The nation's savings rate might climb again as interest rates rise and dampen the overheated housing market, Federal Reserve Gov. Donald L. Kohn said today in a speech at the Levy Economics Institute of Bard College, at Annandale-on-Hudson, N.Y. Over the past year, American households have saved only about 1% of their after-tax income, compared with about 8% on average from 1950 to 2000. The current savings rate is "too low for households to accumulate enough wealth to maintain their standard of living after retirement," he said.
Although many households have received windfalls from the sale of their homes and other assets in recent years, such gains are not likely to be repeated in the future. But if the central bank further increases interest rates, that should "induce an increase in the personal savings rate, and thereby lessen one of the significant spending imbalances we have noted."
Moreover, households might save more than otherwise anticipated as a result of higher interest rates and the impact on housing prices, especially as they contemplate the adequacy of their retirement income, he noted.
Separately, Edward M. Gramlich, a Federal Reserve Board governor and head of the Social Security Advisory Commission in the mid-1990s, on Thursday suggested raising the retirement age for collecting full Social Security and Medicare benefits by 1.25 years every decade to account for increases in longevity. Mr. Gramlich also proposed taxing all wages - instead of the current cap of $90,000 for Social Security - for both Social Security and Medicare. He also suggested synchronizing the age for collecting full Social Security and Medicare benefits, instead of maintaining the current disparity. The increase in retirement age and taxation, combined with including all newly hired state and local government workers into the system and modifying the index to which benefit increases are linked, would be "enough to finance Social Security in perpetuity," or finance Social Security for the next 75 years and extend the life of the Medicare Part A trust fund by about three decades, he said in the speech.
"Will the changes be pleasant or popular? No. Will something like them, or worse, be necessary some day? Yes. We might as well begin now thinking about those changes that seem the fairest across generations," he said in a speech at Widener University, Chester, Pa.