How to boost America’s savings without adding to the national debt

With less than 100 days to go until the election, many questions remain about the future of our country’s economy. Even in an era of unprecedented political turmoil, most Americans say their biggest source of stress is their finances.

It’s worth asking: What are our presidential candidates’ plans to help Americans earn and save more?

Unfortunately, they haven’t said much. However, there are policies readily available, with bipartisan appeal, that would help Americans save more.

The new candidate, Vice President Kamala Harris, has yet to flesh out her policy platform, though much will likely be carried forward from the Biden administration. Former President Donald Trump, as usual, has eschewed policy detail in favor of discursive campaign speeches focused on protectionism and the plight of American workers.

Both parties are trying to speak, albeit vaguely and imprecisely, about the widespread financial insecurity laid bare by the pandemic shutdown of the economy, surging inflation, high interest rates and an ongoing affordability crisis. While the Trump and Biden administrations spent trillions of taxpayer dollars on relief payments and fiscal stimulus — all deficit-financed — much of that backfired in the form of inflation, leading to our current predicament.

The policy prescriptions offered so far are more of the same. More tariffs, tax credits, carve-outs (“no tax on tips”) and deficits are all short-sighted, band-aid solutions that would further push the federal government into debt, distort the economy and risk a trade war.

Whatever their appeal, these policies are increasingly irresponsible as we attempt to deal with the national debt, which exceeds $35 trillion, or prepare for the next economic downturn, as unemployment has been rising since March.

A better, more sustainable approach is to pursue policies now that will encourage a broader swath of households to save and build wealth for the future. To do that, Americans need a simpler way to save without excessive tax penalties or paperwork.

As a general rule, the current tax code encourages people to spend now rather than save for later, due to taxes on workers’ wages plus taxes on returns to what is saved from those wages. To offset this effect, the tax code contains a patchwork of preferences for certain types of saving with complicated rules that generally benefit higher-income households.

For example, some employers offer 401(k)s and other defined contribution retirement plans, but only a minority of low-income earners can participate in these plans and many do not. Options such as health savings accounts are even more niche, primarily utilized by high earners working at large employers.

As a result, most Americans save very little. The average household savings rate has been dropping for decades and, since the pandemic, has hovered around 3 or 4 percent. According to the Federal Reserve, only around half of Americans have emergency savings sufficient to cover three months of expenses. Another recent survey from Bankrate indicates that 3 in 4 Americans feel financially insecure, including most low- and middle-income earners.

Other countries have found a simple solution that is very popular, boosting savings for households across the income scale. Universal savings accounts are tax-advantaged savings vehicles with unrestricted use of funds, allowing participants to save for a variety of reasons including retirement, education, housing, health, unemployment and emergencies.

For example, just as we can open a savings account at any bank, Canadians can go to the bank and open a tax-free savings account, meaning no additional tax on the earnings and no penalties for withdrawals for any reason. The only real restriction is a limit on annual contributions — far simpler and more attractive than our current tax-advantaged options.

About 60 percent of the adult population in Canada has one of these accounts, including about one-third to one-half of low-income earners, who have an average balance of about $15,000. A similar policy exists in the United Kingdom, with similarly stellar results.

In our analysis, we find that such a policy could be implemented in the U.S. without busting the budget. In fact, it could be more than paid for by collapsing other relatively ineffective tax-advantaged options, such as health savings accounts — a trade that would simplify the tax code, reduce compliance costs and shift the benefits to low- and middle-income households.

As the candidates try to tap into voter frustrations, they should offer straightforward and foolproof policy solutions, such as universal savings accounts, which would simplify saving and boost financial security for taxpayers, without adding to the national debt.

William McBride is the vice president of Federal Tax Policy at the Tax Foundation, a nonpartisan tax policy think tank in Washington, D.C.