In the throes of the Great Recession, lawmakers worked to pull the country out of the downturn by introducing stimulus intended to boost spending and lift demand for goods and services. Now some economic experts say it's time for Americans to do just the opposite.
It's saving, not spending, that will solidify the recovery and make the country less vulnerable to another downturn, says a report released Tuesday morning by the consulting firm Oxford Economics and sponsored by retirement focused groups including AARP, the American Society of Pension Professionals & Actuaries and financial firms such as Bank of America Merrill Lynch, Natixis Global Asset Management and Putnam Investments.
Many Americans, after reducing the debt loads that burdened them during the downturn, may now be ready to start saving and eventually, to become investors, says Adrian Cooper, chief executive officer of Oxford Economics. "In the context of a healthy economy, now is the time to start thinking about the ways to encourage saving on a longer term basis," Cooper says.
The thinking is that by boosting savings, specifically retirement savings, people will be less likely to fall into poverty in old age, making them less reliant on government-funded programs like Medicaid. They might also have more money to pass on to their children or to invest in the market, reducing the need for American companies to rely on foreign capital. Indeed, the writers argue that raising the savings rate could add $7 trillion to the U.S. economy over the next 25 years.
"The impact on the economy of savings is much larger than anyone would expect," says Bob Reynolds, president and chief executive officer of Putnam Investments.
Still, Americans aren't saving. Even though many say they understand the importance of saving, especially in the wake of the recession.
A separate survey from Wells Fargo released this month shows that roughly 80 percent of millennials said the recession taught them the importance of saving in order to weather economic downturns, but only slightly more than half are saving for retirement. And of those who are saving, almost half were setting aside only one to five percent of their income.
The report from Oxford Economics notes that the average American household socks away 3.8 percent of its income. Of course, many families are struggling to save at a time when wages are flat and there are still 3.5 million people looking for work who have been jobless for six months or longer.
Researchers suggest that trend can be reversed if employers and lawmakers make it easier for people to save. Employers might boost participation in retirement savings plans if they automated the process, the report notes. That includes automatically enrolling people and giving them the ability to opt-out, instead of requiring them to opt-in to a plan. It also includes automatically escalating their saving rates each year. "What we see is that folks who are automatically enrolled, they don’t opt out more frequently than those who are not automatically enrolled," says Gary Koenig, of the AARP Public Policy Institute.
Companies may get more workers to sign up for a 401(k) plan if they nudge people through an e-mail or offer incentive to save, such as a matching contribution. But in order to meaningfully boost the savings rate, researchers noted, employers and lawmakers will need to increase access to retirement savings accounts. And lawmakers can broaden access to tax-advantaged saving vehicles by encouraging-- or requiring-- more employers to offer plans.