GAO

United States General Accounting Office

June 2001 NATIONAL SAVING

Answers to Key 

Questions

GAO-01-591SP

Page 1 GAO-01-591SP National Saving

Contents

Preface 5

Summary of Major 

Sections

9

Personal Saving and Retirement Security 9

National Saving Overview 11

National Saving and the Economy 12

National Saving and the Government 13

Section 1

Personal Saving and 

Retirement Security

18

Q1.1. What is the Personal Saving Rate and What Does it Mean? 18

Q1.2. Why Measure Personal Saving? 20

Q1.3. How Has the Personal Saving Rate Changed Over Time? 21

Q1.4. Why Do People Save? 22

Q1.5. Why Has the Personal Saving Rate Declined? 25

Q1.6. What Is the Relationship Between Personal Saving and Wealth? 27

Q1.7. If Household Wealth Has Increased, Does It Matter if the 

Personal Saving Rate Has Declined? 31

Q1.8. How Do Social Security and Personal Saving Compare as 

Sources of Retirement Income? 34

Q1.9. What Are the Implications of a Growing Elderly Population for 

Retirement Security? 39

Section 2

National Saving 

Overview

47

Q2.1. What Is National Saving and How Is It Measured? 47

Q2.2. How Has U.S. National Saving Changed Over Time—Both 

Overall and by Component? 49

Q2.3. How Does U.S. National Saving Compare to Other Major

Industrialized Nations? 53

Q2.4. What Are Other Ways of Defining Saving and Investment? 55

Section 3

National Saving and 

the Economy

58

Q3.1. How Does National Saving Contribute to Investment and 

Ultimately Economic Growth? 58

Q3.2. Has the Relatively Low National Saving Rate Affected 

Investment and Economic Growth? What Factors Have Fostered 

Economic Growth in Recent Years? 62

Q3.3. To What Extent Has the United States Supplemented Its 

Saving and Investment by Borrowing Saving From Abroad? How Does 

Such Borrowing Affect the Economy? 65

Q3.4. What Is the Current Long-Term Economic Outlook for
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U.S. National Saving and Investment? How Would the Long-Term 

Economic Outlook Change With Higher Levels of National Saving? 70

Section 4

National Saving and 

the Government

77

Q4.1. How Has Federal Fiscal Policy Affected U.S. National Saving? 77

Q4.2. Why Do Government and Private Saving Tend to Move in 

Opposite Directions? 81

Q4.3. What Is the Long-Term Outlook for Federal Government 

Saving/Dissaving? 82

Q4.4. How Does Saving Affect Future Budgetary Flexibility? 87

Q4.5. What are the Implications of Current Fiscal Policy Choices 

for Future Living Standards? 90

Q4.6. How Does Government Investment Affect National Saving and 

Economic Growth? 93

Q4.7. What Policies of the Federal Government Have Been Aimed at 

Encouraging Nonfederal Saving and Investment? 95

Q4.8. Given That Experts Disagree About Whether Retirement

Saving Tax Incentives Are Effective In Increasing Personal Saving 

Overall, How Do These Tax Incentives Affect National Saving? 99

Q4.9. What Is the Federal Government Doing to Educate the Public 

About Why Saving Matters? 104

Q4.10. How Would Social Security Reform Affect National Saving? 106

Q4.11. How Would Establishing Individual Accounts Affect 

National Saving? 112

Q4.12. How Would Medicare Reform Affect National Saving? 114

Section 5

National Saving and 

Current Policy Issues

119

Q5.1. What Are Key Issues in Evaluating National Saving? 119

Appendixes Appendix I: Objectives, Scope, and Methodolog 122

Appendix II: The Economic Model and Key Assumptions 127

Appendix III: Glossary 135

Appendix IV: Bibliography 142

Appendix V: Related GAO Products 153

Tables Table 4.1:Selected Federal Income Tax Provisions That Influence

Personal Saving 97
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Table 4.2:Change in Government and National Saving Resulting 

From a $4,000 Tax-Deductible IRA Contribution Under

Alternative Personal Saving Assumptions 100

Table II.1:Key Assumptions of the Economic Model 132

Figure S.1:Personal Saving Rate (1960–2000) 10

Figure S.2:Net National Saving as a Share of GDP (1960–2000) 12

Figure 1.1:Personal Saving Rate (1960–2000) 22

Figure 1.2:Comparison of the Personal Saving Rate and the

Wealth-Income Ratio (1960–2000) 28

Figure 1.3:Family Net Worth by Income Level in 1998 33

Figure 1.4:Share of Elderly Households’ Income by Source of

Income, 1998 35

Figure 1.5:Pensions, Income from Accumulated Assets, and Earnings 

Determine Who Had Highest Retirement Incomes, 1998 37

Figure 1.6:Aged Population Nearly Doubles From Today as a Share 

of Total U.S. Population (1960–2075) 40

Figure 1.7:Relatively Fewer Workers Will Support More Retirees

(1960–2075) 41

Figure 1.8:Social Security Trust Fund Faces Insolvency in 2038 

(2000–2050) 42

Figure 1.9:Medicare’s Hospital Insurance Trust Fund Faces

Insolvency in 2029 (2000–2050) 44

Figure 1.10:Social Security and Medicare HI Cost and Income as a 

Percentage of Taxable Payroll (2000–2075) 45

Figure 2.1:Gross National Saving as a Share of GDP (1960–2000) 50

Figure 2.2:Composition of Net National Saving (1960–2000) 51

Figure 2.3:International Trends in Gross National Saving (1960–1997) 54

Figure 3.1:Overview of Saving, Investment, Output, and Income

Flows 59

Figure 3.2:National Saving, Domestic Investment, and Net Foreign 

Investment (1960–2000) 66

Figure 3.3:Net U.S. Holdings of Foreign Assets and Net Income From 

Abroad (1977–1999) 68

Figure 3.4:Gross National Saving as a Share of GDP Under the Save

the Social Security Surpluses Simulation (1990–2075) 72

Figure 3.5:GDP Per Capita Under Alternative Gross National

Saving Rates (2000–2075) 73

Figure 4.1:The Effect of Federal Surpluses and Deficits on Net 

National Saving (1990–2000) 80

Figure 4.2:Unified Surpluses and Deficits as a Share of GDP Under 

Alternative Fiscal Policy Simulations (2000–2075) 86
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Figure 4.3:Composition of Federal Spending as a Share of GDP 

Under the Save the Social Security Surpluses Simulation 89

Figure 4.4:GDP Per Capita Under Alternative Fiscal Policy Simulations 

(1960–2075) 91

Figure 4.5:Medicare HI and SMI Spending as a Share of GDP 

(2000–2075) 116

Text Box 2.1: Gross Domestic Product and Gross National Product 48

Text Box 4.1: How do the NIPA and federal unified budget concepts of 

federal surpluses and deficits differ? 78

Text Box 4.2: Government Saving When Reducing Publicly Held 

Federal Debt is Not an Option 84

Text Box 4.3: Individual Development Accounts for Low-Income

Savers 102

Abbreviations

BEA Bureau of Economic Analysis

BLS Bureau of Labor Statistics

CBO Congressional Budget Office

FFA Flow of Funds Accounts

GDP Gross domestic product

GNP Gross national product

HI Hospital Insurance

IRA Individual Retirement Account

NIPA National Income and Product Accounts

OASDI Old-Age, Survivors, and Disability Insurance

OECD Organization for Economic Cooperation and Development 

R&D Research and development

SAVER “Savings are Vital for Everyone's Retirement” Act of 1997

SMI Supplementary Medical Insurance
Page 5 GAO-01-591SP National Saving

Preface

The term “saving” is used both when people discuss their own finances and 

when policymakers and economists discuss “national saving.” For people 

and for the nation, saving means forgoing consumption today so they can 

enjoy a better standard of living in the future. 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. Saving today increases a 

nation’s capacity to produce goods and services in the future and, 

therefore, helps to increase the standard of living for future generations.

Since the 1970s, combined saving by households and business has declined. 

For much of that time, the federal government did not contribute to saving; 

instead it was a borrower, its deficits absorbing a share of the saving pool 

available for investment. For the nation as a whole, saving has rebounded 

somewhat from its low point in the early 1990s but remains relatively low 

by U.S. historical standards. In fiscal year 1998, the federal government 

began to contribute to the pool of saving by running its first surplus since 

1969. Federal budget surpluses now are projected for at least the next 

decade. But even with the advent of federal government saving in the late 

1990s, national saving available for new investment remains relatively low, 

in large part because personal saving has dramatically declined. The U.S. 

has been able to invest more than it saves by borrowing from abroad, but 

economists question whether this is a viable strategy for the long term.

Personal saving plays a dual role, ensuring both individuals’ retirement 

security and the nation’s economic security. While Social Security provides 

a foundation for retirement income, saving through pensions and by 

individuals on their own behalf contribute substantially to retirement 

income. Even as more people are accumulating balances through 

employer-sponsored 401(k) saving plans and individual retirement 

accounts, personal saving—which does not reflect gains on existing 

assets—has declined. The personal saving rate has plunged, with American 

households spending virtually all of their current income. Although 

aggregate household wealth has risen in part as a result of the stock market 

boom over the 1990s, many individual households have accumulated little, 

if any, wealth.

America faces a demographic tidal wave that poses significant challenges 

for individuals’ retirement security and our economy as a whole. More 
Preface

Page 6 GAO-01-591SP National Saving

people are living longer in retirement, and there will be relatively fewer 

workers supporting each retiree in the future. Without meaningful reform, 

the Social Security and Medicare programs face long-term financing 

problems. Although public attention usually focuses on the dates by which 

the trust funds are projected to become insolvent, the effects associated 

with financing cash deficits for these programs will be felt sooner as the 

baby boom generation begins to retire. As the population ages, spending for 

Social Security and federal health programs will leave increasingly less 

room for spending on other national priorities.

Increasing national saving is an important way to bolster retirement 

security for current workers and to allow future workers to more easily 

bear the costs of financing federal retirement and health programs while 

maintaining their standard of living. As we have reported in the past, the 

surest way for the federal government to affect national saving is through 

federal fiscal policy, particularly in what it chooses to do with the budget 

surpluses projected over the next decade. Policymakers appear to have 

agreed to save the Social Security surpluses, and the fiscal policy debate 

has centered on what to do with the balance of the anticipated surpluses. 

To the extent that they are used to reduce federal debt held by the public, 

surpluses represent an opportunity to increase national saving. In addition, 

how surpluses are used has long-term implications for future economic 

growth. Policy debates surrounding Social Security and Medicare reform 

also have implications for all levels of saving—government, personal, and, 

ultimately, national.

This report is designed to present information about national saving—as 

measured in the National Income and Product Accounts—and its 

implications for economic growth and retirement security in a concise and 

easily understandable manner. In general, this report is based on widely 

accepted economic principles, and we identify those areas where many 

economists do not agree. Although many excellent studies and books have 

been written on national saving and long-term economic growth, these 

discussions tend to be complex and technical. Also, most discussion of the 

decline in personal saving focuses on the adequacy of individuals’

retirement saving rather than on the significance of personal saving for the 

economy as a whole. For example, one point that is sometimes overlooked 

is that low personal saving has consequences for U.S. reliance on foreign 

borrowing, long-term economic growth, and standards of living for future 

generations.
Preface

Page 7 GAO-01-591SP National Saving

This report addresses the following questions: (1) What is personal saving, 

how is it related to national saving, and what are the implications of low 

personal saving for Americans’ retirement security? (2) What is national 

saving and how does current saving in the United States compare to 

historical trends and saving in other countries? (3) How does national 

saving affect the economy and how would higher saving affect the longterm outlook? (4) How does federal fiscal policy affect national saving, 

what federal policies have been aimed at increasing private saving, and 

how would Social Security and Medicare reform affect national saving? 

And, (5) what are key issues in evaluating national saving? For a quick 

overview of the topics discussed in this report, see the summary section.

For easy access to definitions of key terms, we include a glossary at the end 

of this report. Terms contained in the glossary appear in bold type in the 

text the first time they are used in the major sections. For readers who are 

interested in more detailed information on the topics covered here, we also 

include a bibliography.

This report was prepared under the direction of Paul L. Posner, Managing 

Director of Federal Budget Analysis, and Susan J. Irving, Director of 

Federal Budget Analysis, who may be reached at (202) 512-9573 if there are 

any questions.

