United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Long-term 

Growth and Debt Reduction, Committee 

on Finance, United States Senate

NATIONAL SAVING 

Current Saving Decisions 

Have Profound Implications 

for Our Nation's Future 

Well-Being 

Statement of Thomas J. McCool, Director, Center for 

Economics, Applied Research and Methods 

For Release on Delivery

Expected at 2:30 p.m. EST 

Thursday, April 6, 2006

 

GAO-06-628T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

April 6, 2006

NATIONAL SAVING

Current Saving Decisions Have Profound 

Implications for Our Nation's Future WellBeing 

Highlights of GAO-06-628T, a testimony to 

Subcommittee on Long-term Growth and 

Debt Reduction, Committee on Finance, 

United States Senate 

The Chairman of the Senate

Committee on Finance asked GAO

to testify on our nation’s low saving

and discuss the implications for 

long-term economic growth. 

National saving—the portion of a 

nation’s current income not 

consumed—is the sum of saving by 

households, businesses, and all 

levels of government. National 

saving represents resources

available for investment to replace 

old factories and equipment and to

buy more and better capital goods. 

Higher saving and investment in a

nation’s capital stock contribute to 

increased productivity and stronger 

economic growth over the long

term. 

What GAO Recommends

GAO does not make any 

recommendations but lays out a 

few ideas for how the federal 

government can help increase 

national saving. The only sure way 

for the government to increase

national saving is to reduce the 

budget deficit, which will require a 

three-pronged approach: 

restructure existing entitlement

programs, reexamine the base of

discretionary and other spending, 

and review and revise existing tax 

policy, including tax expenditures,

which can operate like mandatory

spending programs. The federal 

government can also explore 

saving incentives and education 

programs to encourage personal 

saving. 

Our nation faces a number of deficits, including our nation’s budget deficit, a 

saving deficit, and a current account deficit. Unfortunately, America has 

been heading in the wrong direction on all three deficits in recent years. 

• In 2005 our nation’s budget deficit was around $318 billion or 

2.6 percent of GDP. 

• For the first time since 1934, net national saving declined to less than 

1 percent of GDP and the personal saving rate was slightly negative 

in 2005 (see figure). 

• While the United States has run a current account deficit—or

borrowed to finance domestic investment—over most of the last 

25 years, the current account deficit hit an all time record— 

$782 billion, or over 6 percent of GDP in 2005. 

Net National Saving and Personal Saving as a Percentage of GDP 

(1930-2005)

-10

-5

0

5

10

15

20

1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Percent of GDP

Source: GAO analysis of NIPA data from the Bureau of Economic Analysis (BEA).

Year

Net national saving Personal saving

Despite low national saving in recent years, economic growth has been high. 

However, we cannot let our recent good fortune lull us into complacency. 

If the net inflow of foreign investment were to diminish, so too would 

domestic investment and potentially economic growth if that saving is not 

offset by saving here in the U.S. Also, our nation faces daunting fiscal and 

demographic challenges, which provide even more of a reason to address 

our nation’s low saving rates. Greater economic growth from saving more 

now would make it easier for future workers to bear the burden of financing 

Social Security and Medicare, but economic growth alone will not solve the 

long-term fiscal challenge. Tough choices are inevitable, and the sooner we 

act the better in order to allow the miracle of compounding to turn from 

enemy to ally. 

www.gao.gov/cgi-bin/getrpt?GAO-06-628T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Thomas J. 

McCool at (202) 512-2700 or 

mccoolt@gao.gov or Susan J. Irving at (202) 

512-9142 or irvings@gao.gov. 
National Saving

Mr. Chairman, Senator Kerry, and Members of the Subcommittee: 

I appreciate the opportunity to talk with you today about national saving 

and the central role it plays for our nation’s long-term economic growth 

and future living standards. National saving—the portion of a nation’s 

current income not consumed—is the sum of saving by households, 

businesses, and all levels of government. National saving represents 

resources available for investment to replace old factories and equipment 

and to buy more and better capital goods. Higher saving and investment in 

a nation’s capital stock contribute to increased productivity and stronger 

economic growth over the long term.

