Empty Pockets

By Pike, Kelly | Independent Banker, April 2005 | Go to article overview

Empty Pockets


Pike, Kelly, Independent Banker


Addressing the drought in American rainy day savings rates * by Kelly Pike

Fists are flying in the battle to reform Social Security. The debate over privatized accounts, increased taxes and adjusting benefits have yet to find a consensus in the halls of Congress or the realm of public debate. But there is one thing everyone can agree on-Americans are not saving enough for retirement.

Three-fourths of workers age 55 to 64 have less than $56,000 saved for retirement, according to U.S. Census Bureau. Forty-two percent of workers cash out their 401(k)s rather than transfer or "roll over" the assets to an IRA or a new employer's retirement plan, according to Hewitt Associates, a global human resources firm.

Maybe it's because the young and middle-aged have difficulty imagining themselves as "old" retirees. Maybe the temptation for the luxuries of today-a new car and a nice vacation-win out over tomorrow's security. Or maybe the incentives to save just don't seem to be there.

Regardless, Americas aren't saving adequately for retirement. In fact, they often aren't saving period.

The savings rate in the United States reached 0.2 percent of disposable income last year, the second lowest level since the U.S. Commerce Department began keeping the statistic in 1959. At that rate, an individual who takes home $40,000 a year only saves $1.50 a week while her counterpart in Germany, France or Italy-where the savings rate is more than 10 percent, according to Global Insight-manages to bank $77.

Supporting Good Habits

Helping customers save more is good business for community banks. Customers who save are less likely to file for bankruptcy and the money that they deposit at their local institution provides a financial boost to their communities by increasing the funds available for banks to make loans.

Fortunately some of the tools for doing just that are already out there if a community bank is willing to invest the time and energy to use and expand them. Take, for instance, the recent attention President Bush's proposed changes to Social Security have received, and the subsequent talks its spawned in general about retirement planning.

"The debate over Social Security is valuable because it forces people to look at the future towards retirement," says Bill Scholl, president of Pulaski Bank & Trust Co. in Little Rock, Ark. "Many people have woken up and realized Social Security isn't a savings vehicle. The money you put in goes to pay today's retirees."

As people are inspired to look ahead and think through their own personal retirement, it's a chance to promote savings products the bank offers and support customers in making intelligent use of the resources they have.

One of the biggest savings vehicles people have-although it isn't included in the official calculations for the national savings rate-is a home and the equity it accrues. Home renovations, consolidating credit card loans or purchasing a car can be wise uses of leveraging home equity, especially since interest from such loans is tax deductible. Making rash or extravagant purchases with those funds, however, may not be a wise investment.

"People don't see the value in saving for something they can buy today," says Scholl. "If customers are taking out home equity and using them for frivolous things, they are taking away a potential savings vehicle."

And that's a real problem. Among households in the bottom 20 percent of income, just 1 percent of after-tax income is saved, according to the Journal of Political Economy. This situation makes the home equity these households build their most valuable asset.

Finance 101

It can be difficult to change the ingrained spending habits of adults, but the next generation of savers and spenders can still be molded. Scholl is among the many who believe financial education is the best way to increase the savings rate.

When students leave high school, their path is littered with all sorts of financial tools such as credit cards, which often become traps.

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