Paul L. Posner 

Managing Director

Federal Budget Analysis

Strategic Issues 

Susan J. Irving

Director

Federal Budget Analysis 

Strategic Issues
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Summary of Major Sections

Personal Saving and 

Retirement Security

The personal saving rate—as measured in the National Income and Product 

Accounts (NIPA)—reflects how much households in aggregate are saving 

from their current disposable income. In evaluating personal saving, it is 

important to distinguish between saving as a way for an individual 

household to finance future consumption and saving as a way to finance 

the nation’s capital formation. Strange as it may seem to the typical 

household, capital gains on its existing assets do not contribute to saving as 

measured in NIPA. That is 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. Whereas employer contributions 

to pension funds as well as pension funds’ interest and dividend income are 

part of personal income and contribute to personal saving, increases in the 

market value of assets held by pension funds, for example, are not counted 

as personal income and saving. 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.

The personal saving rate has largely declined since the 1980s, plummeting 

in recent years to levels not seen since the Great Depression, as shown in 

figure S.1. A low personal saving rate raises questions about whether 

households have adequate resources to sustain their rate of spending. A 

negative saving rate means that, in aggregate, households are spending 

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

existing assets, or borrowing.
Summary of Major Sections

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Figure S.1: Personal Saving Rate (1960–2000)

Source: Bureau of Economic Analysis, Department of Commerce.

Economists use several theories to explain what motivates people to save. 

Despite a great deal of study, economists have found no single reason that 

convincingly explains the decline in the personal saving rate. One possible 

explanation is that surging household wealth in recent years contributed to 

the virtual disappearance of personal saving. Since the mid 1990s, 

aggregate household wealth has swelled relative to disposable personal 

income, largely due to increases in the market value of households’ existing 

assets (see figure 1.2). Yet, despite the stock market boom of the 1990s, 

many households have accumulated little, if any, wealth (see figure 1.3), 

and half of American households did not own stocks as of 1998.

While Social Security provides a foundation for retirement income, Social 

Security benefits replace only about 40 percent of pre-retirement 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. Pensions, income from 

accumulated assets, and earnings from continued employment largely 

determine which households will have the highest retirement income (see 

figures 1.4 and 1.5). Pensions are not a universal source of retirement 

income, and more than half of those working in 1998 lacked a pension plan. 

While most families say they recognize the need to save for retirement, 

-2

0

2

4

6

8

10

12

1960 1965 1970 1975 1980 1985 1990 1995 2000

Percent of disposable personal income
Summary of Major Sections

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fewer than half of those surveyed in early 2001 had tried to calculate how 

much they need to save.

Over the next 75 years, the elderly population will nearly double as a share 

of the total U.S. population (see figure 1.6). As more people live longer, 

there will be relatively fewer workers supporting each retiree unless 

retirement patterns change. While today there are 3.4 workers for each 

Social Security beneficiary, by 2030, there will be only about 2 workers 

paying taxes to support each beneficiary (see figure 1.7). Both Social 

Security and Medicare face long-term financing problems, and the Social 

Security and Medicare’s Hospital Insurance trust funds eventually will be 

exhausted as the baby boomers draw their benefits (see figures 1.8 and 

1.9). Absent reform, Social Security and Medicare costs would constitute a 

substantial drain on the earnings of future workers (see figure 1.10). 

Anticipating potential benefit cuts, people could choose to save more now, 

work longer to delay retirement, or experience a lower standard of living in 

retirement. With an aging population and a slowly growing workforce, 

saving more today and increasing the nation’s future economic capacity is 

critical to ensuring retirement security in the 21st century.

National Saving 

Overview

In the NIPA, national saving is the sum of saving by households, businesses, 

and all levels of government. Gross national saving—which reflects 

resources available both to replace old, worn out capital goods and to 

expand the capital stock—has rebounded as a share of gross domestic 

product (GDP) from its low in the 1990s but remains below the level of the 

1960s (see figure 2.1). Depreciation as a share of GDP has increased slightly 

over the past 4 decades, and net national saving—which excludes 

depreciation—remains well below the 1960s average, as shown in figure 

S.2. Through much of the 1980s and early 1990s, federal deficits absorbed 

funds saved by households and businesses and reduced overall national 

saving available to finance private investment (see figure 2.2). Even as 

federal surpluses have contributed to national saving in recent years, 

personal saving has steadily declined as a share of GDP, and personal 

dissaving in 2000 absorbed resources that otherwise would have been 

available for investment. Although gross national saving in 2000 was low by 

U.S. historical standards, U.S. gross national saving has generally been 

lower than other major industrialized countries over the past 4 decades 

(see figure 2.3).
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Page 12 GAO-01-591SP National Saving

Figure S.2: Net National Saving as a Share of GDP (1960–2000)

Source: GAO analysis of NIPA data from the Bureau of Economic Analysis, Department of Commerce.

National saving represents resources available for investment in the 

nation’s stock of capital goods, such as plant, equipment, and housing. The 

nation’s human capital and knowledge—forms of intangible capital—are 

not part of the NIPA definitions of saving and investment. Also, NIPA 

focuses on the incomes arising from current production of goods and 

services and, thus, does not count revaluation of existing assets in national 

saving. Changes in the market value of existing tangible and financial 

assets, such as land and stocks, reflect expectations about the productive 

potential of the underlying capital, but fluctuations in asset values may not 

represent real, permanent changes in the nation’s productive capacity.

National Saving and 

the Economy

National saving together with borrowing from abroad provides the 

resources for investment that can boost productivity and lead to higher 

economic growth and future living standards (see figure 3.1). Investment in 

new capital is an important way to raise the productivity of the slowly 

growing workforce as the population ages. 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. Economic growth also depends 

on education to enhance the knowledge and skills of the nation’s work 

0

2

4

6

8

10

12

14

1960 1965 1970 1975 1980 1985 1990 1995 2000

Percent of GDP
Summary of Major Sections

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force—the nation’s human capital—as well as research and development to 

spur technological advances.

Even though national saving remains relatively low by U.S. historical 

standards, economic growth in recent years has been high 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, the United States was able to 

invest more than it saved by borrowing from abroad (see figure 3.2). 

Persistent U.S. current account deficits have translated into a rising level of 

indebtedness to other countries, i.e., net U.S. holdings of foreign assets (see 

figure 3.3). Many other nations currently financing investment in the United 

States also will face aging populations and declining national saving, so 

relying on foreign savers to finance a large share of U.S. domestic 

investment is not a viable strategy for the long run.

Current saving and investment decisions have profound implications for 

the nation’s level of well-being in the future. Our simulations using a longterm economic growth model show that, even assuming the United States 

could maintain national saving constant at its 2000 share of GDP, future 

incomes would fall short of the rise in living standards enjoyed by prior 

generations whose income generally doubled every 35 years (see figures 

3.4 and 3.5). Saving more would improve the nation’s long-term economic 

outlook, but this requires consuming less now.

National Saving and 

the Government

Federal fiscal policy affects the amount of federal government saving and 

this in turn directly affects national saving. From the 1970s through the mid 

1990s, federal deficits absorbed a large share of private saving and reduced 

the amount of national saving available for investment (see figure 4.1). 

Borrowing to finance these deficits added to the federal debt held by the 

public. In recent years, federal surpluses added to national saving and 

increased funds available for investment. So far, the federal government 

has used surplus funds to reduce its debt held by the public. Accumulating 

nonfederal financial assets, such as stocks, could be another way that 

government saving could translate into resources available for investment, 

but this idea is controversial. An additional dollar of government saving 

and debt reduction does not automatically increase national saving and 

investment by a dollar because changes in saving by households and 

businesses will tend to offset some of the change in government saving.
Summary of Major Sections

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While attention has focused on budget surpluses projected over the next 

decade, the federal budget will increasingly be driven by one certainty—the 

population is aging and there will be fewer workers supporting each 

retiree. In our simulations, saving only the Social Security surpluses will 

not be sufficient to accommodate both the projected growth in Social 

Security and health entitlements as well as other important national 

priorities in the long term (see figure 4.2). Absent program changes, saving 

the Social Security surpluses—and even the Medicare surpluses—is not 

enough to ensure retirement security for the aging population without 

placing a heavy burden on future generations. Social Security and health 

spending alone eventually would exceed total federal revenue and squeeze 

out most or all other spending (see figure 4.3). Even if the entire unified 

surplus were saved, our simulations show that the rise in living standards—

measured in terms of GDP per capita—would fall short of the rise enjoyed 

by prior generations whose income generally doubled every 35 years (see 

figure 4.4). Reforming retirement and health entitlement programs is 

critical to putting the federal budget on a more sustainable footing for the 

long term and to freeing up future resources for other competing needs.

Although increasing government saving is the most direct way for the 

federal government to increase national saving, budget surpluses also 

could be used to finance federal investment intended to promote long-term 

economic growth or to encourage personal saving. Whereas unified budget 

surpluses increase national saving available for private investment, 

increasing federal spending on national infrastructure, if properly designed 

and administered, can be another way to increase the nation’s capital stock. 

In addition, federal spending on education and research and 

development—while not counting as investment in NIPA—can, if properly 

designed and administered, promote the nation’s long-term productivity 

and economic growth. The federal government also has sought to 

encourage personal saving both to enhance households’ financial security 

and to boost national saving. But, developing policies that have the desired 

effect is difficult. Tax incentives 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, the personal saving rate has steadily 

declined. Economists disagree about whether tax incentives are 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. In recent 
Summary of Major Sections

Page 15 GAO-01-591SP National Saving

years, policymakers have explored using government matching or creating 

new individual accounts to encourage Americans to save more.

Congress found that a leading obstacle to expanding retirement saving has 

been that many Americans do not know how to save for retirement, let 

alone how much. The Department of Labor maintains an outreach program 

to raise public awareness about the advantages of saving and to help 

educate workers about how much they need to save for retirement. Other 

federal agencies also play a role in educating the public about saving. 

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.

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.

The Medicare program is fiscally burdensome in its current form, and 

Medicare spending (see figure 4.5) is expected to drive federal government 

dissaving over the long run. Given the aging of the U.S. population and the 

increasing cost of modern medical technology, it is inevitable that demands 

on the Medicare program will grow. The current Medicare program lacks 

incentives to control health care consumption, and the cost of health care 

decisions is not transparent to consumers. Although future Medicare costs 

are expected to consume a growing share of the federal budget and the 

economy, pressure is mounting to expand Medicare’s benefit package to 

cover prescription drugs, which will add billions to Medicare program 

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

important to distinguish between health care wants, which are virtually 
Summary of Major Sections

Page 16 GAO-01-591SP National Saving

unlimited; needs, which should be defined and addressed; and overall 

affordability, which has a limit. Reducing federal Medicare 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.

Key Issues 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, federal decisionmakers 

must consider how much of the anticipated budget surpluses to save, 

spend, or use for tax reductions. Economic growth will help society bear 

the burden of financing Social Security and Medicare, but it alone will not 

solve our long-term fiscal challenge. To participate in the debate over how 

to reform Social Security and Medicare, the public needs to understand the 

difficult choices the nation faces.
Page 17 GAO-01-591SP National Saving
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Section 1

Personal Saving and Retirement Security Secotin1

Q1.1. What is the 

Personal Saving Rate 

and What Does it 

Mean?

A1.1. The personal saving rate is the most widely cited statistic about how 

much households save, but most people do not know what the rate 

measures or what it means. First, it is necessary to distinguish “saving”

from “savings.” In everyday terms, “saving” means spending less than your 

income and “savings” are the assets accumulated over time. To better 

distinguish between these concepts in this report, the term “saving” means 

the money set aside from current income for future consumption—i.e., 

how much of each period’s income is saved rather than spent. The terms 

“assets accumulated” and “wealth” are used for the cumulative stock of 

resources built over time—what people commonly think of as “savings.”

The personal saving rate, as measured in the National Income and 

Product Accounts (NIPA),

1

 reflects how much American households are 

setting aside from current income. Under NIPA, personal saving is what is 

left over from personal income after taxes and personal spending for goods 

and services. Disposable personal income is the income available for 

personal spending and saving after federal, state, and local taxes as well as 

Social Security and Medicare payroll taxes are paid. The NIPA personal 

saving rate is calculated as the ratio of personal saving to disposable 

personal income.

