Why American Savings Are Inadequate (Aug 2013)

piggy-bank

Source: Forbes – Why American Savings Are Inadequate

Notable excerpts:

The news from the latest survey from bankrate.com that 76 percent of Americans don’t have enough savings to cover at least six months of emergency expenses probably won’t shock anyone who has been watching the deteriorating state of Main Street finances.

Families have been stretched to the limit. Many dipped into 401(k)s during the recession as unemployment surged beyond 8 percent.

Adding salt to that wound is the finding that more than one quarter of those surveyed had no emergency savings at all.

Although the debt-to-service ratio for American households — a gauge of debt payments to disposal income — dipped from a high of 17-plus percent in 2007 to just under 14 percent earlier this year, according to the Federal Reserve, Americans got gobsmacked by the loss in home equity after the housing/credit bubble burst and stock market crash of 2008.

Millions regarded their homes as piggy banks, and even tapped equity during the boom through loans to get at the bubble-induced equity. Unfortunately, getting into more debt and spending it on consumer goods (cars, boats, vacations), wasn’t the same thing as building emergency savings.

Cash became scarce after the bubble burst and it became nearly impossible to make money on after-tax/after-inflation returns in ultra- short-term bonds, money market funds or insured deposits. On top of that, disposable income was likely sucked up by soaring medical or college bills and debt repayments. For more than 15 million, the costs of being unemployed also vacuumed cash.

Ironically, the recently announced Fed pullback on its easing programs has triggered some upward movement in short-term interest rates. If the central bank allows rates to climb — along with inflation — that might be an incentive for savers.

While that may not happen soon, it’s time for Congress to consider a universal savings account that’s tax free.  It wouldn’t be earmarked like health savings or retirement accounts. You could use the money for any purpose, you just wouldn’t be taxed on contributions. At present, bond and savings interest is taxed at your marginal rate in non-retirement accounts.

It’s not fair that money that most Americans need to get through a rough patch is taxed like it’s salary income. If Washington wants Americans to gain a little financial cushion — which they’ve lost in the last decade — they’re going to need to add some more incentives for savers.  Few can wait on the Fed to act.

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