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How Government Punishes Savings

Friday March 29th, 2013   •   Posted by K. Lloyd Billingsley at 4:11pm PDT   •  

sinking-piggy-bank_squareThe budget recently passed by Senate Democrats approves spending of $3.7 trillion over the next year alone, and this is not a new trend. Economist Burton Abrams notes that since 2000, the U.S. federal government has overspent in excess of $10 trillion. Deficits of $16 trillion confirm that government has a hard time saving. That is bad enough but the government also makes it increasingly harder for Americans to save.

In 1980 saving as a percentage of after-tax household income, was 10 percent. As Valentina Pasquali and Tina Aridas of Global Finance note, now it’s a paltry 4 percent and far below the rates for Switzerland at 12 percent; Germany 10.6 percent; and Australia at 9.1 percent With savings down, Americans, particularly baby boomers, are looking to Social Security and Medicare to handle their retirement needs. But they might be in for a surprise.

In his book The Third Lie: Why Government Programs Don’t Work – and a Blueprint for Change, Richard Gelles, dean of social policy at the University of Pennsylvania, confesses he did not know that there was no Social Security “account” for him. That is true, and there isn’t one for anybody else either. As Abrams explains, in a Ponzi-like scheme, the government had already transferred the proceeds from the Social Security tax to others. But that’s not the end of it.

Social Security and Medicare are in trouble and government may resort to means testing recipients. If that happens, Abrams warns, those who did save for their own retirement will find their benefits reduced. This amounts to a punishment for having saved one’s own money, and has consequences for the economy. The main domestic source of funds for capital investment, business expansion and such, explain Pasquali and Aridas, is household savings.

But as Abrams observes, the United States government has essentially destroyed household saving and substituted tax claims on future workers. That can only be described as incredibly bad government, but nobody on the federal scene is crafting new policies that promote public and private saving. Meanwhile, in addition to $3.7 trillion in spending over the next year, the recently approved budget approves $1 trillion in tax increases over the next decade. Remember, taxes are due April 15.

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March 2013