To understand what the personal saving rate means, it is helpful to 

understand the NIPA definitions of “persons,” personal income, and 

personal spending. For NIPA purposes, “persons” include not only 

individuals but also nonprofit institutions primarily serving individuals, 

pension funds, and private trust funds. NIPA personal income includes 

wages and salaries; interest and dividend income; rental income;2

proprietors’ income; government transfer payments, such as Social 

Security, veterans, and unemployment benefits; and employer 

contributions to pension plans as well as group health and life insurance 

plans. Contributions to traditional defined benefit pension plans and 

defined contribution plans—such as 401(k) plans—together with pension 

1

The national income and product accounts (NIPA) are the comprehensive set of accounts 

that show the composition of production and the distribution of incomes earned in 

production. NIPA data reflect production in the United States as well as U.S. transactions 

with the rest of the world. NIPA data are prepared by the Bureau of Economic Analysis of 

the Department of Commerce. For more information, see Eugene P. Seskin and Robert P. 

Parker, “A Guide to the NIPA’s,” Survey of Current Business, Vol. 78, No. 3 (March 1998), 

pp. 26–68.

2

NIPA treats the net rental value on owner-occupied housing as personal income.
Section 1

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Page 19 GAO-01-591SP National Saving

funds’ interest and dividend income represent an important component of 

NIPA personal income and saving.3

 Benefits paid by pension plans are not a 

component of NIPA personal income, although pension benefits represent 

an important means for many retirees to finance consumption (see Q1.8). 

NIPA personal spending includes, for example, food, clothing, rent, 

utilities, and medical care; consumer interest payments; and consumer 

durables, such as cars and major appliances.4

Strange as it may seem to the average household, changes in the value of 

existing assets, such as stocks, bonds, or real estate, do not contribute to 

NIPA personal income and saving. That is 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. Under the 

current NIPA methodology, realized gains do not count as personal income, 

but any taxes paid on such gains reduce disposable personal income and 

thus personal saving.

Although the NIPA personal saving rate is the measure most frequently 

cited by analysts and the media, an alternative macroeconomic measure of 

personal saving is available from the Federal Reserve’s Flow of Funds 

Accounts (FFA).

5

 Whereas NIPA measures saving as what is left over 

from personal income after taxes and personal spending, FFA measures 

saving as the net increase in households’ financial and tangible assets less 

the net increase in households’ liabilities. Both the NIPA and FFA measures 

count household purchases of houses as saving. The FFA personal saving 

rate also counts household purchases of consumer durables as saving and, 

thus, is somewhat higher than the NIPA personal saving rate. Both the NIPA 

and FFA macroeconomic measures focus on saving from the economy’s 

current production and do not include changes in the market value of 

households’ existing portfolios. In this report, we use the NIPA measure of 

3

A defined benefit pension plan generally provides benefits based on a specific formula 

linked to the worker’s earnings and tenure. Typically, a defined benefit plan is funded 

completely by the employer, who bears the investment risk of such as arrangement. Under a 

defined contribution plan, a percentage of pay is contributed by the employer to an account 

for each worker, with the worker bearing the investment risk. The increasingly popular 

401(k) plans also allow contributions by workers.

4

This refers to spending by “persons” in NIPA and not just by individuals.

5

The Flow of Funds Accounts (FFA) measure the acquisition of physical and financial assets 

throughout the U.S. economy and the sources of funds used to acquire the assets. For more 

information, see Guide to the Flow of Funds Accounts, Vol. 1, Board of Governors of the 

Federal Reserve System (2000).
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personal saving because it more closely represents the resources available 

from households for the nation’s capital formation.

For the economy as a whole, the personal saving rate provides a measure 

of how much households are saving compared to current disposable 

personal income. A positive saving rate means that American households in 

aggregate are saving. A low personal saving rate means that households in 

aggregate are spending virtually all of their current income. A negative 

personal saving rate means that, in aggregate, American households are 

spending more than their current income—or “dissaving.” Given that the 

personal saving rate is an aggregate measure, some individuals might be 

saving a lot even while others are drawing down past saving, selling 

existing assets, or borrowing to finance their current consumption.

Q1.2. Why Measure 

Personal Saving?

A1.2. For the economy as a whole, personal saving can be a vital source of 

the nation’s saving available to finance private and government investment. 

NIPA personal saving is widely recognized by economists as the key 

measure of the resources that households contribute to national saving. A 

low personal saving rate—unless offset by relatively higher saving by 

businesses and/or government or by borrowing from abroad—limits how 

much the nation can invest and so ultimately limits future economic 

growth. A low personal saving rate can raise questions about whether 

current generations are setting aside enough to sustain the nation’s 

productive capacity, especially if the other components of national saving 

are not correspondingly higher. Some analysts are concerned that the 

demand for household consumption is in part fueling the U.S. trade deficit. 

Section 2 discusses the trend and the components of national saving, and 

section 3 explains how saving affects long-term economic growth and 

living standards.

The personal saving rate also has implications for Americans’ ability to 

sustain their current rate of spending. Personal spending represents about 

two-thirds of the U.S. economy. A low personal saving rate raises questions 

about whether Americans have adequate resources to withstand a financial 

emergency such as unemployment in the event of an economic downturn. 

In addition, many policymakers and analysts have questioned whether 

American households are saving enough to ensure their retirement 

security.

Having said this, it is important to recognize that macroeconomic measures 

such as the NIPA personal saving rate do not provide a complete picture of 
Section 1

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Page 21 GAO-01-591SP National Saving

the finances of individual households. A household’s capacity to consume 

depends on both its current income and its wealth. One way to measure 

households’ wealth is net worth, or the difference between households’

assets and their liabilities.6

 The change in households’ net worth is broader 

than the NIPA or FFA measures of personal saving and includes both the 

flow of saving from current income plus any increase (or decrease) in the 

market value of existing assets such as houses and stocks. For the 

economy as a whole, however, the change in households’ net worth due to 

revaluation of households’ existing assets does not represent resources 

available to invest in the nation’s capital stock.7

Q1.3. How Has the 

Personal Saving Rate 

Changed Over Time?

A1.3. Figure 1.1 shows the personal saving rate—expressed as a 

percentage of disposable personal income—over the past 4 decades. The 

personal saving rate averaged 8.3 percent over the 1960s and increased to 

an average of 9.6 percent over the 1970s. Within each of those 2 decades, 

annual saving rates were relatively steady, although they ranged from a low 

of 7.2 in 1960 to a high of 10.7 percent in 1974. Over the 1980s, the personal 

saving rate was slightly lower than in the 1970s. After peaking at 10.9 

percent in 1982, the rate generally declined over the 1980s, dropping as low 

as to 7.3 percent in 1987; for the decade, the rate averaged 9.1 percent. The 

personal saving rate rebounded from 1987 to 1992 when it reached 8.7 

percent. Since then, the personal saving rate has steadily declined and 

averaged only 5.9 percent over the 1990s. In the late 1990s, the personal 

saving rate dropped below the postwar low of 4.7 percent in 1947. In 1999, 

the personal saving rate plunged to 2.2 percent—an annual rate not seen 

since the Great Depression. As shown in figure 1.1, the personal saving rate 

in 2000 was estimated to be –0.1 percent.8

 With the personal saving rate 

around zero or negative, economists have questioned how to interpret the 

decline; see question 1.7.

6

Households’ aggregate net worth is available from the Flow of Funds Accounts’ balance 

sheet for the household sector.

7

For further discussion of whether revaluation of existing assets counts as saving, see 

questions 1.7 and 2.4.

8

The last time the personal saving rate was negative was in 1932 (-0.8 percent) and 1933 (-1.5 

percent).
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Figure 1.1: Personal Saving Rate (1960–2000)

Source: Bureau of Economic Analysis, Department of Commerce.

Q1.4. Why Do People 

Save?

A1.4. Before trying to answer why people are saving less, let’s start with 

the question of what motivates people to save. People save for a variety of 

reasons such as buying a house, taking a vacation, providing a college 

education for their children, or preparing for their own retirement. They 

may also save for general reasons such as for a “rainy day” or to leave 

money to their heirs. People with seemingly identical family and income 

situations may make different saving choices—some may save a great deal 

while others save little, if anything. Economists and other analysts use 

several theories in analyzing how individuals and households decide how 

much of their current income to save for the future.

The standard theory for explaining personal saving is the life-cycle 

model.

9

 The basic hypothesis is that people save and accumulate assets to 

smooth out their consumption and standard of living over their lifetimes.

-2

0

2

4

6

8

10

12

1960 1965 1970 1975 1980 1985 1990 1995 2000

Percent of disposable personal income

9

A complementary theory of personal saving is the permanent-income hypothesis. Generally, 

people save a greater share of income when their annual income is higher than their 

expected long-run permanent income and save a smaller share when their income is lower 

than the expected long-run level.
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Young people entering the workforce, anticipating that their incomes will 

increase over their careers, save little and may borrow to finance current 

spending. Workers in their peak earning years save to repay past borrowing 

and to accumulate assets for retirement. The life-cycle model predicts that 

saving is hump-shaped by age so that wealth accumulation peaks just 

before retirement. Upon leaving the workforce, the elderly run down their 

wealth—or “dissave.” In saving for retirement, individuals theoretically 

take into account not only their expected retirement age and the number of 

years they expect to live in retirement but also project their expected 

income, real returns on assets accumulated, and inflation over their 

lifetime.

Although providing for retirement is a powerful motive for saving, the

life-cycle model in its simplest form cannot fully explain how people decide 

to save. Faced with the difficulty of reconciling the standard life-cycle 

model with available empirical data, economists have examined other 

motives that may help explain saving behavior. While some evidence 

supports each motive, economists do not have a unified theory that fully 

explains how people choose to save.10 In general, the other major 

incentives or reasons why people save are categorized as follows:

• Precautionary saving motive. This is saving to protect against 

unexpected expenses or possible emergencies, such as unemployment 

or illness. In particular, individuals who face greater uncertainty about 

their income and those who are risk-averse may tend to save more for a 

“rainy day.” Precautionary saving may be over-and-above basic life-cycle 

saving for retirement. Some people may choose to save enough to 

maintain a buffer-stock or contingency reserve during their early 

working years and defer retirement saving until their 40s or 50s.11

• Bequest saving motive. This is saving beyond basic life-cycle saving 

for retirement. Some people may choose to save more in order to 

bequeath the accumulated wealth to future generations. The desire to 

leave a bequest may explain why the elderly do not fully deplete their 

wealth and some even continue to save during retirement. To some 

10For a comprehensive review of personal saving literature, see Martin Browning and 

Annamaria Lusardi, “Household Saving: Micro Theories and Micro Facts,” Journal of 

Economic Literature, Vol. XXXIV, No. 4 (1996), pp. 1797-1855.

11Christopher D. Carroll, “Buffer-Stock Saving and the Life Cycle/Permanent Income 

Hypothesis,” Quarterly Journal of Economics, Vol. CXII, No. 1 (1997), pp. 1–56.
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extent, bequests may be unplanned and thus reflect unspent retirement 

and precautionary saving.

• “Big ticket” saving motive. This is relatively short-term saving to 

accommodate a mismatch between current income and expenses during 

the life-cycle. Some people save to pay for big-ticket items such as cars, 

other consumer durables, or vacations. Some must save in advance 

because they cannot borrow, while others may prefer to save and avoid 

borrowing. Another big ticket is the down payment to buy a home; 

households largely borrow to buy homes and later save by repaying 

their mortgages. Paying for postsecondary education is a big ticket 

above and beyond life-cycle saving for retirement.

Given that people save for different purposes, increasing the rate of return 

on saving does not necessarily motivate people to save more. A higher rate 

of return has two opposing effects on personal saving. On the one hand, a 

higher rate of return may encourage people to save more because future 

spending becomes less costly relative to spending today—the 

substitution effect. On the other hand, given a higher rate of return, 

people need to save less now to finance a given level of future 

consumption. This reduced incentive to save as real rates of return 

increase is called the income effect.