As our 21st century challenges report notes, the United States faces 

serious long-term challenges in several areas, some of them 

unprecedented in their size, scope, complexity, and potential impact.1

 One 

of the primary challenges is demographics. The U.S. workforce growth 

rate is slowing and will continue to slow. This means that just when 

increasing numbers of baby boomers start to retire and draw benefits, 

there will be relatively fewer full-time workers to help support these 

retirees. What’s more, people are living longer. In the very near future, our 

aging population will begin to put enormous strains on our nation’s 

pension and health care systems. Other emerging trends that warrant close 

scrutiny are globalization, new security threats, rapidly evolving 

technology, and a range of quality-of-life concerns affecting everything 

from education and health care to energy and the environment. 

Comptroller General Walker has spoken frequently about the fact that our

nation faces a number of deficits, including three that are directly related 

to this hearing. These three interrelated deficits are our nation’s budget 

deficit, a saving deficit, and a current account deficit. He has noted that 

our growing fiscal imbalance threatens our future economic growth, our 

future standard of living, and even our future national security. 

Unfortunately, America has been heading in the wrong direction on all 

three deficits in recent years. Nonetheless, we have a window of 

opportunity to turn things around, but we need to act and act soon 

because the miracle of compounding is currently working against us. 

 1

GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, 

GAO-05-325SP (Washington, D.C.: February 2005). 

Page 1 GAO-06-628T
National Saving

Today’s saving and investment decisions have profound implications for 

the level of well-being in the future. Increasing personal saving is an 

important way to bolster retirement security for current workers and 

increasing national saving will allow future workers to more easily bear 

the costs of financing federal retirement and health programs while 

maintaining their standard of living. 

In my testimony today, I will describe these three deficits and why they 

raise concerns about our nation’s long-term growth and its ability to 

finance the health and retirement needs of an aging population. Finally, I 

will lay out a few ideas for how the federal government can help increase 

national saving. 

My remarks are based on our previous work on a variety of issues, 

including a report on national saving and GAO’s work on the long-term 

fiscal challenge.2

 These efforts were conducted in accordance with 

generally accepted government auditing standards. 

The first deficit we face is the federal budget deficit (see fig. 1). In 2005 the 

unified federal budget deficit was around $318 billion or 2.6 percent of 

gross domestic product (GDP). This figure is an approximation of what the 

federal government absorbs from private saving. Although a single year’s 

federal deficit is not a cause for concern, persistent deficits are. Federal

deficits reduce the amount of national saving available for investment. 

They also lead to growing federal debt, on which net interest payments 

must be made by current and future generations.

The Budget Deficit 

 2

 GAO, National Saving: Answers to Key Questions, GAO-01-591SP (Washington, D.C.: 

June 2001). See also http://www.gao.gov/special.pubs/longterm/ for information on GAO’s

most recent long-term simulations and 

http://www.gao.gov/special.pubs/longterm/longtermproducts.html for a bibliography of 

GAO’s issued work on the long-term fiscal outlook. 

Page 2 GAO-06-628T
National Saving

Figure 1: Federal Surpluses and Deficits (-) as a Percent of GDP (1930-2005) 

-35

-30

-25

-20

-15

-10

-5

0

5

10

1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Percent of GDP

Source: Office of Management and Budget (OMB).

Fiscal year

A budget deficit represents dissaving by the government, but the U.S. 

suffers from an even broader national saving deficit. National saving is the 

sum of personal saving, corporate saving, and government saving. Last 

year, for the first time since 1934, net national saving declined to less than 

1 percent of GDP and the personal saving rate was slightly negative (see 

fig. 2).3

 Remarkably—and unfortunately—the United States has returned 

to saving levels not seen since the depths of the Great Depression. 

The Saving Deficit 

 3

Personal saving, as measured in the National Income and Product Accounts (NIPA), does

not include capital gains on existing assets because capital gains reflect a revaluation of the 

nation’s existing capital stock and do not provide resources for financing investment that 

adds to the capital stock. In other words, although an individual household can tap its

wealth by selling assets to finance consumption or accumulate other assets, the sale of an 

existing asset merely transfers ownership; it does not generate new economic output. 

Page 3 GAO-06-628T
National Saving

Figure 2: Net National Saving and Personal Saving as a Percent of GDP (1930-2005) 

-10

-5

0

5

10

15

20

1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Percent of GDP

Source: GAO analysis of NIPA data from the Bureau of Economic Analysis (BEA). 

