Instead, its priority has been encouraging savings and 85 percent of young people ages 14 to 24 had a savings account in 2003, according to Garon.
The savings and public policy history of other countries and the contrast with the American experience is a compelling story. Garon makes a powerful case that savings isn't about culture. It's policy.
We should learn from other nations, Garon says, as he delves deep into the experience of savings programs around the world through time. We could also take some lessons from our own history. Did you know that we had a (terrible) postal savings system in the early 20thcentury? (I didn't.) School savings banks were popular in the late 19thand early 20thcentury, too. Yet they largely disappeared after the Great Depression and World War II. In the postwar period, the emphasis changed from educating young people about thrift and savings to teaching them about consuming and borrowing.
Sad to say, the 19th and early 20th century notion of the democratization of savings became the late 20th century idea of the democratization of credit.
Taking steps at all levels of society -- government, business and education -- to expand low-cost very convenient savings institutions for small savers with small sums of money could go far in turning the current national conversation about the need for greater thrift into the reality of good money habits for the majority of Americans.
Here's an intriguing idea. Garon recently wrote an article suggesting the U.S. bring back postal savings as a means of both improving small savers' financial access and "saving" the post office itself. Why not? However, it should be modeled on the best practices for national postal savings systems rather than America's designed-to-fail experiment. I've argued elsewhere that credit unions and other financial institutions should set up shop in schools around the country. How about eliminating the mortgage interest deduction and substitute the tax-free treatment of all small savings (as in France and Germany)?
There's a lot that can be done to encourage greater savings in the U.S. It isn't a tale of denial and stinginess. No, it's about balance and freedom from the debt collector. You'll think about savings policies differently after pick up a copy of Beyond Our Means.