12 How people react to an increase in 

the rate of return depends not only on their preferences about spending 

today versus spending in the future but also on the real after-tax rate of 

return—that is, the rate expected after taking into account inflation and 

taxes.13

Not everyone behaves like a life-cycle saver. Many people plan over shorter 

horizons—a few years or even paycheck-to-paycheck. Instead of trying to 

forecast lifetime income and economic conditions in the distant future, 

people may use simple rules of thumb, such as saving a fixed share of their 

income or avoiding debt.14 Many people are “target savers” who aim for a 

fixed level of wealth or ratio of wealth to income in order to achieve 

12Textbooks in microeconomics discuss these effects in detail. For a brief summary of 

substitution and income effects, see N. Gregory Mankiw, Macroeconomics, 4th Edition 

(New York, N.Y.: Worth Publishers, 2000), pp. 446–447.

13See section 4 for a discussion of federal tax incentives for personal saving.

14People can save for retirement using rules of thumb, such as saving a fixed percentage of 

income in an employer-sponsored retirement saving plan or saving $2,000 each year in an 

individual retirement account (IRA).
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specific goals such as retirement, college education, a new car, or a 

vacation. Once target savers reach their wealth target, they may feel no 

need to save more. Individuals may use mental accounts—and even 

separate bank accounts—to earmark the money saved for different uses. 

To ensure saving discipline, people may use “contractual” or automatic 

mechanisms, such as payroll deductions, to save. A mortgage is a key form 

of contractual saving in which the homeowner’s commitment to repay the 

principal borrowed compels future saving.

Even though economists have various theories to explain why people 

choose to save, some people do not save at all.15 Low-income and even 

some moderate-income households may feel that they are unable to save. 

Others may be unwilling to save. Some people may be impatient and they 

may discount the future so heavily that retirement saving seems irrelevant 

compared to current spending.

Q1.5. Why Has the 

Personal Saving Rate 

Declined?

A1.5. No one is sure why the personal saving rate has declined. Despite a 

great deal of study, economists have found no single reason that 

convincingly explains the decline. Instead, research points to a 

combination of factors that influence the personal saving rate. These 

include—but are not limited to—demographics, government programs for 

the elderly, credit availability, and expectations about future income and 

wealth.16

• Demographics. Under the basic life-cycle model, one would expect that 

an increase in the elderly as a percentage of the total population would 

reduce the aggregate saving rate. However, empirical research has 

found that saving has declined across most age groups. There is no

15For more information, see Annamaria Lusardi, “Explaining Why So Many Households Do 

Not Save,” Working Paper Series 00.1, Dartmouth College and The University of Chicago 

(January 2000); and Annamaria Lusardi, Jonathan Skinner, and Steven Venti, “Saving Puzzles 

and Saving Policies in the United States,” Working Paper No. 8237 (Cambridge, MA: National 

Bureau of Economic Research, April 2001).

16Martin Browning and Annamaria Lusardi, in “Household Saving: Micro Theories and Micro 

Facts,” Journal of Economic Literature, Vol. XXXIV, No. 4 (1996), pp. 1797–1855, identified 

11 possible explanations offered for the decline in personal saving. Jonathan Parker, in 

“Spendthrift in America? On Two Decades of Decline in the U.S. Saving Rate,” Working 

Paper No. 7238 (Cambridge, MA: National Bureau of Economic Research, July 1999), 

examined seven possible explanations for the decline.
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Page 26 GAO-01-591SP National Saving

consensus that the aging of the U.S. population caused the decline in the 

personal saving rate.

• Programs for the elderly. Medicare and Social Security affect people’s 

incentives to save for their old age.17 Medicare may reduce the elderly’s 

perceived needs for precautionary saving to cover medical expenses. 

Social Security can have opposing effects on personal saving.18 On the 

one hand, Social Security benefits reduce the amount people need to 

save on their own for retirement. On the other hand, Social Security may 

induce personal saving by encouraging workers to save for earlier 

retirement—the retirement effect. In a sense, Social Security makes 

retirement an attainable goal and thus can prompt individuals to plan for 

retirement. People may save more than they would have otherwise to 

supplement their Social Security benefits with additional retirement 

income or because they want to retire before they are eligible for Social 

Security and Medicare benefits. Nevertheless, some evidence suggests 

that the existence of Social Security may have reduced personal saving, 

and numerous studies have attempted to estimate the saving offset.19

However, given that Social Security was established in 1935 and 

Medicare in 1965, it seems unlikely that these programs were major 

contributors to the decline in the personal saving rate over the 1980s 

and 1990s.

• Credit availability. Improved access to credit reduces the need to save 

before big-ticket purchases. Over the last 20 years, credit cards have 

become widely available, and a smaller down payment is needed to buy 

a house. Easier access to credit may have contributed somewhat to the 

saving decline. The ability to borrow together with a rise in the number 

of two-earner families may have reduced the perceived need for 

precautionary saving.

17Means-tested government programs, such as Medicaid, also may affect the incentive to 

save. For example, requirements specifying low levels of financial assets in order to qualify 

for government benefits may discourage personal saving.

18Employer-sponsored pension plans also affect individuals’ incentives to save for 

retirement on their own. As noted above, employer pension contributions as well as pension 

funds’ interest and dividend income are part of NIPA personal income and saving.

19For more on Social Security, see Congressional Budget Office Memorandum, Social 

Security and Private Saving: A Review of the Empirical Evidence (July 1998).
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Page 27 GAO-01-591SP National Saving

• Expectations about future income and wealth. People decide how 

much to save based not only on their current income but also on their 

expectations about their future lifetime income and wealth. Since March 

1991, the United States has enjoyed its longest postwar economic 

expansion—unemployment and inflation have remained relatively low 

and stable, and the stock market has achieved record highs. Over the 

1990s, the booming economy and stock market may have lulled people 

into a sense of complacency that good times were here to stay. People 

may have saved less because they were confident about future income 

prospects, and households were wealthier because of gains on their 

existing assets. As discussed below in question 1.6, increased household 

wealth in recent years appears to have contributed to the plunge in the 

personal saving rate over the late 1990s.

Q1.6. What Is the 

Relationship Between 

Personal Saving and 

Wealth?

A1.6. That Americans save little but households are wealthier is a paradox 

that can be confusing. It is widely known that saving from current income 

is the way to accumulate assets and repay past borrowing, thus increasing 

net worth. The flow of saving is essential to accumulating a stock of 

wealth—as a general rule someone who never saves will have no wealth.20

Conversely, dissaving—spending more than current income—reduces the 

stock of wealth because amounts saved in the past must be drawn down, 

existing assets sold, or borrowing increased. Not only does saving affect 

the stock of wealth, but wealth in turn influences the choice to save.

Under the life-cycle model, people save to accumulate assets to finance 

future consumption, and attaining their wealth-to-income target depends in 

part on the rate of return anticipated. Assets accumulated can generate 

income in the form of interest and dividends that in turn may be saved. 

Moreover, the change in net worth not only includes the saving flow from 

current income but also reflects changes in the market value of assets 

accumulated by households. Economists generally agree that saving and 

wealth are inversely related: increased wealth increases an individual’s 

ability to consume in the future and thus reduces the incentive to save from 

current income. In other words, when households’ existing assets increase 

in value, people can save less from current income and still achieve their 

wealth-income target. If households’ existing assets lose value, people have 

to save more to attain their wealth-income target. While the idea of wealth 

20A nonsaver could get lucky and receive an inheritance or win the lottery.
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Page 28 GAO-01-591SP National Saving

targets may seem abstract to the average household, increased wealth 

clearly influences personal saving through traditional defined-benefit 

pension plans. For example, gains on existing assets reduce the amount of 

an employer’s contribution necessary to fund its pension liability.

Figure 1.2 shows that even as the personal saving rate has fallen, the ratio 

of aggregate household net worth to disposable personal income (“the 

wealth-income ratio”) has risen in recent years. Over most of the last 4 

decades, households’ wealth-income ratio did not fluctuate widely from 

year to year. Over the 1960s through the mid 1990s, households’ aggregate 

wealth ranged from a high of 5.3 times households’ disposable income in 

1961 and 1996 to a low of 4.3 in 1974. Since 1996, households’ wealthincome ratio has increased rapidly—peaking at 6.4 in 1999. Although the 

surge in household wealth contributed to the plunge in the personal saving 

rate in recent years, economists agree that increased wealth does not fully 

explain the timing or magnitude of the decline over the 1980s and 1990s.

Figure 1.2: Comparison of the Personal Saving Rate and the Wealth-Income Ratio 

(1960–2000)

Source: Bureau of Economic Analysis, Department of Commerce, and GAO analysis of Flow of Funds 

Accounts data from the Federal Reserve Board of Governors.

-2

0

2

4

6

8

10

12

1960 1965 1970 1975 1980 1985 1990 1995 2000

Personal saving percent of 

disposable personal income

0

2

4

6

8

Household wealth to disposable

personal income ratio

Personal saving rate

Household wealth-to-income ratio
Section 1

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Page 29 GAO-01-591SP National Saving

Over the 1990s, aggregate household net worth doubled in nominal terms. 

Moreover, the mix of assets held by American households has changed 

dramatically. Traditionally, real estate has represented households’ largest 

asset; while the total value of households’ real estate holdings grew by 50 

percent over the 1990s, real estate steadily declined as a share of 

households’ total assets from 31 percent in 1990 to 23 percent in 1999. 

Meanwhile, the total value of households’ stock holdings grew more than 

fourfold over the 1990s, and stocks as a share of households’ total assets 

increased from 10 percent in 1990 to 28 percent in 1999.21

As figure 1.2 shows, household wealth accumulation has swelled relative to 

disposable personal income even as the flow of saving from current income 

has dwindled. Recent research estimated that the growth in households’

aggregate net worth over the 1960s and during the early 1990s was roughly 

equally divided between traditional saving and the increase in the nominal 

value of existing assets. Over the 1970s and 1980s, the increase in the 

nominal value of existing assets was estimated to be about twice as large as 

the flow from saving.22 In recent years, nominal gains on households’

assets—particularly financial assets—have dwarfed the saving flow. For 

example, in 1999, even though personal saving was less than $150 billion, 

households’ wealth still grew by $5.2 trillion (14 percent).

As Americans learned in 2000 when the stock market declined from its 

peak value, what goes up can come down. Aggregate household wealth in 

2000 declined for the first time since data were available in 1945. According 

to the latest estimates, personal saving in 2000 was -$8.5 billion, but 

households’ wealth declined by nearly $842 billion (2 percent) largely as a 

result of the drop in the market value of households’ stock holdings. The 

total value of households’ stock holdings declined by nearly 18 percent in 

2000, and stocks as a share of households’ total assets declined to less than 

24 percent. Households’ wealth-income ratio dropped from its 1999 peak of 

6.4 to 5.9 in 2000 but remains relatively high compared to the 1960s through 

the mid 1990s.

The basic life-cycle model of saving holds that people are trying to smooth 

their standard of living over their lifetime. Therefore, life-cycle savers 

21Households hold stocks directly as well as indirectly through mutual funds, pension funds, 

life insurers, and trusts.

22William G. Gale and John Sabelhaus, “Perspectives on the Household Saving Rate,”

Brookings Papers on Economic Activity (1:1999), pp. 181–224.
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would not treat gains on existing assets as a windfall to spend today. The 

theory predicts that anticipated wealth changes would not affect planned 

lifetime spending. Likewise, changes in wealth perceived to be temporary 

due to fluctuating market values of assets would not affect planned 

spending. However, people can respond to an unexpected increase in 

wealth that they think will be permanent by spending more of their current 

income. This change in spending in response to a change in wealth is called 

the wealth effect. Some people may tap their wealth by selling stocks or 

borrowing against their home equity to boost current consumption. The 

wealth effect can also work in the opposite direction. A dramatic drop in 

household wealth—for example, due to an extended downturn in the stock 

market—could eventually dampen household consumption and lead to an 

increase in saving.

The increase in spending at any one time due to the wealth effect would be 

expected to be small, given a life-cycle saver’s tendency to spread 

consumption of a significant change in wealth over time. Researchers 

estimate that each dollar in increased wealth increases consumption by a 

few cents. Estimates of the wealth effect range from 1 to 7 cents, and the 

typical estimate is about 3 to 4 cents. A recent study estimated that a 

wealth effect of 3 to 4 cents could explain two-fifths to about half of the 

decline in the personal saving rate since 1988.23

23Annamaria Lusardi, Jonathan Skinner, and Steven Venti, “Saving Puzzles and Saving 

Policies in the United States,” Working Paper No. 8237 (Cambridge, MA: National Bureau of 

Economic Research, April 2001).
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Q1.7. If Household 

Wealth Has Increased, 

Does It Matter if the 

Personal Saving Rate 

Has Declined?

