William G. Gale

Perspectives on the Household Saving Rate

We evaluate official saving rate measures in light of the recent decline of NIPA personal saving to effectively zero. We find, like others, that official saving measures are not representative of basic economic concepts, and that various adjusted measures of saving have moved in markedly different directions over the past two decades.In particular, although NIPA personal saving declined from about 5 percent of GDP in the 1970s and 1980s to less than 0.5 percent in 1998, a measure that adjusts personal saving for durables, retirement accounts, inflation, and tax accruals, and integrates personal and business saving fell from about 9 percent of GDP in the 1970s and 1980s to 7 percent in 1998. Using this measure, which we would claim is closer to an economic concept of saving, the decline is much smaller, and the current level of saving is much higher, than under the conventional measure. Adjusted Flow of Funds saving data show a similar decline. They also show that borrowing is not significantly out of line with prior years, and that the vast portion of the decline is concentrated in net acquisitions of non-retirement assets.Adding capital gains fundamentally changes recent trends. With all capital gains included, the adjusted household saving rate is the highest in at least the last forty years, despite the personal saving rate being zero. However, it remains controversial whether it is appropriate to include capital gains in general, and the recent capital gains in particular, in saving.Our findings suggest that, in principle, all discussions of whether saving has risen or fallen, and by how much, need to be qualified by the concept and measure of saving employed. In practice, this distinction appears to be particularly crucial when considering data over the recent past.

Economic Effects of Fundamental Tax Reform

[© Brookings Institution] The tax system profoundly affects countless aspects of private behavior. It is a powerful policy influence on the distribution of income and it is the one aspect of government that almost every citizen cannot avoid. With tax reform high on the political agenda, this book brings together studies of leading tax economists and lawyers to assess the various reform proposals and examine the effects of tax reform in several distinct areas. Together, these studies and comments on them present a balanced evaluation of professional opinion on the issues that will be critical in the tax reform debate. nThe book addresses annual and lifetime distributional effects, saving, investment, transitional problems, simplification, home ownership and housing prices, charitable groups, international taxation, financial intermediaries and insurance, labor supply, and health insurance.

Financial Literacy: What Works? How Could it be More Effective?

This paper highlights the extent and effects of financial illiteracy among American households, reviews previous efforts to promote financial literacy, and discusses new directions for such initiatives. None of the four traditional approaches to financial literacy - employer-based, school-based, credit counseling, or community-based - has generated strong evidence that financial literacy efforts have had positive and substantial impacts. Nevertheless, the apparent success of financial planning efforts and of simplification initiatives suggests that there are both private actions and public policy strategies that can influence saving behavior. There is a key role for the private sector in enhancing financial literacy and the market is responding rapidly to try to fill the void. At the same time, there is an at least equally important role for the public sector, via a campaign that revolves around a comprehensive website, and through better coordination of existing policies toward saving. We conclude that improving financial literacy should be a first-order concern for policy-makers, and that gains could accrue not only to the affected individuals, but also to their family members and society at large.

Lifetime Earnings, Social Security Benefits, and the Adequacy of Retirement Wealth Accumulation

This paper provides new evidence on the adequacy of household retirement saving. We depart from much previous research on the adequacy of saving in two key ways. First, our underlying simulation model of optimal wealth accumulation allows for precautionary saving against uncertain future earnings. Second, we employ data on lifetime earnings. Using data from the 1992 Health and Retirement Study, we find that households at the median of the empirical wealth-lifetime earnings distribution are saving as much or more as the underlying model suggests is optimal, and households at the high end of the wealth distribution are saving significantly more than the model indicates. But we also find significant undersaving among the lowest 25 percent of the population. We show that reductions in Social Security benefits could have significant deleterious effects on the adequacy of saving, especially among low-income households. We also show that, controlling for lifetime earnings, households with high current earnings tend to save far more adequately than other households.

Developing and Disseminating Financial Guidelines for American Households

Household financial planning can be challenging and household members often lack basic financial literacy skills. This paper discusses the potential and pitfalls of one approach to solving these problems — the development and dissemination of financial guidelines simple enough to be explained in graphic form. The discussion is motivated by the history of nutritional guidelines, namely the Food Pyramid and MyPlate. Financial and nutritional choices share several salient features, including the trade-off between current and future choices, the underlying complexity of the problem, and the auspicious effect that simple rules-of-thumb can provide. We conclude that financial guidelines can be most effective if they meet the following criteria. First, the guidelines should be simple, accurate, and comprehensive. Second, alternative versions of the guidelines should be developed to reflect the divergent economic circumstances of people at different points in the life-cycle, or who for other reasons face different economic situations. Third, the guidelines should be designed to be a focal point for the development of new, appropriate financial products and services. Fourth, the financial guidelines should be widely disseminated from an unbiased source of financial information and planning.