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Why Americans Don't Save

It's a puzzle: as a recent World Bank study claims, the people in the U.S. have the highest "average" income in the world--or the second highest, next to Luxembourg. But to many it seems we have no money and no savings, that our Social Security may collapse and that we won't have anything to live on in our old age. How can this be?

I look at my own IRA and groan. People my age, in their 40s, are saving at less than a third the rate our parents did. Or so say some economists. Others say no, it's people over 50 who aren't saving. Somebody isn't. Is it you?

I know, I get sick of the alarms, too. "Social Security will collapse." "The world will end." And it never does. But I'm a pension lawyer, and I talk to other pension lawyers. "I think," one of them said, "this really is it." And, if they do get around to cutting Social Security, whose will they cut first? Won't it be yours, you who practice law or who think you're "elite"? Are you ready for that? Instead of playing golf at 78, do you want to work at Montgomery Ward? Once I thought of Social Security as, I must admit, sort of a white-trash benefit. But now, seriously, I'd kind of like to have it.

How could this have happened?

March 2, 1995. (I should start keeping a journal like Shirer's Berlin Diary. I guess somebody is.) Today they almost passed the balanced budget amendment, which could have shattered the Republic--not to mention affect my Social Security.

Shouldn't I be taking out an IRA? No, I should have done that years ago. Now at 46, it is, as they say in the financial magazines, almost too late to start. Too late! Damn it, I knew this would happen, too.

When I was in college, in the 1960s, I used to look at the Self-Portrait by the German expressionist Max Beckmann. In the painting, it's late Weimar, or even later. Beckmann, in a tuxedo, is holding a cigarette and just staring, staring: bald, middle-aged and somehow implicated in the Evil. At 19, I'd stand in front of Beckmann's painting and think, "When I'm 40, that's how I'll look. It'll be late Weimar all over again, and I'll be bald, staring, implicated." But, when I did turn 40, it seemed as if nothing would really happen. I was still jogging, and drinking Evian, just as I did in college. I still didn't read, yet, Longevity magazine. Yet, out there in the U.S., the wages were falling. It was getting darker. And all this time, like a fool, I didn't save. Now I might not even have Social Security. No, that's crazy. Of course I will.

But in my mind I see a picture of the House Republicans marching on the Senate, waving their fists and shouting. Only I can't hear them, because I've rented a tux like Beckmann's, and I'm standing in front of a mirror, wondering what I'm going to do.

Of course, I could move to Europe. That's one option. "You don't need a job," my friend Joe-Tom has been saying. "You just need enough money for three months, and then something will turn up." Let's suppose, then, I could leave. What about my fellow Americans, the bottom 80 percent? "Only a coward would leave now," I tell myself.

Still, by virtue of my occupation, I should know what's coming. Since 1979, the hourly wage, along with nearly every other index, has been falling. At first it was small, but now there's panic. Some people, the Cato Institute types, are still in denial.

"Well, household income is falling because there are more divorces."

"But more people have jobs."

And what about the hourly wage? And median family income? And aren't people working longer hours? Finally, what about savings?

Here we have to distinguish between "national" savings and "personal" savings. "National" savings have fallen, obviously, because of the huge budget deficit. But it doesn't necessarily follow that "personal" savings should drop. Even if median income has fallen, total income in the U.S. is going up. If the rich are much, much richer, you would even think that personal savings would increase. Or that we would be saving more for retirement.

But it seems that both national and personal savings rates are falling. And there's not enough money for retirement, either. Why? One school of thought blames baby-boomers for failing to put away a mere third of what they need for retirement. Another school blames the boomers' parents for not saving enough for retirement.

Let's start with the drop in the big one, the national savings rate. By one standard measure, the U.S. in the 1950s had a savings rate of 7 percent. That wasn't much, even then, compared to the current rate of 12 percent in Germany or 17 percent in Japan. But we're Americans. This is the U.S. Every day here, ever since the Pilgrims landed at Plymouth Rock, has been the Day of the Locust. So it was impressive, at the time, to have a rate of 7 percent.

