Sponsors of savings proposals hope
public buys idea of putting money away
By Michelle Samaad • Bankrate.com

The news is disturbing: Americans are spending so much of their money that the personal savings rate fell to 0.5 percent -- the lowest figure since 1946, Federal Reserve Board Chairman Alan Greenspan said May 24.

And on May 28, the Commerce Dept. reported that while Americans' personal income rose 0.5 percent, their spending climbed 0.4 percent.

While the good news is that salaries are on the upswing for many families, it often means that the extra cash is going toward exotic vacations and cars, not long-term savings such as retirement.

Financial experts warn that millions of today's workers will have to accept a lower living standard after retirement unless they increase their savings.

Children, poor, middle class targeted
A number of rescue programs, essentially offering free money from Uncle Sam, are in the planning stages. They are targeting the most vulnerable groups: children -- who may not see Social Security earnings when they retire -- and people with low- and middle-income salaries who can't afford to save for the so-called golden years.

"We are in a desperate situation," says James H. Castle, a certified public accountant in Cedarburg, Wis. "Unless we hammer home the message that saving for retirement is not a luxury but a necessity, there's going to be a whole generation of people who will be caught in financial straits."

For the past few years, President Bill Clinton has hosted White House meetings on ways to educate consumers and employers about the urgency of participation in retirement programs. His latest weapon involves establishing a government savings account that would match personal contributions dollar-for-dollar. It is aimed at the estimated 73 million workers who have no individual retirement accounts, pensions, 401(k) or other retirement savings plans.

Clinton's Universal Savings Account proposal works this way:

• Full eligibility for individuals earning less than $40,000 a year, and married couples earning as much as $80,000.
• Every year, an individual would receive a $300 tax credit, with the cash coming from the federal budget surplus; a married couple would receive a $600 tax credit. The credit would automatically be deposited into a special savings account at a bank, thrift or credit union.
• In addition to the tax credit, the government would match dollar-for-dollar the amount of money a person or couple contributes to the account. For instance, the government would match a $200 contribution with $200. The maximum contribution each year would be $2,000.
• Contributions to the account would be tax-free until the money is withdrawn at age 65, unless the participant dies. Participants would not be allowed to borrow money from the account for financial hardship. If money were to be withdrawn prematurely, the participant would have to pay an early withdrawal penalty -- the amount has not yet been determined.
• Participants would pay taxes on withdrawals once they reach retirement age.
• Once a withdrawal is made after age 65, no additional contributions can be made to the account.

Here is an example of how the USA would work: A 25-year-old person contributing a maximum of $2,000 each year would save $76,104 by age 65, assuming a 5 percent rate of return. A married couple would build up $253,680 during the same period.

While the account is targeted toward those earning a modest income, a modified version would be available to couples who earn $80,000 to $100,000 a year. The government would match 50 cents for each dollar contributed by the participant.

Nothing left to save
Some people won't get the most out of this plan. "Most taxpayers faced with the choice of paying rent or medical bills, or putting aside money for an event 40 years in the future, are unlikely to have the extra amount on hand to receive the federal match," says David C. John, a senior policy analyst for Social Security at The Heritage Foundation, a research and educational institute based in Washington, D.C..

So who benefits most? "We're taking about ... the average person who has the means to save but just doesn't," says Tahira K. Hira, a professor of family and consumer science at Iowa State University in Ames.

On the surface, it sounds like a solid, preventive plan. But some critics argue that the cost to create the government accounts -- an estimated $500 billion over 15 years -- would be footed by all taxpayers.

At publishing time, the USA proposal remained stalled in the House of Representatives.

While Clinton's plan is geared toward middle-aged adults, at least one senator thinks the focus should be on the youngsters. How young? Say, newborns.

Beginning at the beginning
Under Sen. Bob Kerrey's (D-Neb.) KidSave plan, a savings account would be set up at a bank or credit union for every child born. Here is what Kerrey is proposing:

• Upon the birth of a child, the government would provide $1,000 to a savings account and add another $500 each year until the child's fifth birthday.
• When the child turns 5, the parents can invest the money in the account in investments such as stocks, bonds or mutual funds, until the child reaches age 18.
• When the 18-year-old starts working, as much as 2 percent of the withholding on a paycheck can be contributed to the KidSave account.
• The KidSave account holder would not be allowed to withdraw from the account until age 65, similar to a 401(k). The only likely exception would be if the participant becomes disabled.
• If a participant dies, the money would be presented to the parents, a designated custodian or heirs.

The cost of the KidSave program to taxpayers? Approximately $14 billion each year until the child reaches age 5. The Social Security Administration would run the program.

"Many senior citizens who rely on Social Security now are eking out a living from check to check each month," says Jody Ryan, Sen. Kerrey's deputy press secretary. "Fixing the (Social Security) problem sooner might mean that Congress could spread the burden of fixing the program across all generations."

Kerrey's bill is currently before the Senate.

Making citizens stakeholders
While Clinton and Kerrey's proposals involve long, drawn-out contributions and investments, one radical idea rewards every 21-year-old American with cash.

Bruce Ackerman and Anne Alstott, authors of The Stakeholder Society, propose giving 21-year-olds $80,000 to spend on whatever their heart desires.

Retirement savings would certainly be a choice but the idea is to invest a stake in something substantial such as paying for college, buying a house or even starting a business.

Who would foot the bill for this windfall?

Those who can really afford to give their money away, the authors say: the wealthy. The $250 billion it would cost to distribute the money would be obtained through a 2 percent annual wealth tax paid by the wealthiest 40 percent of Americans.

Meanwhile, what can people do to prepare themselves for the day they stop working? It's a familiar piece of advice, but financial planners recommend starting something -- anything -- now to get into the habit of saving.

"Even if you start small, it's a start," says Robert E. Pennington, an academic associate with the College for Financial Planning in Denver. "The discipline and the accumulation of money each week or month may surprise those who didn't think they could save."

Pennington also suggests investing in your employer's 401(k) program. With a standard 401(k), people can contribute up to 15 percent of their income each year. Their employers may match the contribution to some extent. Typically, the employees have the option of deciding how to invest the total contribution.

-- Posted: June 1, 1999