A1.7. With the personal saving rate around zero or negative, economists 

have questioned the relevance of the NIPA personal saving measure.24

Wealth measures, which reflect the value of existing assets based on 

current market conditions, show a fundamentally different trend, as 

illustrated in figure 1.2.25 Although these supplementary measures may 

explain why individual households may choose to save less, the NIPA 

personal saving rate shows that people are consuming virtually all of their 

current income and saving little for the future.

In evaluating the level of personal saving, it is important to distinguish 

between saving as a source to finance the nation’s capital formation and 

saving as a way for individual households to finance future consumption. A 

key difference between measuring the nation’s saving and gauging a 

household’s finances is the treatment of changes in the market value of 

existing assets. As discussed in section 2, it is saving from current 

income—not gains on existing assets—that is key to financing capital 

investment and increasing the nation’s capacity to produce goods and 

services. Although an individual household can tap the increased value of 

its assets to finance additional consumption or accumulate other assets by 

selling an asset to another household, the transaction itself shifts 

ownership of the existing asset and does not generate new economic 

output. Thus, the nation as a whole may not be able to consume and invest 

more.26 Moreover, all households may not be able to simultaneously tap 

their apparent wealth to finance consumption because large-scale asset 

sales could tend to depress market values.

24To some extent, spending wealth—like spending income—drives down the reported 

personal saving rate. As discussed in Q1.1, realized gains do not count as personal income, 

but any taxes paid on such gains reduce disposable personal income and thus saving. If 

households then spend a portion of their realized gains, this spending further reduces the 

saving residual and the saving rate.

25For alternative measures including changes in the market value of households’ existing 

assets, see William G. Gale and John Sabelhaus, “Perspectives on the Household Saving 

Rate,” Brookings Papers on Economic Activity (1:1999), pp. 181–224; and Richard Peach 

and Charles Steindel, “A Nation of Spendthrifts? An Analysis of Trends in Personal and 

Gross Saving,” Current Issues in Economics and Finance, Vol. 6, No. 10 (September 2000).

26However, the sale of assets to foreigners can affect the nation’s ability to consume and 

invest. 
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Page 32 GAO-01-591SP National Saving

Although the personal saving rate is low, economists do not agree on 

whether this is a problem or whether private saving is inadequate to 

finance domestic investment. On the one hand, some economists are 

concerned that low personal saving is undercutting national saving and 

leaving the United States more dependent on foreign capital inflows to 

maintain domestic investment.27 On the other hand, other economists have 

observed that strong consumer spending—boosted by low saving and the 

wealth effect discussed above—has fueled the surge in business 

investment and strong economic growth in the U.S. economy in recent 

years. Some economists and analysts are concerned that individual 

households are living beyond their means and some may have been 

counting on continued high gains on their assets to finance future 

consumption. If such expectations are not realized and, for example, there 

is a sustained stock market downturn or an economic downturn, 

households may have to scale back their consumption. This in turn could 

potentially slow economic growth given that household spending 

represents about two-thirds of the U.S. economy. However, some 

researchers suggest that the risk of a collapse in household spending that 

would hurt overall economic growth is exaggerated because households 

have greater resources than the personal saving rate suggests. 28

Although the aggregate wealth-income ratio rose in recent years, wealth is 

fairly concentrated and not all households have experienced gains in the 

stock market. To gauge the financial situation of individual households 

requires going beyond aggregate household data. The Survey of Consumer 

Finances provides detailed data on family net worth and holdings of assets 

and liabilities.29 Figure 1.3 shows that many households have accumulated 

little, if any, net worth. As one might expect, high-income families typically 

have accumulated more net worth than low-income families.

27See Jagadeesh Gokhale, “Are We Saving Enough?” Economic Commentary, Federal 

Reserve Bank of Cleveland (July 2000).

28Richard Peach and Charles Steindel, “A Nation of Spendthrifts? An Analysis of Trends in 

Personal and Gross Saving,” Current Issues in Economics and Finance, Vol. 6, No. 10 

(September 2000).

29The Survey of Consumer Finances is a triennial survey of U.S. families sponsored by the 

Board of Governors of the Federal Reserve with the cooperation of the Department of 

Treasury. For results from the latest Survey of Consumer Finance, see Arthur B. Kennickell, 

Martha Starr-McCluer, and Brian J. Surette, “Recent Changes in the U.S. Family Finances: 

Results from the 1998 Survey of Consumer Finance,” Federal Reserve Bulletin (January 

2000).
Section 1

Personal Saving and Retirement Security

Page 33 GAO-01-591SP National Saving

Figure 1.3: Family Net Worth by Income Level in 1998

Note: Survey of Consumer Finances collects information on total cash income before taxes for the 

calendar year preceding the survey.

Source: Federal Reserve’s 1998 Survey of Consumer Finances (January 2000).

Although a great deal of attention has been paid to the wealth effect from 

the stock market boom of the 1990s, half of American households did not 

own stocks as of 1998, according to the 1998 Survey of Consumer Finance. 

For most families, real estate remains the most important asset—twothirds of households owned their homes in 1998. The rise in consumer 

borrowing over the 1990s has raised concerns that households are 

overextended. The ratio of total debt payments to total income is a 

common measure of a household’s debt burden. According to one estimate 

using 1998 Survey of Consumer Finances data, the aggregate debt burden 

was nearly 15 percent of income, but nearly 13 percent of families had debt 

burdens greater than 40 percent.30 About 10 percent of households did not 

30Arthur B. Kennickell, Martha Starr-McCluer, and Brian J. Surette, “Recent Changes in the 

U.S. Family Finances: Results From the 1998 Survey of Consumer Finance,” Federal Reserve 

Bulletin (January 2000).

$3,600 $24,800

$60,300

$152,000

$510,800

0

100,000

200,000

300,000

400,000

500,000

600,000

Less than $10K $10K-$25K $25K-$50K $50K-$100K $100K and over

Less than $10K $10K-$25K $25K-$50K $50K-$100K $100K and over

Percentage 

of families 12.6% 24.8% 28.8% 25.2% 8.6%

Family income before taxes

Median family net worth (dollars)
Section 1

Personal Saving and Retirement Security

Page 34 GAO-01-591SP National Saving

even have a checking account. These households might be seen as outside 

the financial mainstream and thus unlikely to be saving.

The key to accumulating wealth for retirement is simply the choice to save, 

although investment choices also matter. Some workers choose to save 

over their working lives for retirement while others choose to save little 

and spend more while working. Recent research found that even 

households with similar lifetime earnings approach retirement with vastly 

different levels of wealth.31 Even though many low-income households 

have accumulated no wealth as they approach retirement, the researchers 

found that some low-income households had managed to accumulate fairly 

sizeable wealth. Moreover, the researchers found that a significant portion 

of higher-income households save little. Choices about whether to invest, 

for example, in the stock market or in less risky, lower-yielding assets such 

as a bank saving account also make a difference. Regardless of income 

level, those households that do not save much will have few assets on 

which to enjoy gains.

Q1.8. How Do Social 

Security and Personal 

Saving Compare as 

Sources of Retirement 

Income?

A1.8. Traditionally, retirement income was characterized as a “three-legged 

stool” comprising Social Security, employer pensions, and individuals’ own 

saving for retirement. In 1998, Social Security benefits contributed 38 

percent of the elderly’s cash income. As figure 1.4 shows, saving, both 

through employer-sponsored pension plans and by individuals on their own 

behalf, provides a significant part of retirement income. Pension benefits 

accounted for 19 percent of the elderly’s cash income in 1998 and income 

from individuals’ accumulated assets for another 20 percent. In addition, 

the elderly and their spouses may supplement their retirement income by 

continuing to work. As shown in figure 1.4, earnings from continued 

employment represent a fourth leg on the retirement-income stool.

31Steven F. Venti and David A. Wise, “Choice, Chance, and Wealth Dispersion at Retirement,”

Working Paper No. 7521 (Cambridge, MA: National Bureau of Economic Research, February 

2000).
Section 1

Personal Saving and Retirement Security

Page 35 GAO-01-591SP National Saving

Figure 1.4: Share of Elderly Households’ Income by Source of Income, 1998

Note: Elderly households are individuals and married couples with at least one member aged 65 and 

older. Aggregate income represents the sum of cash income from reasonably regular sources—before 

taxes and Medicare premiums. This retirement income definition differs somewhat from the NIPA 

personal income definition discussed in Q1.1.

a

Income from accumulated assets includes interest, dividends, royalties, income from estates and 

trusts, and rent. Capital gains (or losses) and lump-sum or one-time payments such as life insurance 

settlements are excluded. Cash rental income differs from NIPA rental income, which includes the 

imputed net rental value on owner-occupied housing.

b

Benefit payments (not lump-sum payments) from private pensions or annuities and government 

employee pensions. NIPA personal income includes pension contributions by employers in the year 

income is earned, and benefits paid at retirement are not a component of NIPA income.

c

“Other” income includes SSI, unemployment and workers’ compensation, alimony, child support, and 

other public assistance. Noncash transfers such as food stamps or health care benefits are not 

reflected.

Source: GAO analysis of data from Social Security Administration, Income of the Population 55 or 

Older, 1998 (March 2000).

Otherc

3%

Pensionsb

18.7%

Income from 

assetsa

19.9%

Earnings

20.7%

Social Security

37.6%
Section 1

Personal Saving and Retirement Security

Page 36 GAO-01-591SP National Saving

Currently, many financial planners advise people that they will need to 

replace about 70 to 80 percent of their pre-retirement income to maintain 

their pre-retirement living standard.32 According to the Social Security 

Administration, Social Security benefits currently replace about 39 percent 

of pre-retirement income for a worker with average wages ($32,105 in 

2000). Given Social Security’s progressive benefit formula, however, the 

replacement rate varies by income. Social Security currently replaces 

about 53 percent for low earners and about 24 percent for those who 

earned the taxable maximum ($72,600 in 2000).33

While Social Security provides a foundation for retirement income, 

pensions, income from accumulated assets, and current earnings largely 

determine which households will have the highest retirement incomes, as 

figure 1.5 shows. Social Security makes up over 80 percent of the 

retirement income for the first (lowest) and second income quintiles. For 

the third and fourth quintiles, Social Security still serves as the most 

important source of retirement income. For the highest quintile, pensions 

are a more significant income source than Social Security, but pensions 

represent a smaller share for this group than either income from 

accumulated assets or earnings. It is important to note that these data 

reflect in part the fact that pensions are not a universal source of 

retirement income as is Social Security. In 1998, about 48 percent of 

retirees lacked pension income or annuities, and about 53 percent of those 

employed lacked a pension plan.34

32The replacement rate can be calculated as a simple percentage of pretax income. Or, the 

replacement rate considered to be adequate can be computed in a more sophisticated way, 

netting out Social Security taxes, other taxes, or working expenses that will not be paid in 

retirement. Thus, desired or target replacement rates can vary significantly depending on 

income level and other factors.

33These replacement rates are based on applying Social Security benefit rules to 

hypothetical retired workers age 65 in 2001 who had steady earning levels over their 

careers. The average earner represents a worker who earned the average of covered 

workers under Social Security each year. The low earner earned 45 percent of this average. 

The maximum earner had earnings equal to the maximum taxable amount each year.

34Pension Plans: Characteristics of Persons in the Labor Force Without Pension Coverage

(GAO/HEHS-00-131, August 22, 2000).
Section 1

Personal Saving and Retirement Security

Page 37 GAO-01-591SP National Saving

Figure 1.5: Pensions, Income from Accumulated Assets, and Earnings Determine Who Had Highest Retirement Incomes, 1998

Note: Median incomes for each quintile are GAO estimates. Social Security income for the highest fifth 

may be lower than for the previous fifth because, among other possible reasons, some elderly workers 

or their spouses may not yet be collecting benefits. Elderly households are individuals and married 

couples with at least one member aged 65 and older. See notes to figure 1.4 for descriptions of income 

types.

Source: GAO analysis of data from Social Security Administration, Income of the Population 55 or 

Older, 1998 (March 2000).