Year

Net national saving

Personal saving

A negative saving rate means that, in the aggregate, households are 

spending more than their current income by drawing down past saving, 

selling existing assets, or borrowing. No one is sure why the personal 

saving rate has declined. One possible explanation is increases in 

household wealth, which surged in the late 1990s due to the stock market 

boom and more recently due to the run-up in housing prices. Household 

wealth relative to income increased from 4.7 in 1990 to 5.8 in 2005 (see fig.

3). If people feel wealthier, they may feel less need to save. Continued 

financial liberalization and innovation have made it easier for Americans 

to borrow, particularly against their real estate wealth, which may have

lead to greater consumption. 

Page 4 GAO-06-628T
National Saving

Figure 3: Personal Saving and the Wealth-Income Ratio (1960-2005) 

-2

0

2

4

6

8

10

12

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Personal saving as a percent of

disposable personal income

Source: GAO analysis of data from BEA’s National Income and Product Accounts and the Federal Reserve Board’s Flow 

of Funds Accounts.

-1

0

1

2

3

4

5

6

7

Personal saving rate

Household net worth 

Ratio of household net worth

to disposable personal income

Year

Clearly, as the Comptroller General has said, many Americans, like their 

government, are living beyond their means and are deeply in debt. This 

trend is particularly alarming in an aging society such as our own. Those 

Americans who choose to save more will certainly live better in 

retirement. Those Americans who choose to save less are rolling the dice 

on whether they will have adequate resources for a secure retirement. 

While Social Security provides a foundation for retirement income, Social

Security benefits replace only about 40 percent of preretirement income 

for the average worker. As a result, Social Security benefits must be 

supplemented by private pensions, accumulated assets, or other resources 

in order for individuals to maintain a reasonable standard of living in 

retirement compared to their final working years. Though the aggregate 

wealth-to-income ratio remains relatively high, it is a misleading indicator 

of financial status of the typical household because wealth is highly 

concentrated among a few households. While the median net worth of all 

families was $93,100 in 2004, the top 10 percent of the families had a 

median net worth of over $1.4 million and the bottom quarter of the 

families had a median net worth of about $1,700. Moreover, measures of 

Page 5 GAO-06-628T
National Saving

wealth are largely based on market values, which on occasion can exhibit 

substantial swings. This is illustrated by the sharp run-up in stock prices in

the late 1990s and their subsequent decline beginning in 2000.

The only components of national saving that have not shown a long-term 

decline are corporate and state and local saving.

4

 In fact, corporate saving 

is actually high by historical standards. After declines in corporate profits 

in 2000-2001, corporate saving has rebounded to almost 4 percent of 

GDP—a level not seen since the late 1960s. The state and local sector as a 

whole experienced a deficit from 2002 to 2004 but has since returned to a 

slight surplus. 

Now let me turn to the third deficit: our current account deficit. The 

current account deficit is the difference between domestic investment and 

national saving. That is, it is the amount of domestic investment financed

by borrowing from abroad. Over most of the last 25 years, the United 

States has run a current account deficit, but in 2005 the current account 

deficit hit an all-time record—$782 billion, or over 6 percent of GDP (see 

fig.4).5

 That is twice what it was only 6 years earlier. 

The Current Account 

Deficit 

 4

Corporate saving consists of retained earnings, while state and local government saving is 

the difference between the sector’s total current receipts and expenditures. 

5

This is measured on a NIPA basis. The current account deficit on an international 

transaction account basis was $805 billion. 

Page 6 GAO-06-628T
National Saving

Figure 4: Net National Saving, Net Domestic Investment, and the Current Account 

Balance as Percents of GDP (1960-2005) 

-10

-5

0

5

10

15

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Percent of GDP

Source: GAO analysis of NIPA data from BEA.

Year

Net national saving

Net domestic investment

Current account balance

Funds from overseas have been pouring into the United States. One 

explanation for these inflows is that high productivity in the U.S. raised 

the perceived return on U.S. assets. Moreover rising federal budget deficits 

and declining personal saving rates have necessitated foreign borrowing to 

help finance domestic investment. Another possible explanation for 

persistent U.S. current account deficits may be the weakness of foreign 

demand and the efforts of some countries to support their exports by 

keeping their own currencies from strengthening. Also, other countries’ 

populations are aging more rapidly than the U.S. population and they may 

be investing in the U.S. in order to build up a stock of assets to prepare for 

their retirement spending. 

