Raise domestic savings rates by making saving easier
David Laibson our guest wrote on Aug 6th 2010, 16:28 GMT
HERE are six ways to raise the savings rate without twisting arms. A higher savings rate will suppress imports and raise exports, closing the current account deficit.
1. Require all employers to default workers into a retirement savings plan. Let workers opt out if they don’t want to save.
2. Require all employers to use income-based default savings rates: 2% for low income workers, scaling up gradually to 15% for workers with the very highest incomes. (Low income workers have a relatively high Social Security replacement rate, so they don’t need to save as much.)
3. Make auto-escalation the default. In other words, after workers join the savings plan, automatically raise their savings rate 1% each year for five years. Workers can opt out if they don’t want auto-escalation.
4. Disallow early withdrawals from retirement savings accounts, (but keep loan features).
5. Repeal mandatory withdrawals from retirement savings accounts (after age 70½).
6. Cap expense ratios on retirement savings plans and other retirement savings accounts at 1.5% per year for small plans, 1% for medium-size plans, and 0.65% for large plans. (This reduces implicit dis-saving through payment of fees.)
If these six policies were adopted in the United States, the effective savings rate would rise by enough to wipe out the current account deficit. Moreover, nobody would be forced to save, since workers would have the opportunity to opt out.