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

First Second Third Fourth Fifth

Income Level (Quintile)

Other

Earnings

Pensions

Income from

accumulated

assets

Social Security

$6,510

$11,220

$17,965

$28,765

$59,685

Median elderly household income (dollars)
Section 1

Personal Saving and Retirement Security

Page 38 GAO-01-591SP National Saving

Personal saving now can contribute substantially to future retirement 

income, as illustrated in figure 1.5. While most families say they recognize 

the need to save for retirement, many do not save in any systematic way. 

The Congressional Research Service recently reported that in 1997 nearly 

63 percent of workers between the ages of 25 and 64 replied that they did 

not own a retirement saving account, such as an employer-sponsored 

401(k) or an individual retirement account (IRA).35 According to the 2001 

Retirement Confidence Survey,36 about 46 percent of American workers 

have not tried to calculate how much they need to save for retirement. The 

survey also found that many people—particularly those planning to work 

the longest—underestimate how long they will live in retirement. Half of 

men reaching age 65 can expect to be alive at age 82 and half of women 

reaching age 65 can expect to be alive at age 86; some will live to age 100 

and older. Yet, 15 percent of those surveyed expect their retirement will last 

for 10 years or less, and another 11 percent believe their retirement will last 

less than 20 years. In addition, many workers are unaware that the 

retirement age for full Social Security benefits is gradually rising from age 

65 to 67. Researchers do not agree on whether baby boomers and other 

workers are saving enough for their retirement.37

Research suggests that individuals who are not financially literate tend to 

save less. Many people do not appreciate that saving even small amounts 

over time is the way to accumulate wealth. According to a 1999 opinion 

survey, low and moderate income Americans mistakenly believe they have 

a better chance of accumulating $500,000 through winning the lottery than 

through saving and investing a portion of their income.38 One reason for 

this mistaken notion is that most Americans dramatically underestimate

35Patrick J. Purcell, Retirement Savings and Household Wealth in 1997: Analysis of 

Census Bureau Data (Washington, D.C.: Congressional Research Service, April 2001).

36Now in its 11th year, this annual survey gauges the views and attitudes of working and 

retired Americans regarding their preparations for and confidence about various aspects of 

retirement. The 2001 survey was cosponsored by the Employee Benefit Research Institute, 

the American Savings Education Council, and Mathew Greenwald and Associates, Inc.

37For a summary of recent studies addressing retirement saving adequacy, see Paul 

Yakoboski, “Retirement Plans, Personal Saving, and Saving Adequacy,” Employee Benefit 

Research Institute, EBRI Issue Brief No. 219 (March 2000).

38The Consumer Federation of America and Primerica, on October 28, 1999, released results 

of the public opinion survey conducted by Opinion Research Corporation International.
Section 1

Personal Saving and Retirement Security

Page 39 GAO-01-591SP National Saving

the value of compounding—how money saved can grow over time.39 People 

might begin to save more if they were aware how much they need for 

retirement and that saving regularly over time is the key to preserving their 

future standard of living.

Q1.9. What Are the 

Implications of a 

Growing Elderly 

Population for 

Retirement Security?

A1.9. As we have reported, the United States faces a demographic tidal 

wave in the future that poses significant challenges for Social Security, 

Medicare, and our economy as a whole.40 More people are living longer, and 

they will need more resources to finance more years of retirement. The 

U.S. elderly population—those aged 65 and over—is growing and accounts 

for an increasing share of the total population (see figure 1.6). As a share of 

the total population, the elderly population has grown from 9.1 percent to 

12.4 percent over the last 4 decades. Over the next 75 years, the elderly 

population share will nearly double to 22.5 percent, according to the Social 

Security Trustees’ intermediate actuarial projections.41 Although the babyboom generation will contribute heavily to the growth of the elderly 

population, increasing life expectancy and declining fertility rates are also 

responsible for the aging of the U.S. population.42

39Compounding can be explained in terms of the “rule of 72.” To find out how fast an amount 

saved can double, divide the interest rate into 72. For example, at an interest rate of 5 

percent, $100 saved would double to $200 in about 14 years. At a rate of 8 percent, it would 

take only 9 years to double.

40Medicare and Budget Surpluses: GAO’s Perspective on the President’s Proposal and the 

Need for Reform (GAO/T-AIMD/HEHS-99-113, March 10, 1999).

41Throughout this report, we relied on data from The 2001 Annual Report of the Board of 

Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust 

Funds, hereafter “the 2001 OASDI Trustees’ Report” and The 2001 Annual Report of the 

Board of Trustees of the Federal Hospital Insurance Trust Fund, hereafter “the 2001 HI 

Trustees’ Report.” In projecting future revenues and benefits, actuaries at the Social 

Security Administration and Health Care Financing Administration use alternative 

assumptions about economic and demographic trends, including average earnings, 

mortality, fertility, and immigration. We used the intermediate assumptions, which reflect 

the Trustees’ best estimate. Due to the inherent uncertainty surrounding long-term 

projections, the Trustees’ reports also include two other sets of assumptions, a high-cost 

and a low-cost alternative.

42Other nations, both developed and developing, are experiencing similar and often more 

pronounced aging of their populations.
Section 1

Personal Saving and Retirement Security

Page 40 GAO-01-591SP National Saving

Figure 1.6: Aged Population Nearly Doubles From Today as a Share of Total U.S. 

Population (1960–2075)

Note: Projections based on intermediate assumptions of the 2001 OASDI Trustees’ Report.

Source: GAO analysis of data from the Office of the Actuary, Social Security Administration.

As people live longer and have fewer children, there will be relatively fewer 

workers supporting each retiree unless retirement patterns change. As 

figure 1.7 shows, there were about five workers supporting each retiree in 

1960. Today, there are approximately 3.4 workers for each Social Security 

beneficiary and by 2030, this number is projected to fall to 2.1, according to 

the Trustees’ intermediate actuarial assumptions. Those workers will have 

to produce the goods and services to maintain their own standard of living 

as well as to finance government programs and other commitments for the 

baby boomers’ retirement. Even as there are relatively fewer workers to 

pay taxes to finance Social Security and Medicare, these programs will 

have to provide benefits over longer periods of time as life expectancies 

rise.

0

5

10

15

20

25

1960 1980 2000 2020 2040 2060

Population aged 65 and over

Percent of total population

2075
Section 1

Personal Saving and Retirement Security

Page 41 GAO-01-591SP National Saving

Figure 1.7: Relatively Fewer Workers Will Support More Retirees (1960–2075)

Note: Projections based on intermediate assumptions of the 2001 OASDI Trustees’ Report.

Source: Office of the Actuary, Social Security Administration.

Social Security has a long-term financing problem.43 Social Security is 

financed mainly on a pay-as-you-go basis, which means that payroll taxes 

of current workers are used to pay retirement, disability, and survivor 

benefits for current beneficiaries. Social Security now collects more in 

payroll taxes than it pays in benefits, but just 15 years from now this will be 

reversed, as shown in figure 1.8. Beginning in 2016, the program faces cash 

deficits as benefit payments are projected to outpace cash revenue. Absent 

meaningful reform, the Social Security trust fund will be exhausted in 2038, 

and projected tax revenue would be adequate to pay for only 73 percent of 

projected benefits thereafter.

43Social Security consists of two separate trust funds: Old-Age and Survivors Insurance, 

which funds retirement and survivors benefits, and Disability Insurance, which provides 

benefits to disabled workers and their families. These two accounts are commonly 

combined in discussing the Social Security program. For purposes of this product, any 

reference to the Social Security trust fund refers to the combined Old-Age, Survivors, and 

Disability Insurance (OASDI) trust funds.

0

1

2

3

4

5

6

1960 1980 2000 2020 2040 2060

Covered workers per OASDI beneficiary

2075
Section 1

Personal Saving and Retirement Security

Page 42 GAO-01-591SP National Saving

Figure 1.8: Social Security Trust Fund Faces Insolvency in 2038 (2000–2050)

Notes: Projections based on intermediate assumptions of the 2001 OASDI Trustees’ Report. The 

analysis assumes that current-law benefits are paid in full beyond 2038 through borrowing from the 

Treasury. The cash surplus/deficit excludes interest earnings on trust fund assets and interest expense 

associated with the assumed borrowing. Both interest earnings and interest expense are included in 

the trust fund balance. Data converted to 2000 dollars using the consumer price index for all urban 

consumers.

Source: GAO analysis of data from the Office of the Actuary, Social Security Administration. 

The long-term outlook for Medicare is much bleaker. Medicare’s financial 

status has generally been gauged by the financial solvency of the Part A 

Hospital Insurance (HI) trust fund, which primarily covers inpatient 

hospital care and is financed by payroll taxes. As shown in figure 1.9, 

Medicare’s HI trust fund faces cash deficits beginning in 2016, and the trust 

fund will be depleted in 2029. These HI projections do not reflect the 

-1000

0

1000

2000

3000

4000

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Cash surplus/deficit

Trust fund balance

Cash deficits

begin in 2016

Social Security trust

fund depleted in 2038

Billions of 2000 dollars
Section 1

Personal Saving and Retirement Security

Page 43 GAO-01-591SP National Saving

growing cost of the Part B Supplementary Medical Insurance (SMI) 

component of Medicare, which covers outpatient services and is financed 

through general revenues and beneficiary premiums. SMI accounts for 

somewhat more than 40 percent of Medicare spending and is expected to 

account for a growing share of total program dollars. As with Social 

Security, Medicare spending will swell as the elderly population increases. 

Moreover, Medicare costs are expected to increase faster than the rest of 

the economy. Projected growth in Medicare reflects the escalation of health 

care costs at rates well exceeding general rates of inflation. Increases in the 

number and quality of health care services have been fueled by the 

explosive growth of medical technology.
Section 1

Personal Saving and Retirement Security

Page 44 GAO-01-591SP National Saving

Figure 1.9: Medicare’s Hospital Insurance Trust Fund Faces Insolvency in 2029 (2000–2050)

Notes: Projections based on intermediate assumptions of the 2001 HI Trustees’ Report. The analysis 

assumes that current-law benefits are paid in full after 2029 through borrowing from the Treasury. The 

cash surplus/deficit excludes interest earnings on trust fund assets and interest expense associated 

with the assumed borrowing. Both interest earnings and interest expense are included in the trust fund 

balance. Data converted to 2000 dollars using the consumer price index for all urban consumers.

Source: GAO analysis of data from the Office of the Actuary, Health Care Financing Administration. 

Although public attention focuses on the trust fund insolvency dates, the 

effect of financing Social Security and Medicare will be felt sooner as the 

baby boom generation begins to retire. As shown in figures 1.8 and 1.9, the 

Social Security and Medicare HI cash deficits are expected to grow 

substantially in the near future. Regardless of whether the trust funds are 

relying on interest income or drawing down their balances to pay benefits, 

the government as a whole must come up with the cash by reducing overall

-600

-400

-200

0

200

400

600

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Cash surplus/deficit

HI trust fund balance

Cash deficits

emerge in 2016

Trust fund depleted

in 2029

Billions of 2000 dollars
Section 1

Personal Saving and Retirement Security

Page 45 GAO-01-591SP National Saving

budget surpluses, borrowing from the public, increasing other taxes, or 

reducing spending for other programs.44

Without reform, the combined financial burden of Social Security and 

Medicare on future taxpayers becomes unsustainable. As figure 1.10 

shows, the cost of these two programs combined would nearly double as a 

share of the payroll tax base over the long term. Assuming no other 

changes, these programs would constitute a substantial drain on the 

earnings of our future workers.

Figure 1.10: Social Security and Medicare HI Cost and Income as a Percentage of 

Taxable Payroll (2000–2075)

Note: Projections based on the intermediate assumptions of the 2001 OASDI and HI Trustees’ reports.

Source: Office of the Actuary, Social Security Administration, and Office of the Actuary, Health Care 

Financing Administration.

Personal saving plays a dual role in bolstering retirement security for 

American workers. For individuals, assets accumulated by saving provide a 

key source of retirement income (see Q1.8). Those who do not save and 

who do not have pensions will have to depend largely on Social Security in 

their old age. According to the 2001 Retirement Confidence Survey, many 

44Q4.10 discusses how the Social Security trust fund, for example, affects federal 

government saving and national saving.

0

5

10

15

20

25

30

35

2000 2025 2050 2075

Income rate

Percent of taxable payroll

Cost rate
Section 1

Personal Saving and Retirement Security

Page 46 GAO-01-591SP National Saving

workers are not confident that Social Security (65 percent) and Medicare 

(57 percent) will continue to provide benefits equivalent to those received 

today. Anticipating potential benefit cuts, people could save more now to 

supplement their future retirement income and to cushion against future 

health care costs or they could choose to work longer and delay retirement. 