Whatever the reason for high current account deficits, policymakers 

should be aware of the implications these financial inflows have for the 

nation’s economic growth and for future living standards. While current 

account deficits support domestic investment and productivity growth, 

they also translate into a rising level of indebtedness to other countries. 

Page 7 GAO-06-628T
National Saving

Figure 5 shows that the net foreign ownership of U.S. assets grew to more

than 20 percent of GDP in 2005. The fact that our net indebtedness to 

other nations is rising more rapidly than our income raises concerns that 

the U.S. current account balance is on an unsustainable path.

Figure 5: U.S Net International Investment Position and Net Income Receipts on

Assets as Percents of GDP (1976-2004) 

-25

-20

-15

-10

-5

0

5

10

15

1976 1980 1984 1988 1992 1996 2000 2004

Net international investment 

position as a percent of GDP

Year

Source: GAO analysis of BEA data.

Net international investment position of the U.S.

Net income receipts (+) /payments (-) on assets 

Net income on assets

as a percent of GDP

The income receipts on U.S. owned assets 

abroad still exceed the income payments

on foreign-owned assets in the U.S.

Beginning in 1986, foreign 

holdings of U.S. assets exceed 

U.S. holdings of foreign assets

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

Despite the growth of foreign asset holdings in the United States in recent

years, the United States earned more in interest, dividends, and other 

investment returns from other countries than it paid on U.S. assets held by 

foreigners. This may seem counterintuitive to the notion that U.S. assets, 

on average, pay a higher return than foreign assets and thus attract a large 

amount of foreign investment. The positive net income receipts reflect 

differences in the composition of foreign and U.S. investment and the 

higher rate of return that U.S. firms earn on their direct investments 

abroad compared to the earnings of foreign companies from their U.S. 

Page 8 GAO-06-628T
National Saving

subsidiaries.6 A larger share of foreign-owned assets in the U.S. is held in 

portfolio investment, such as stocks, bonds, loans, and bank deposits, 

which pay a lower yield than U.S. direct investments abroad. A recent 

study by the Congressional Budget Office (CBO) attributed this to three 

factors.7

 First, U.S. subsidiaries abroad have generally been in business 

longer than foreign-owned subsidiaries in the U.S., which contributes to 

greater profitability. Second, investors of U.S. subsidiaries abroad may 

require higher returns because they face greater political and economic 

risks than subsidiaries of foreign-owned corporations. Finally, some 

observers argue that U.S subsidiaries abroad may overstate their profits 

for tax reasons, while foreign-owned subsidiaries in the United States 

understate their profits. However, given the nation’s increasingly negative 

net international investment position, it is not clear how long the U.S. will 

continue to earn more on its foreign investment than it pays on foreign 

investment in the U.S. 

The effect of large foreign borrowing on our economy also depends in part

on how the borrowed funds are used. To the extent that borrowing from 

abroad finances domestic investment, the foreign borrowing adds to the 

nation’s capital stock and boosts productive capacity. Thus, even though

some of the income generated by the investment must be paid to foreign 

lenders, the investment—and hence the borrowing that financed it—

augments future income. However, if the borrowing from abroad is used to

finance consumption, this is not true. Short-term well-being is improved 

but the ability to repay the borrowing in the future is not. 

Both economists and policymakers are concerned about whether the 

United States can maintain its reliance on foreign capital inflows to sustain 

domestic investment. Investors generally try to achieve some balance in 

the allocation of their portfolios, and U.S. assets already represent a 

growing and significant share of foreign portfolios (see fig. 6). Although 

the United States accounts for 29 percent of global GDP, it received 

70 percent of the net saving exported by countries with current account 

surpluses in 2004. Observers suggest that the United States’ favorable 

investment climate, including the potential for high rates of return, may 

 6

Direct investment is investment in which a resident of one country obtains a lasting 

interest in, and a degree of influence over, the management of a business enterprise in 

another country. 

7

CBO, Why Does U.S. Investment Abroad Earn Higher Returns Than Foreign Investment 

in the United States? Economic and Budget Issue Brief (Washington, D.C.: Nov. 30, 2005).

Page 9 GAO-06-628T
National Saving

explain why the U.S. absorbs such a large share of the world’s saving. 