Then the net national savings rate began to drop. We busted unions, we pushed down wages and we started screaming for tax cuts. By the Reagan era, the rate was down to 3 percent. By the 1990s, it was 1.8 percent. In other words, we now have a net national savings rate of about 1 percent. (Remember, we in the U.S. have the highest "average" incomes in the world, although that "average" includes Michael Jordan and Bill Gates.) How could our savings rate be so low?

It wasn't just the government borrowing too much. The personal savings rate since the 1950s has dropped by a third (when you figure it as a percentage of disposable income). With all the rich at the top, and the huge haul of money up there, you might have figured that at least the personal savings rate would have shot up in the new top-heavy United States. But, no, we're only at 4 percent, behind the Germans, the Japanese and most others. Even the Belgians are up there at nearly 20 percent.

Remember how they kept pounding into us, back in college, that S=I? Savings equals Investment. If we have a savings rate of only 1 percent, how are we going to invest?

Of course, in the advanced courses, one finds out that S need not equal I or maybe even shouldn't. Keynes, for example, disliked people who "saved." Of course he would. He and all his Bloomsbury friends used to laugh at the Victorians, bluestockings who thought they should scrimp. In Robert Skidelsky's biography of the economist, Keynes seems, at times, almost to blame them for England's slump.

Besides, it's chilling to think what might have happened in the U.S. since 1979 if people had actually saved. Wages were dropping. We had less to spend. We used credit cards like never before just to keep up. If we had saved, demand would have dropped even more.

I like to think about the equation S=I. What I did I stop by not putting in more S? When I drive west of Chicago, I can picture the buildings that didn't get built because I threw it all away on bad dates. But what if I'd saved it? It would have gone into Wal-Marts, Waldenbooks, squalid little glass things. I'm glad when I drive out here. Because I chose not to save, the banking system couldn't lend out my money. Good. Let them get it from Japan.

The question of how much less we're saving remains a murky one. To begin with, many economists define savings differently, with some, for example, including our houses as part of our savings and some not. And there are so many conflicting studies that as a pension expert I know says, "Only a non-economist can understand it."

I will summarize what I think we do know:

(1) The way most of our money is saved is through pensions.

(2) It was once thought that pension funds would be the overwhelming source of our corporate equity. In a 1976 book called The Unseen Revolution: How Pension Fund Socialism Came to America, economist Peter Drucker crowed that pension funds would soon own most of U.S. business. Without even knowing it, the "workers" would own 60 percent of equity by 1985. By Drucker's estimate, the plans already owned a quarter. What actually happened? By the 1990s, the plans, public and private, still owned only about a quarter. The Unseen Revolution turned out to be a dud.

(3) Some traditional pensions are worth less and are more volatile. If this is how most Americans save, then most Americans aren't saving. The trusty old traditional plans by which we once saved have declined, and our pension savings now seem less stable. We save through 401(k)s. We invest in mutual funds. We look for the quick buck. I hear my friends say, "I know I should invest for the long term. But what can I do?" My friend Jim says, "I know, I know, but that's my retirement money. What am I going to live on if that 401(k) doesn't shoot up and up?"

Wasn't it people like you and me who were calling for companies to downsize, to lay off, well, people like us, the middle managers, the professionals? In the last recession, weren't we who had our money in mutual funds shouting loudest for our own liquidation? Fire me, please--just jack up my 401(k). When we have downsized one another, who will be saving then? I guess if it comes to that, Mexico can always bail us out. They owe us one, don't they?

I can't prove all this volatility is destabilizing the U.S., but I do know this: it's de-stabilizing me.

It might seem odd to say that the U.S. pension system has collapsed. From a distance, it looks as though more people have pensions than ever. And not just pensions, but IRAs, 401(k)s, profit-sharing plans and all the "salesmen" that go with them. As a pension lawyer, though, I can tell you the whole thing is an illusion, a trompe l'oeil.

I'd like to talk about the different plans. I always feel as if I'm showing people their caskets, so just relax and breathe slowly, and let's open them up one by one.