Alternatively, they might not save more or work longer, and they would 

experience a lower standard of living in retirement.

For the nation, personal saving provides resources vital to enhancing the 

nation’s productive capacity. Saving more today, in turn, can improve the 

outlook for Social Security and Medicare. As discussed in section 3, higher 

saving and investment can boost worker productivity and lead to greater 

economic growth. A larger economy would mean higher real wages for 

future workers and in turn more payroll taxes to finance Social Security 

and Medicare. With an aging population and a slowly growing workforce, 

increasing the nation’s future economic capacity is critical to ensuring 

retirement security in the 21st century.
Page 47 GAO-01-591SP National Saving

Section 2

National Saving Overview Secotin2

Q2.1. What Is National 

Saving and How Is It 

Measured?

A2.1. Just as for people, saving for the national economy is the act of 

setting some of current income aside for the future instead of spending it 

for current consumption. In NIPA, saving is measured as current income 

less current consumption expenditures. National saving is the sum of 

saving by households, businesses, and all levels of government (federal, 

state, and local). For the economy as a whole, national saving is the portion 

of the nation’s income not used for private and public consumption. The 

sum of national saving and saving borrowed from abroad represents the 

total amount of resources available for investment, that is, the purchase of 

capital goods—plant, equipment, software, houses,1

 and inventories—by 

businesses and governments.2

 Saving and investing today increase the 

nation’s stock of capital goods to be used in the future—the capital stock—

and thus the nation’s capacity to produce goods and services in the future.

National saving is measured in two ways—gross national saving or net 

national saving. Gross national saving is a nation’s total income minus its 

consumption and represents resources available for domestic or foreign 

investment. Some portion of gross national saving pays for replacing 

capital goods that have been worn out or used up in producing goods and 

services—consumption of fixed capital in technical terms, or hereafter 

simply depreciation.

3

 The other portion of gross national saving, which is 

used to add to the nation’s stock of capital goods, is net national saving. Net 

national saving is the measure commonly used to gauge whether the 

nation’s capacity to produce goods and services in the future is increasing 

or decreasing.

By itself, the dollar amount of national saving is not a particularly 

meaningful indicator of the portion of the nation’s income that is not 

consumed. National saving is usually expressed as a share of the nation’s

1

Investment in owner-occupied residential property is defined as business investment.

2

This represents the current NIPA definition of investment used throughout this primer 

unless otherwise stated. Other ways of thinking about national saving and investment are 

discussed in Q2.4 and in sections 3 and 4.

3

For more information on how depreciation is measured in NIPA, see Arnold Katz and 

Shelby Herman, “Improved Estimates of Fixed Reproducible Tangible Wealth, 1929–95,”

Survey of Current Business, Bureau of Economic Analysis, Vol. 77, No. 5 (May 1997), 

pp. 69–92, and Barbara M. Fraumeni, “The Measurement of Depreciation in the U.S. National 

Income and Product Accounts,” Survey of Current Business, Bureau of Economic Analysis, 

Vol. 77, No. 7 (July 1997), pp. 7–23.
Section 2

National Saving Overview

Page 48 GAO-01-591SP National Saving

current income—or its economic output.4 Because the primary measure of 

the nation’s economic output is gross domestic product (GDP), saving is 

often shown as a percent of GDP. Text box 2.1 compares GDP to another 

measure of economic output—gross national product (GNP). In 2000, 

gross national saving as a share of GDP was 18.3 percent. After subtracting 

depreciation, which was 12.6 percent of GDP, net national saving was 5.7 

percent of GDP.

4

The nation’s income is the sum of all the payments made to those who produce output. This 

income equals the total spending on the economy’s output of goods and services; thus, the 

nation’s income and output are the same.

Text Box 2.1: Gross Domestic Product and Gross National Product

a

GDP is the output of goods and services produced by labor and property located in the United States, while GNP is the 

output of goods and services produced by labor and property supplied by U.S. residents, regardless of where they are 

located. The difference between GDP and GNP is income receipts from the goods and services produced abroad using 

labor and capital of U.S. residents less income payments for the goods and services produced in the United States using 

labor and capital supplied by foreign residents. Because both GNP and national saving include these income receipts, net 

of payments, the Bureau of Economic Analysis (BEA) presents national saving as a share of GNP. However, since 1991, 

BEA has featured GDP as the primary measure of economic activity because GDP is consistent in coverage with 

indicators such as domestic investment and productivity. GDP is also the measure cited in economic trend analyses and 

for cross-country comparisons by many, including the President’s Council of Economic Advisers, the International 

Monetary Fund, and the Organization for Economic Cooperation and Development (OECD). Because this report deals 

not only with national saving but also with other measures such as investment and the federal budget position, we 

express saving, investment, and federal government spending as a share of GDP. Expressing all of our analysis as a share 

of GDP provides a consistent frame of reference for comparing economywide shares for the United States and for 

comparing U.S. saving rates to those of other countries.

In the United States, the difference between GDP and GNP is small. For example, in 2000, GDP was $9,963 billion and 

GNP was $9,959 billion.b

 Given the relatively small difference between the two measures, the denominator has little effect 

on calculating saving as a share of the economy. Regardless of which measure is used, saving as a share of the U.S. 

economy was 18.3 percent in 2000.

a

“Gross Domestic Product as a Measure of U.S. Production,” Survey of Current Business, Bureau of Economic Analysis, 

Vol. 71, No. 8 (August 1991), p. 8.

b

In 2000, GNP was less than GDP because income receipts from the rest of the world were less than U.S. payments to the 

rest of the world.
Section 2

National Saving Overview

Page 49 GAO-01-591SP National Saving

Gross national saving is a good indicator of resources available both to 

(1) replace old, worn-out capital goods with new, and sometimes more 

productive, goods and (2) expand the capital stock.5

 The share of gross 

national saving used to replace depreciated capital has increased over the 

past 40 years. This increase in depreciation reflects a shift in the capital 

stock’s composition from long-lived assets with relatively low depreciation 

rates, like steel mills, to shorter-lived assets such as computers and 

software. Even if gross national saving were only sufficient to replace 

depreciated capital, the economy could grow to some extent because 

replacing worn-out and used capital with new equipment tends to bring 

improved technology into the production process. Nevertheless, national 

saving beyond the amount necessary to replace depreciated capital goods 

is important for increasing the overall size of the capital stock and the 

nation’s future productive capacity.

Q2.2. How Has U.S. 

National Saving 

Changed Over Time—

Both Overall and by 

Component?

A2.2. As figure 2.1 shows, gross national saving rebounded from a low of 

15.6 percent of GDP during the saving slump of the early 1990s to 18.3 

percent in 2000. This rebound is due primarily to increased government 

saving that has more than made up for the decline in personal saving 

described in section 1. However, despite this rebound, national saving as a 

share of GDP is still below the level of the 1960s—an era characterized by 

high saving and rapid growth in productivity and living standards, defined 

in terms of GDP per capita. Since the 1960s, depreciation as a share of GDP 

has increased slightly (see Q2.1), and net national saving as a share of GDP 

has declined more than gross national saving. Net national saving rose from 

3.4 percent of GDP in 1993 to 5.7 percent in 2000 but remains well below 

the 1960s average of 10.9 percent.

5

As discussed in section 3, a nation can use some of its saving to invest abroad and can also 

borrow from abroad to finance domestic investment.
Section 2

National Saving Overview

Page 50 GAO-01-591SP National Saving

Figure 2.1: Gross National Saving as a Share of GDP (1960–2000)

Source: GAO analysis of NIPA data from the Bureau of Economic Analysis, Department of Commerce.

Figure 2.2 breaks net national saving down into components. It shows both 

the aggregate trend and how saving by households, businesses, and 

governments affected net national saving. As discussed in section 1, 

personal saving is the amount of aggregate disposable personal income left 

over after personal spending on goods and services.6

 Personal saving 

averaged 5.7 percent of GDP in the 1960s and increased to an average of 

almost 7 percent over the 1970s and 1980s. Since the early 1990s, however, 

personal saving has steadily declined to -0.1 percent of GDP in 2000—the 

lowest point in over 65 years.

6

NIPA personal saving is measured net of depreciation on fixed assets owned by 

unincorporated businesses and owner-occupied residential dwellings. Because household 

purchases of residential dwellings are treated as business investment in NIPA, the 

depreciation on these assets is included in gross business saving. 

0

5

10

15

20

25

1960 1965 1970 1975 1980 1985 1990 1995 2000

Percent of GDP

Net national saving available for new investment

Saving used to replace depreciated capital

Gross national saving
Section 2

National Saving Overview

Page 51 GAO-01-591SP National Saving

Figure 2.2: Composition of Net National Saving (1960–2000)

a

State and local surpluses in 1990 and 1993 and the deficits in 1992 are less than 0.1 percent of GDP. 

b

Net personal saving was –0.1 percent in 2000.

c

Although the NIPA federal surplus or deficit is arithmetically similar to the federal unified budget 

surplus or deficit, there are some conceptual differences. Text box 4.1 describes how the NIPA and 

unified budget concepts differ.

Source: GAO analysis of NIPA data from the Bureau of Economic Analysis, Department of Commerce.

Personal and business saving together make up the nation’s private 

saving. Business saving reflects the earnings retained by businesses after 

paying taxes and dividends. These retained earnings are available to 

finance investment. For business saving, it is important to distinguish 

between net and gross saving. On a gross basis, businesses have been the 

biggest savers in recent years, accounting for over 70 percent of gross 

national saving in 2000. However, given that a large portion of business 

saving is used to replace capital goods worn out or used in the production 

process, business saving net of depreciation is a smaller share—about 47 

-5

0

5

10

15

1960-1969 1970-1979 1980-1989 1990-1999

Percent of GDP

State and local surplus/deficita

Net business saving

Net personal savingb

Federal surplus/deficitc

Net national saving

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Section 2

National Saving Overview

Page 52 GAO-01-591SP National Saving

percent—of net national saving. As shown in figure 2.2, net business saving 

has averaged about 3 percent of GDP from 1960 to 2000.

Government saving arises when federal, state, and local government 

revenue exceeds current expenditures. Government saving, also called a 

surplus, adds to the pool of national saving available to finance investment 

and allows a government to reduce its outstanding debt or purchase 

nongovernment assets. Conversely, government dissaving, or a deficit, 

absorbs funds saved by households and businesses and reduces overall 

national saving available to finance private investments. To finance a 

deficit, a government has to borrow or sell assets it owns. State and local 

government net saving has been relatively small, ranging from a surplus of 

1.1 percent of GDP in 1973 to a deficit of 0.1 percent in 1991.

The federal government’s effect on net national saving has varied widely 

over the past 40 years. During most of the 1960s, the federal government 

was a net saver. However, the federal government ran large deficits through 

much of the 1980s and early 1990s, which reduced the overall level of 

national saving in the economy. Federal deficits averaged 3.4 percent of 

GDP in the 1980s and reached 4.7 percent in 1992. In 1992 and 1993, federal 

deficits absorbed more than half of private saving. Since 1990, deficit 

reduction initiatives and economic growth have reduced federal dissaving. 

From 1998 through 2000, the federal government achieved surpluses, 

shifting from being a drain on net national saving to become a contributor 

to it. These surpluses also allowed the federal government to reduce its 

outstanding debt held by the public.7

 Section 4 discusses in more detail 

how federal fiscal policy affects national saving.

Despite this recent shift in the federal position, net national saving as a 

share of GDP remains well below the average level of the 1960s largely as a 

result of the decline in personal saving. Traditionally, personal saving had 

been a key source of net national saving available for new investment. 

Whereas personal saving represented one-half to three-quarters of average

7

For more information on debt reduction, see Federal Debt: Answers to Frequently Asked 

Questions—An Update (GAO/OCG-99-27, May 28, 1999), Federal Debt: Debt Management 

in a Period of Budget Surplus (GAO/AIMD-99-270, September 29, 1999), and Federal Debt: 

Debt Management Actions and Future Challenges (GAO-01-317, February 28, 2001).
Section 2

National Saving Overview

Page 53 GAO-01-591SP National Saving

net national saving in the 1960s and 1970s, personal dissaving absorbed 

resources that otherwise would have been available for private investment 

in 2000.8

Q2.3. How Does U.S. 