However, it is probably not realistic to expect ever-increasing foreign 

investment in the United States. Imagine what would happen to the stock 

and bond markets if these foreign investors began to lose confidence and 

lowered their rates of accumulation, or worse yet, started to sell off their 

holdings. We would likely face some adverse effects in the form of higher 

interest rates, reduced investment, and more expensive imports. 

Figure 6: U.S. Net Borrowing from Abroad as a Percent of Total Worldwide Net 

Borrowing (1980-2004) 

0

10

20

30

40

50

60

70

80

1980 1984 1988 1992 1996 2000 2004

Percent of net borrowing worldwide

Source: GAO analysis of the International Monetary Fund’s World Economic Outlook Database (September 2005 edition).

Year

-10

Note: Calculated as the ratio of the U.S. current account balance to the sum of the current account 

balances of all countries that had current account deficits. 

Economic growth in recent years has been high despite the fact that 

national saving was low by U.S. historical standards. This is because more

and better investments were made. Each dollar saved bought more 

investment goods, and a greater share of saving was invested in highly 

productive information technology. Also, as discussed earlier, the United

States was able to invest more than it saved by borrowing from abroad. 

Why Does It Matter? 

However, we cannot let our recent good fortune lull us into complacency.

While the U.S. has benefited from high levels of foreign investment in 

recent years, this is not a viable strategy for the long run. Many of the 

Page 10 GAO-06-628T
National Saving

nations currently financing investment in the United States face aging 

populations and their own retirement financing challenges that may 

reduce foreign saving available for U.S. domestic investment. If the net 

inflow of foreign investment were to diminish, so too would domestic 

investment and potentially economic growth if that saving is not offset by 

saving here in the U.S. Also, our nation faces daunting fiscal and 

demographic challenges, which may be even more of a reason to address 

our nation’s low saving rates. Saving and economic growth will be key 

factors to prepare future generations to bear the burden of financing the 

retirement and health costs of an aging population. 

Nation Faces Long-term 

Fiscal Challenges 

Given our nation’s long-term fiscal outlook, acting sooner rather than later 

to increase national saving is imperative. The federal government’s current 

financial condition and long-term fiscal outlook present enormous 

challenges to future generations’ levels of well-being. No one can forecast 

with any precision what the next 75 years will look like—that would 

require the ability to predict changes in the economy and future 

legislation. However, there is a fair amount of certainty in one major driver 

of our long-term outlook—demographics. As life expectancy rises and the 

baby boom generation retires, the U.S. population will age, and fewer 

workers will support each retiree. Over the next few decades, federal 

spending on retirement and health programs—Social Security, Medicare, 

Medicaid, and other federal pension, health, and disability programs—will 

grow dramatically. Absent policy changes on the spending and/or revenue 

sides of the budget, a growing imbalance between expected federal 

spending and tax revenues will mean escalating and eventually

unsustainable federal deficits and debt that will threaten our future 

economy and standard of living. As Comptroller General Walker has said,

“Simply put, our nation’s fiscal policy is on an imprudent and 

unsustainable course.”8

Neither slowing the growth in discretionary spending nor allowing the tax 

provisions to expire—nor both together—would eliminate the imbalance.

Although revenues will be part of the debate about our fiscal future, 

assuming no changes to Social Security, Medicare, Medicaid, and other 

drivers of the long-term fiscal gap would require at least a doubling of 

taxes—and that seems highly implausible. 

 8

GAO, 21st Century: Addressing Long-Term Fiscal Challenges Must Include a Reexamination of Mandatory Spending, GAO-06-456T, (Washington, D.C.: Feb. 15, 2006). 

Page 11 GAO-06-628T
National Saving

GAO’s long-term simulations illustrate the magnitude of the fiscal 

challenges associated with an aging society. Indeed, the nation’s long-term 

fiscal outlook is daunting under many different policy scenarios and 

assumptions. For instance, under a fiscally restrained scenario, if 

discretionary spending grows only with inflation over the next 10 years 

and all existing tax cuts expire as scheduled under current law, spending 

for Social Security and health care programs would grow to consume over 

80 percent of federal revenue by 2040 (see fig. 7). On the other hand, if 

discretionary spending grew at the same rate as the economy in the near 

term and if all tax cuts were extended, by 2040 federal revenues may just 

be adequate to pay only some Social Security benefits and interest on the 

growing federal debt (see fig. 8). 

