Text as Prepared for Delivery
July 22, 1998


Mr. Chairman, members of this Committee, I appreciate this opportunity to say a few words about the importance of savings to our economy and to make a few observations about promoting savings.

Saving is obviously important for families; it is also critical for the nation at large. Savings provides the capital that funds investment, and increased investment, in turn, is critical to greater productivity and higher standards of living.

Our national savings rate -- which is the sum of private and public savings -- has increased in the last few years, from 3.1 percent of GDP in 1992 to 6.5 percent last year. But this increase has been the net of a large increase in the public savings rate while the private savings rate has decreased the last five years. The public savings rate reflects the move from a budget deficit that equaled five percent of GDP in 1992 to a projected budget surplus this year. Critical to this process was the President's deficit reduction program, beginning with the 1993 Deficit Reduction Act, and the lower interest rates and greater economic growth it generated, which set off a virtuous cycle and further reduced the deficit.

Notwithstanding the recent increase in our national savings rate, it remains among the lowest of the industrialized nations and well below where we were twenty to thirty years ago. Raising our national savings rate further should be a high priority for our nation especially as we approach the retirement of the baby boom generation.

While new global capital markets allow us to draw on savings from abroad -- in fact, investment rates have substantially exceeded savings rates, and investment in plant and machinery is now at historic highs -- funding investment from abroad is not as desirable as funding it from domestic savings. Efficient as they are, global capital markets aren't perfect -- domestic savers continue to have a preference for investing in domestic assets, and the resulting dependance on foreign capital increases the cost of capital for U.S. firms. Moreover, while foreign-funded investment provides a net benefit to our economy, the return on foreign-funded investment goes abroad. Perhaps most importantly, while capital is flowing from abroad because of our attractive environment with respect to economic policy and economic conditions, there is always a risk that this perception might change and, as a result, capital will become more expensive. One conclusion from this is the great importance of maintaining a sound macroeconomic environment, including fiscal discipline, so that we continue to attract capital at a low cost.

It is very tempting with the projected budget surplus to cut taxes or increase spending, but I believe that instead, it is critical that we maintain the fiscal discipline which has been central to our strong economic growth over the last five years by adhering to the President's strategy of putting Social Security on a sound footing. Moreover, while our surplus projections are soundly based, we have had almost thirty years of deficits, and have not yet had one full year in surplus. Projections are exactly that, projections, not certainties, and subject to change, even great change. We shouldn't commit to any policy, let alone to a large tax cut, to use the projected surplus until Social Security's long term financial integrity has been effectively addressed. That strategy will both protect retirement security and protect the fiscal discipline that his so central to our economic well being. Fiscal discipline is the hard path, not the easy path, but it is the right path for our economic well being. Large tax cut proposals based on projected surpluses are an unsound and unwise strategy for our future.

Let me make two other observations about what will and will not contribute to increased savings.

Most economic work strongly suggests that transforming the tax system to some form of consumption tax, whether the flat tax or a VAT, would have little impact on the savings rate. The savings rate is not very sensitive to the after tax return on savings. Therefore, I don't believe there is a savings argument for reducing the progressivity of the tax system.

On the other hand, there is a broadly held view among economists that education and measures to facilitate savings do have an impact on savings. Examples of successful education campaigns include the Savings Bonds campaign, and the marketing of IRA's and 401(K) plans. Pension reforms and IRA reforms also have facilitated savings.

This Committee is making an important contribution to our nation's economic health by focusing on the importance of savings. Deputy Secretary Summers and Commissioner Apfel will also be discussing various aspects of retirement saving in more detail. I look forward to working with all of you to promote savings, and to protect our nation's fiscal discipline, and thereby benefit both families and our nation as a whole as we approach a new century. Thank you very much.