(1) Defined benefit. This is what many of our parents had. It meant that you knew you'd get a certain fixed amount each month after retirement, and you knew what that amount would be. These defined benefit plans started out as union plans. Then non-union companies began offering them. Who needed unions? It began to seem that we were saving on our own and didn't need help. Then, as unions weakened, the trusty pension plans declined. About half of the private work force were once in defined benefit plans. Now that half has dropped to a third. Besides, a recent study by the Committee on Economic Development shows that between 1981 and 1991, the employer contribution per person into defined benefit plans dropped by roughly half. Now, some economists say, "No problem. The stock market went up, so business didn't have to contribute." But labor unions and pension rights groups scoff. They say the downscaling of employer contributions amounted to an invisible pay cut or, at least, a freeze in benefits.

Why did the old-style defined benefit plans work well? Oddly enough, because they were unfunded. A union such as the United Auto Workers would force General Motors to promise to contribute a fixed amount to the pension. GM would have to figure out how to fund it.

"Isn't that bad?" I used to ask my union clients.

"No," they'd say. "It's good. We set it up high, real high. They've got thirty years to scramble, to come up with the money."

Now that employers aren't under the same union pressures to set up these plans, they're flooding people out into...

(2) 401(k)s. These are pension plans for employers who don't want to pay pensions. They are a type of defined contribution plan, but unlike the old defined contribution schemes, they're voluntary. We K-Mart workers kick in what our Mastercard and our consciences allow. The employer then, sometimes, "matches" this amount. 401(k)s are great for dentists, drug dealers, people with big dreams of Boca Raton. But they're a joke for people who earn $10 an hour and can barely make it from week to week. As for the median worker, racking up $26,000 a year, even if he's Silas Marner, there's just no margin to save.

The new 401(k)s are different from the traditional defined benefit plans. In profit-sharing and other plans, saving was mandatory. But with the 401(k), it's do it yourself, as your median wage falls.

(3) IRAs. Who needs an "employer"? The temporary, part-time worker--one in four workers--has no real employer anyway, not even the kind that can match a 401(k).

Every month in Washington, someone like Newt Gingrich says, "Oh, we're going to expand 401(k)s, and IRAs, bring in more people, etc." What are these people supposed to contribute? Real money? We don't have any.

As it is, about 70 percent of the work force now qualifies for tax-deductible IRAs. Anyone can set up an IRA, but not everyone qualifies for the deductible kind. Each year Congress showers people like you and me with more tax credits, more tax deductions, free toasters. We go into the red to save. But, of this 70 percent who can take out deductible IRAs, only about 5 percent actually do so. They've all got free toasters by now. The rest of us have no unions and almost no way to raise our benefits except through individual begging. Even where unions do exist, they can't budge pension benefits any more than they can budge wages.

The average American worker now holds an average of seven jobs--consecutively, that is, though pretty soon it may be all at one time. With all these people floating around, there is a risk that many will not vest and, in the end, will get nothing. Zero. Nada. Not one cent. More troubling, a vast number of them will get only a deferred vested benefit, based on five or ten years of work. That's worth about $2,000 or $3,000 total. It's a consolation prize for getting in five to six years working for the same employer--now much more typical--instead of thirty. Who gets in thirty these days? Americans move from job to job, like Okies in jalopies, even if they have B.A.s. Not one of these people is going to have a pension. And they're the lucky ones. At least half the male work force and more than half the female work force are not at this moment in any kind of retirement plan at all. They can't even dream of getting nothing.

Then there's Social Security. According to a Wall Street Journal/NBC poll in March, most people assume they will get whacked. Indeed, 29 percent of those surveyed predicted there would be no Social Security when they retire. Another 37 percent thought it would be slashed severely. Most of the rest said they didn't know.

Everyone in this country is headed for an unmarked grave. Even you and I, and all our friends out in Seattle who ride their bikes--one day they're going to throw all of us, you, me, the lawyers in Seattle, in the same unmarked grave and the bicycles on top of us. And on top of it, they'll put a simple wooden cross, like Dylan Thomas's.

I'm one of the 5 percent who actually took out an IRA. But it was just once, in 1987, and now I almost wish I hadn't. Each January, there's a sickening moment when it comes. I know how little is in it. Damn it, if I'd never opened one, there wouldn't be this agony. Maybe I should move.