Figure 7: Composition of Spending as a Share of GDP under Baseline Extended 

Percent of GDP

Fiscal year

All other spending Medicare & Medicaid Social Security Net interest

Source: GAO’s January 2006 analysis.

0

10

20

30

40

50

2005 2015 2040 2030

Revenue

Notes: In addition to the expiration of tax cuts, revenue as a share of GDP increases through 2016 

due to (1) real bracket creep, (2) more taxpayers becoming subject to the alternative minimum tax 

(AMT), and (3) increased revenue from tax-deferred retirement accounts. After 2016, revenue as a

share of GDP is held constant. 

Page 12 GAO-06-628T
National Saving

Figure 8: Composition of Spending as a Share of GDP Assuming Discretionary 

Spending Grows with GDP After 2006 and All Expiring Tax Provisions Are Extended 

Percent of GDP

Fiscal year

All other spending Medicare & Medicaid Social Security Net interest

Source: GAO’s January 2006 analysis.

0

10

20

30

40

50

2005 2015 2040 2030

Revenue

● ● ● ●

Note: This includes certain tax provisions that expired at the end of 2005, such as the increased AMT

exemption amount. 

GAO’s long-term simulations show the squeeze on budgetary flexibility 

that the combination of demographics and health care cost growth will 

create. The burden on the budget and on the economy mean that letting 

current policy continue will leave few resources for investment in new 

capital goods and technology and result in slower income growth. 

National Saving Critical for 

Long-term Economic 

Growth 

There are three key contributors to economic growth—labor force growth, 

capital input, and total factor productivity (or increased efficiency in the 

use of capital and labor). Figure 9 shows the slowing in labor force growth 

(potential hours worked) over the next decade. Indeed, the Social Security 

and Medicare trustees project labor force growth to slow after 2010 and be

negligible after 2020. Without improvements in managerial efficiencies or 

increases in capital formation, low labor force growth will lead to slower 

growth in the economy—and to slower growth in federal revenues at a 

time when the expenditure demands on federal programs for the elderly 

are increasing. This illustrates the imperative to increase saving and 

investment and explore other efficiency-enhancing activities, such as 

education, training, and R&D. 

Page 13 GAO-06-628T
National Saving

Figure 9: Contributions to Potential Output Growth (Nonfarm Business Sector) 

Percentage points

Potential TFP

Capital input

Potential hours worked

Total contributions to potential output growth

Source: CBO.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1950

1974

1982

1991

1996

2006

-20

-2016

05

-197

-1981

-1990

-1995

3

1.0

0.5

0.7

1.9

1.1

1.3

1.2

0.8

1.3

1.2

1.0 0.9 0.9

1.7

0.9

1.3

1.6

1.4

4

3.7

3.1

3.0

3.8

3.2

projected

Note: Numbers may not add to total due to rounding.

Greater economic growth from saving more now would make it easier for 

future workers to achieve a rising standard of living for themselves while 

also paying for the government’s commitments to the elderly. While 

economic growth will help society bear the burden of financing Social

Security and Medicare, it alone will not solve the long-term fiscal 

challenge. Closing the current long-term fiscal gap would require sustained 

economic growth far beyond that experienced in U.S. economic history 

since World War II. Tough choices are inevitable, and the sooner we act 

the better. 

Page 14 GAO-06-628T
National Saving

Although there may be ways for the government to affect private saving, 

the only sure way for the government to increase national saving is to 

decrease government dissaving (the budget deficit). Each generation is a 

steward for the economy it bequeaths to future generations, and the 

nation’s long-term economic future depends in part on today’s decisions 

about consumption and saving. To address our nation’s daunting long-term 

fiscal challenges, we must change the path of programs for the elderly and 

build the economic capacity to bear the costs of an aging population. 

From a macroeconomic perspective, it does not matter who does the 

saving—any mix of increased saving by households, businesses, and 

government would help to grow the economic pie. Yet, in light of the 

virtual disappearance of personal saving, concerns about U.S. reliance on

borrowing from abroad to finance domestic investment, and the looming 

fiscal pressures of an aging population, now is an opportune time for the 

federal government to reduce federal deficits. Higher federal saving—to 

the extent that the increased government saving is not offset by reduced

private saving—would increase national saving and tend to improve the 

nation’s current account balance, although typically not on a dollar-fordollar basis. 

The Federal 

Government’s Role in 

National Saving 

Reduce Federal Deficits As the Comptroller General has said,9

 meeting our nation’s large, growing, 

and structural fiscal imbalance will require a three-pronged approach: 

• restructuring existing entitlement programs, 

• reexamining the base of discretionary and other spending, and 

• reviewing and revising existing tax policy, including tax expenditures, 

which can operate like mandatory spending programs. 

Increased government saving and entitlement reform go hand-in-hand. 

Over the long term, the federal government cannot avoid massive 

dissaving unless it reforms retirement and health programs for the elderly. 

Without change, Social Security and Medicare will constitute a heavy drain 

on the earnings of future workers. Although saving more yields a bigger 

pie, policymakers will still face the difficult choice of how to divide the pie 

between retirees and workers. It is worth remembering that policy debates 

 9

GAO-06-456T. 

Page 15 GAO-06-628T
National Saving

surrounding Social Security and Medicare reform also have implications 

for all levels of saving—government, personal, and, ultimately, national. 

Restoring Social Security to sustainable solvency and increasing saving are 

intertwined national goals. Saving for the nation’s retirement costs is 

analogous to an individual’s retirement planning in that the sooner we 

increase saving, the greater our benefit from compounding growth. The 

way in which Social Security is reformed will influence both the 

magnitude and timing of any increase in national saving. The ultimate 

effect of Social Security reform on national saving depends on complex 

interactions between government saving and personal saving—both 

through pension funds and by individuals on their own behalf. Various 

proposals would create new individual accounts as part of Social Security 

reform or in addition to Social Security. The extent to which individual 

accounts would affect national saving depends on how the accounts are 

funded, how the account program is structured, and how people adjust 

their own saving behavior in response to the new accounts. 

As everyone here knows, health care spending is the major driver of longterm government dissaving. This is due to both demographics and the 

increasing cost of modern medical technology. The current Medicare 

program largely lacks incentives to control health care consumption, and 

the cost of health care decisions is not readily transparent to consumers. 

In balancing health care spending with other societal priorities, it is 

important to distinguish between health care wants, needs, affordability, 

and sustainability at both the individual and aggregate level. Reducing 

federal health care spending would improve future levels of government 

saving, but the ultimate effect on national saving depends on how the 

private sector responds to the reductions and the extent to which overall 

health care spending is moderated. For example, reforms that reduce 

federal deficits by merely shifting healthcare spending to state and local 

governments or the private sector might not increase national saving on a

dollar-for-dollar basis. 

Tax expenditures have represented a substantial federal commitment over 

the past three decades. Since 1974, the number of tax expenditures more 

than doubled and the sum of tax expenditure revenue loss estimates 

tripled in real terms to nearly $730 billion in 2004. On an outlay-equivalent 

basis, the sum of tax expenditure estimates exceeded discretionary 

spending for most years in the last decade. Tax expenditures result in 

forgone revenue for the federal government due to preferential provisions

in the tax code, such as exemptions and exclusions from taxation, 

deductions, credits, deferral of tax liability, and preferential tax rates. 

Page 16 GAO-06-628T
National Saving

These tax expenditures are often aimed at policy goals similar to those of 

federal spending programs; existing tax expenditures, for example, are 

intended to encourage economic development in disadvantaged areas, 

finance postsecondary education, and stimulate research and

development. A recent GAO report calls for a more systematic review of 

tax expenditures to ensure that they are achieving their intended purposes

and are designed in the most efficient and effective manner.10

The federal government has sought to encourage personal saving both to 

enhance households’ financial security and to boost national saving. 

However, developing policies that have the desired effect is difficult. Tax 

incentives may affect how people save for retirement but do not 

necessarily increase the overall level of personal saving. Even with 

preferential tax treatment for employer-sponsored retirement saving plans 

and individual retirement accounts (IRA), the personal saving rate has 

steadily declined. For example, although tax benefits seem to encourage 

individuals to contribute to these kinds of accounts, the amounts 

contributed are not always new saving. Some contributions may represent

saving that would have occurred even without the tax incentives—and 

may even be shifted from taxable assets or financed by borrowing. 

Economists disagree about whether tax incentives have been or could be 

effective in increasing the overall level of personal saving. The net effect of 

a tax incentive on national saving depends on whether the tax incentive 

induces enough additional saving by households to make up for the lower 

government saving resulting from the government’s revenue loss. The 

bottom line is that we have many saving incentives but very little 

information on whether they work and how they interact. 