Each year I throw the statement, unopened, on the dining room table. Sometime in June, I put it in a drawer. I'm helping others who have no pensions, but I'm like a doctor in a plague who won't take his own temperature. Of course, when I get the IRA statement, I get, as I do every May day, a credit card application, "pre-approved." How can something be "pre-approved"? I'd like to keep about thirty or forty of them. Can I open them when I'm 82?

Sometimes I keep a "spending diary," but it always turns dark, and I begin recording conversations, which is not the point. The other night I dined at a restaurant with a young German woman, and I thought, "When the bill comes, impress her, pay for it in cash." But, as always when the bill comes, I panic, and pull out a Visa, which I see her staring at.

"It's odd," she says, "how people in America use credit cards for everything."

"Look," I say, annoyed, "they use credit cards in Europe, too."

"For groceries?"

At least I don't do that.

It's not that, being an American, I'm just reckless. But I live in a market so big, on such a fruited plain, that it's hard to confine my wants, as maybe a European can manage to do more easily. There are so many things here. That's why it's so explosive when wages fall.

I know I should save. I know what William Bennett, with his Book of Virtues, would say. Why can't we save, be provident and upstanding, like Americans in the 1950s?

But a lot of those people were in unions. It's not John Calvin but John L. Lewis who made them save. Whether they knew it or not (and many of them didn't), the unions, with the pension funds, were pulling the money out of their pockets. We had a system back in the 1950s of forced savings. Besides, who can save now, when the Affluent Society is going in reverse, and diabolically so, giving us more and more "wants" and less and less cash?

And then, when I look at my German friend, I realize she's going back to Europe. She'll never have to worry.

The other day, I spoke with an official from Germany, and he mentioned casually the public pension, or the German Social Security. "Over here, in the U.S.," he reminded me, "Social Security is a `replacement' income of 40 percent."

And in Germany what do they get? From 60 to 65 percent, of a much, much higher wage. It gets better. In Italy, it's 80 percent; in the Netherlands, 70 percent.

Imagine: 65 percent for life. As in $26 per hour x 65 percent x mortality factor, etc.

Yes, German retirees get this much or even more, in fact, though some studies try to low-ball it.

And when does this start?

I didn't believe this.

"Oh," he said, "Germans typically stop working by 58."

"You mean," I gasped, "they leave by 58 and never work again?"


"But what do people do the rest of their lives?"

"They have hobbies."

Hobbies? I didn't want my voice to rise. "I mean, they're 58, don't they want to do a little work?"

He seemed puzzled, so I added, "I mean isn't there a lot of restlessness?"

He paused. "No."

Meanwhile, we're at a miserable two-fifths. Japan and France have much higher public pensions. France actually has two mandated pensions. Yet most economists, even liberals, believe if we don't take our pitiful two-fifths, and slash it, the U.S. is going to collapse.

Of course they will never cut public pensions in France or Germany. It's hard for us to imagine, when we read about the French grape growers going on strike, or truckers burning tires, or rock throwing at Air France. We love to talk about our "angry white males"; but, while they may be angry, these guys seem pretty meek when it comes to their own wages.

In Germany, this spring, I.G. Metall, which employs more than 3 million workers, went on strike. The workers got a pay raise of 4 percent. When was the last time anyone in the U.S. got an across-the-board pay raise of 4 percent? Pay raises like that send the Germans to Las Vegas and let them stay in Caesar's Palace. Our old people are working at Montgomery Ward. "It's shocking to a European," a German friend said, "to come over here and see old people working at the counters."

And what do we call these old people, hands palsied, trembling, serving up fries and shakes? "Greedy Geezers of America, Amalgamated," is what Senator Alan Simpson, who now heads the Senate Committee on Social Security, calls them. It's not just Simpson. Even my friends, civic liberals, mutter about aarp as a "special interest group."

A special interest group? To me, it's the closest thing the U.S. has to a big European-type union, an I.G. Metall for old people. At 46, I almost feel like a 16-year-old who wants to join the Army, only they won't take me because of my age. When will I be old enough?

Senator Simpson, William Safire, the Cato Institute--they're all pushing the idea that the Greedy Geezers, the two-fifths club, are preying on the young. Safire writes column after column about how the old are destroying the Republic. The only hope, for the Cato Institute, is "privatizing" Social Security.

Let's see if I have this straight. Most of my friends can expect to pay $350,000 to $500,000 to educate a kid in a decent school (not a public one). In a country with a personal savings rate of about 4 percent? It's laughable. Where are we going to get the money?

The Clintonites have come up with the answer. You know that pension money? You didn't really think it was going for your pension? Now in the 1995 budget, Clinton (and the House is even more eager) will let us dip, without penalty, even deeper into the IRAs, so we can pull out the money to send the kids to college.

And after we've blown all our savings, all our pension money, on them, is it too much to expect that maybe they could kick in a little to our Social Security? According to the Cato Institute, and Safire, and Simpson, yes.

First, what kind of country is it that lets people dip into their pension money for their kids' education? Here are the Americans my age, the baby-boomers, who have a "savings problem," the way the people in the old John Cheever stories have a "drinking problem," and they're going to give us keys to the liquor cabinet. Second, what are we going to live on?

"You're preying on them," the Cato Institute is shrieking, and it advocates "privatizing" the whole system. Now what does this mean, "privatization"? It means the kids will set up their own "private" Social Security accounts, like IRAs. Then they'll turn those accounts over to money managers, that is, to other kids, 27, 28, who work out of Singapore and who are free to take all the money and put it on red. If the Cato Institute has its way, how long before the kids, drooling, want to tap into their own "private" Social Security, the way we (for their sake) tapped into the IRAs? Who's going to say no? Clinton? Dole? Pete Wilson?

So we, the baby-boomers, will get the last laugh.

"This will be the greatest intergenerational war of our lifetime," says Simpson, 64, who seems to think he's going to be leading the other side. So do Paul Tsongas, Warren Rudman, Safire and the rest as they head into a Mao-like golden age.

I don't think there will be "war." But who can blame the kids for going after us? Aren't we doing the same to our parents now? How many now are trying to strip Old Dad and Mom of their assets to qualify them for "Medicaid"? What's creepy to me is that our own children are watching, as we strip the bodies, take off the precious rings and push them into "homes." As our own savings fall, we have to protect ourselves, right?

Keynes, who had a lot of money, once observed: if we really want to corrupt the national character, "cut the cord between effort and reward." He was writing about the demoralizing effect of unemployment more than fifty years ago. In some ways, though, the phrase applies even better to working-class Americans--employed Americans--now. The cord is being cut, maybe not as dramatically as for the jobless, but for many more people than were ever affected then. Because people work forty-five, fifty, fifty-five hours a week and get less and less. For all that "effort," don't we deserve some "reward"? So we run up our Visa. We shove our parents into nursing homes. We try desperately to cut our taxes. We shriek about affirmative action. We prey on each other. "Where's mine?" Isn't this the effect of the cord being cut?

On public radio, I heard an economist saying, "Oh, the young people coming out of college, they're different now. They know they'll have to work longer for less. They're prepared to save." Are they? That's what they may say now, to please Old Mom and Dad, who never could save. But how will they feel about us, twenty years from now, when they have kids of their own, and the fall their kids face will be even steeper? Aren't you and I, crow's feet, wrinkles, hands and face aging in the mirror, about to step into the role of enemy of the people?

When I was young, I thought, "See Paris and die." But I don't want to die in Paris in a rented room, like Old Goriot. The irony, of course, is that if I'd gone to Paris when I was young and lived for the moment, on the Left Bank, I'd have a pension now and wouldn't have to worry. But that was a risk I took when I stayed in the United States.

Now what? It would be nice to think, in twenty years, when they come for my Social Security card, that I will still have my twenty Visa cards, which is to say, my life's savings. Run down the road, run them all up. A kind of revenge. My brother says, "It takes them about a year to catch you." Then, so what? Can't you file for bankruptcy? When you die, you'll have discharged every debt, my fellow lawyers tell me, as a matter of law--except, it seems, the kids' college loans. But when the Just Judge comes at the end of time, maybe He'll discharge those, too.

Thomas Geoghegan, a lawyer in Chicago, is the author of Which Side Are You On: Trying to Be for Labor When It's Flat on Its Back (Plume).

By Thomas Geoghegan