Saving Incentives 

Saving Education A leading obstacle to expanding retirement saving has been that many 

Americans do not know how to save for retirement, let alone how much to 

save. The need to improve consumers’ financial literacy—their ability to 

make informed judgments and effective decisions about the management 

of money and credit—has become increasingly important. Congress has 

responded by passing legislation, such as the Savings Are Vital for 

Everyone’s Retirement Act of 1997 (SAVER Act). In addition, in the Fair

 10GAO, Government Performance and Accountability: Tax Expenditures Represent a

Substantial Federal Commitment and Need to Be Examined, GAO-05-690, (Washington, 

D.C.: Sept. 23, 2005). 

Page 17 GAO-06-628T
National Saving

and Accurate Credit Transactions Act of 2003, Congress created the 

Financial Literacy and Education Commission, which is charged with 

coordinating federal efforts and developing a national strategy to promote 

financial literacy. Also, GAO has identified financial literacy as a 21st 

century challenge.11

In a July 2004 Comptroller General forum, we discussed the federal 

government’s role in improving financial literacy.12 Among other things, 

forum participants suggested that the federal government serve as a leader

using its influence and authority to make financial literacy a national 

priority. Some federal agencies already play a role in educating the public 

about saving. For example, as mandated by the SAVER Act, the 

Department of Labor maintains an outreach program in concert with other 

public and private organizations to raise public awareness about the 

advantages of saving and to help educate workers about how much they 

need to save for retirement. Also, individualized statements now sent 

annually by the Social Security Administration to most workers aged 25 

and older provide important information for personal retirement planning, 

but knowing more about Social Security’s financial status would help 

workers to understand how to view their personal benefit estimates. 

Increasing the nation’s economic capacity is a long-term process. Acting 

sooner rather than later could allow the miracle of compounding to turn 

from enemy to ally. This is why the Comptroller General has called for 

reimposing budget controls; reforming Social Security, Medicare and

Medicaid; and reexamining the base of all major spending programs and 

tax policies to reflect 21st century challenges. As I said before, every

generation is in part responsible for the economy it passes on to the next. 

Our current saving decisions have profound implications for the nation’s 

future well-being. 

Concluding 

Observations 

Mr. Chairman, this completes my prepared statement. I would be happy to

respond to any questions you or other Members of the Subcommittee may 

have at this time. 

 11GAO-05-325SP. 

12GAO, Highlights of a GAO Forum: The Federal Government’s Role in Improving 

Financial Literacy, GAO-05-93SP, (Washington, D.C.: Nov. 15, 2004). 

Page 18 GAO-06-628T
National Saving

My remarks are based largely on our previous report National Saving:

Answers to Key Questions and other related GAO products. We updated

the information from the National Saving report with the most recent 

published data from OMB, BEA, the Federal Reserve Board, CBO and the 

IMF. We also reviewed some recently published studies and statements 

from academic journals, Federal Reserve officials, the IMF, CBO and other 

sources. 

Contact points for our Offices of Congressional Relations and Public 

Affairs may be found on the last page of this testimony. For further 

information on this testimony, please contact Thomas J. McCool at (202) 

512-2700 or mccoolt@gao.gov or Susan J. Irving at (202) 512-9142 or 

irvings@gao.gov. Individuals making key contributions to this testimony 

include Rick Krashevski, Assistant Director; and Melissa Wolf, Senior 

Analyst. 

21st Century Challenges: Reexamining the Base of the Federal 

Government. GAO-05-325SP. February 2005. 

Highlights of a GAO Forum: The Federal Government’s Role in 

Improving Financial Literacy. GAO-05-93SP. Nov. 15, 2004. 

Scope and 

Methodology 

Contacts and 

Acknowledgments 

Related GAO 

Products 

Federal Debt: Answers to Frequently Asked Questions, An Update. GAO04-485SP. August 2004. 

National Saving: Answers to Key Questions. GAO-01-591SP. June 2001. 

See also http://www.gao.gov/special.pubs/longterm/ for information on 

GAO’s most recent long-term simulations and 

http://www.gao.gov/special.pubs/longterm/longtermproducts.html a 

bibliography of GAO’s issued work on the long-term fiscal outlook. 

Page 19 GAO-06-628T (450490) 
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