National Saving 

Compare to Other 

Major Industrialized 

Nations?

A2.3. Although gross national saving as a share of GDP in the 1990s was 

low by U.S. historical standards, U.S. saving as a share of GDP has 

generally been lower than other major industrialized countries over the 

past 40 years. Since the 1960s, U.S. gross national saving as a share of GDP 

has ranked sixth among a group of seven major industrialized countries—

the G-7. Interestingly, as figure 2.3 shows, saving as a share of GDP across 

all of these countries has declined since the 1960s.

8

When federal dissaving peaked in 1992, personal saving as a share of GDP was nearly 

double net national saving as a share of GDP. In a sense, government dissaving consumed 

much of the personal saving, leaving relatively little to finance private investment.
Section 2

National Saving Overview

Page 54 GAO-01-591SP National Saving

Figure 2.3: International Trends in Gross National Saving (1960–1997)

Note: Because depreciation is measured differently across countries, international saving comparisons 

are shown on a gross saving basis.

a

Covers 1990–1997.

Source: GAO analysis of data from Standard & Poor’s DRI OECD National Income Accounts 

database.

It is not surprising that national saving varies across countries. The 

increased output resulting from a given level of saving and investment 

depends on the investment choices available and selected in each country. 

In addition, national saving may vary across countries due to differences in 

the price of capital goods, income levels, growth rates, economic and social 

policies, demographics, and even culture. For example, recent research 

suggests that capital goods are relatively cheaper in the United States than 

in other countries, which means it takes less saving to buy a given amount

0

5

10

15

20

25

30

35

40

Japan Italy France Germany Canada United

Kingdom

United

States

Percent of GDP

1960s

1970s

1980s

1990sa
Section 2

National Saving Overview

Page 55 GAO-01-591SP National Saving

of capital goods in the United States than in other developed countries.9 As 

noted in section 1, Americans may choose to save less because they have 

ready access to credit and have been confident about the future of the U.S. 

economy.10

As figure 2.3 shows, Japan’s gross national saving as a share of GDP has 

consistently ranked the highest among the G-7 countries. Japan’s high 

saving rate has been attributed to several factors including less access to 

consumer credit and cultural factors. For example, Japanese households 

face greater borrowing constraints than households in the United States 

and must save a great deal to purchase a home. In addition, the Japanese 

are considered to be more risk-averse and forward-looking than American 

consumers.11

Q2.4. What Are Other 

Ways of Defining 

Saving and 

Investment?

A2.4. In the context of long-term economic growth, the NIPA saving 

definition is traditionally used to describe resources available to sustain 

and expand the nation’s capital stock. Since its creation in the 1930s, NIPA 

definitions and measurement have evolved to better portray the changing 

U.S. economy. NIPA historically recognized tangible investments and 

considered other spending to be consumption.12 However, software—a 

form of intangible capital—has played an increasingly important role in the 

U.S. economy. Recognizing that software, like other investment goods, 

provides a flow of services that lasts more than one year, NIPA now counts

9

Milka S. Kirova and Robert E. Lipsey, “Measuring Real Investment: Trends in the United 

States and International Comparisons,” Federal Reserve Bank of St. Louis Review

(January/February 1998), p. 6.

10Norman Loayza, Klaus Schmidt-Hebbel, and Luis Serven, “What Drives Private Saving 

Across the World?” Review of Economics and Statistics (May 2000) and N. Gregory 

Mankiw, Macroeconomics, 4th edition (2000), p. 450.

11N. Gregory Mankiw, Macroeconomics (2000), p. 450, and Fumio Hayashi, “Why Is Japan’s 

Saving Rate So Apparently High?” NBER Macroeconomics Annual 1986, pp. 147–210.

12NIPA had already recognized mineral exploration as investment, and in 1996, NIPA 

reclassified government purchases of plant and equipment as investment.
Section 2

National Saving Overview

Page 56 GAO-01-591SP National Saving

software as investment.13 Because saving equals investment in the 

economy—a national income accounting identity—reclassifying software 

as investment not only raised the measure of investment but also raised the 

measure of gross saving and of the nation’s total output. 

Although NIPA measurement has evolved, the nation’s human capital and 

knowledge—also forms of intangible capital—are not part of the NIPA 

definitions of investment and saving. This means that, under NIPA, 

business computer purchases count as saving and investment, but 

spending to train workers to use the new computers counts as current 

consumption rather than investment. Many economists agree that spending 

both on education and on general research and development (R&D) 

enhances future economic capacity and, conceptually, should be 

considered investment. Nonetheless, broadening the NIPA investment 

definition to include education and R&D would be difficult because there is 

no consensus on which expenditures should be included or how to 

measure the depreciation and contribution to output of intangible capital. 

Although counting education and R&D as investment would raise the 

measured level of investment, this broader measure of investment has also 

experienced a downward trend. Federal Reserve researchers estimated 

that, as of the early 1990s, U.S. investment including education and R&D 

had declined as a share of GDP since the 1970s.14

A more controversial measure of personal saving would include changes in 

the value of existing assets.15 Since NIPA focuses on the current production 

of goods and services and on the income arising from that production, 

NIPA income and saving do not reflect changes in the value of existing 

tangible and financial assets, such as land, stocks, or bonds. As discussed

13This change was among those made in the 11th comprehensive revision of the national 

accounts in 1999. For more information on the recent NIPA definitional and classificational 

changes, see Brent R. Moulton, Robert P. Parker, and Eugene P. Seskin, “A Preview of the 

1999 Comprehensive Revision of the National Income and Product Accounts,” Survey of 

Current Business, Bureau of Economic Analysis, Vol. 79, No. 8 (August 1999), pp. 7–20.

14Milka S. Kirova and Robert E. Lipsey, “Does the United States Invest ‘Too Little’?” Federal 

Reserve Bank of St. Louis, Research Division Working Papers 97-020A (November 1997).

15Whether changes in the market value of existing assets should be counted as saving is 

beyond the scope of this report. For a review of the literature, see William G. Gale and John 

Sabelhaus, “Perspectives on the Household Saving Rate,” Brookings Papers on Economic 

Activity (1:1999), pp. 181–224.
Section 2

National Saving Overview

Page 57 GAO-01-591SP National Saving

in section 1, economists generally agree that wealth-based measures that 

reflect changes in the value of existing assets are useful for gauging 

individual households’ finances and retirement preparations. However, it is 

uncertain whether wealth-based measures are reliable for gauging the 

growth in the nation’s capital stock and whether revaluation of existing 

assets should count as saving for society as a whole. Some portion of the 

change in the market value of existing assets may reflect increased 

productive capacity and thus could represent income and saving, but it is 

difficult to isolate that portion.16 Most gains and losses from transferring 

assets within and between sectors “wash out” at the national level and may 

not represent newly available resources for the economy as a whole.17 For 

example, when one household sells an appreciated asset to another 

household, any gain realized may be used to finance the seller’s 

consumption, but the transaction does not increase the nation’s income or 

output. Moreover, the market value of financial assets is often volatile and 

may not reflect a real, permanent change in the productive potential of the 

underlying capital assets. Lastly, some of the increased market value of 

households’ stock holdings may stem from the use of businesses’ retained 

earnings for investment, which is already reflected in NIPA saving and 

investment.

16An asset’s market value can change as a result of changes in tax treatment; investors’

perceptions of risk; taste; or households’ expectations of future economic capacity arising 

from, for example, the introduction of new technology. Only the last source, however, may 

relate to the asset’s productive capacity.

17However, gains and losses arising from sale of assets to foreigners do not “wash out” and 

could affect national consumption and investment.
Page 58 GAO-01-591SP National Saving

Section 3

National Saving and the Economy Secotin3

Q3.1. How Does 

National Saving 

Contribute to 

Investment and 

Ultimately Economic 

Growth?

A3.1. National saving provides the resources for a nation to invest 

domestically and abroad. Domestic investment in new factories and 

equipment can boost productivity of the nation’s workforce. Increased 

worker productivity, in turn, leads to higher real wages and greater 

economic growth over the long term. U.S. investment abroad does not add 

to the domestic capital stock used by U.S. workers to produce goods and 

services. U.S. investment abroad does increase the nation’s wealth and will 

generate income adding to U.S. GNP. When national saving is lower than 

domestic investment, a nation can borrow from foreign savers to make up 

the difference.1

 The resulting increase in domestic capital would enhance 

worker’s productivity and wages, but the payments to foreign lenders flow 

abroad. In general, saving today increases a nation’s capacity to produce 

more goods and services and generate higher income in the future. 

Increased economic capacity and rising incomes will be crucial as the 

population ages because a relatively smaller workforce will bear the 

burden of financing Social Security and Medicare while also seeking to 

maintain its own standard of living.

Saving entails a tradeoff because it requires consuming less now in 

exchange for consuming more later. While those who sacrifice to save now 

can themselves enjoy higher consumption in the future, some of the 

resulting increase in the nation’s capital stock and the related income will 

also benefit future generations. Thus, current saving and investment 

decisions have profound implications for the level of wellbeing in the 

future, and current generations are in a sense stewards of the economy on 

behalf of future generations.

Figure 3.1 is a flow chart illustrating saving’s central role in providing 

resources to invest in the capital needed to produce the nation’s goods and 

services. In this simplified depiction of the production process, capital and 

labor are the basic inputs used to produce goods and services. The 

resources used for domestic investment come from saving by households, 

businesses, and all levels of government. In addition, a nation can invest 

more in domestic capital than it saves by borrowing from other countries.

1

When foreign investment in a nation exceeds that nation’s investment abroad, the nation’s 

net foreign investment will be negative. Q3.3 discusses the extent to which the United States 

has supplemented its saving and investment by borrowing from abroad.
Section 3

National Saving and the Economy

Page 59 GAO-01-591SP National Saving

Figure 3.1: Overview of Saving, Investment, Output, and Income Flows 

The amount of goods and services produced depends not only on the 

amount of capital and labor but also on how efficiently these inputs are 

used. This is called total factor productivity. Total factor productivity is 

the portion of output not explained by the use of capital and labor and is 

generally associated with the level of technology and managerial 

efficiency.2

 Education, training, and R&D also can potentially increase 

output; in this simplified flow chart, these would influence total factor 

NATIONAL

SAVING

= Personal

Saving

+ Business

Saving

+ Government

Saving

DOMESTIC

CAPITAL

STOCK

(Plant,

Equipment,

Software, etc.)

GROSS

DOMESTIC

PRODUCT

LABOR

 (Hours

Worked)

TOTAL FACTOR

PRODUCTIVTY

=

INVESTMENT 

= Domestic Investment

+ Net Foreign Investment

NET INTERNATIONAL INVESTMENT POSITION

= U.S.-Owned Assets Abroad

- Foreign-Owned Assets in the U.S.

INCOME

RECEIPTS FROM

- INCOME

PAYMENTS TO

THE REST OF

THE WORLD

GROSS

NATIONAL

PRODUCT

INCOME

2

The Bureau of Labor Statistics (BLS) publishes an official measure of output per unit of 

combined labor and capital inputs—multifactor productivity. BLS’ measure of labor input 

not only takes into account changes in the size of the labor force, but also changes in its 

composition as measured by education and work experience. Capital inputs are measured 

in terms of efficiency or service flow rather than price or value. For more information on 

multifactor productivity, see “Productivity Measure: Business Sector and Major Subsectors,”

BLS Handbook of Methods, Bureau of Labor Statistics (April 1997), pp. 89–98; and Edwin R. 

Dean and Michael J. Harper, “The BLS Productivity Measurement Program,” Bureau of 

Labor Statistics (July 5, 2000), paper presented to the NBER Conference on Research in 

Income and Wealth on New Directions in Productivity Analysis, March 20–21, 1998.
Section 3

National Saving and the Economy

Page 60 GAO-01-591SP National Saving

productivity. A nation’s total output of goods and services, or its GDP, is a 

function of the hours worked, the capital stock, and total factor 

productivity. Adding the net income payments received from the rest of the 

world (which can be negative) to GDP yields the gross national income, or 

GNP. A portion of the nation’s income, in turn, is saved, allowing for 

additional investment in domestic factories, equipment, and other forms of 

capital that workers use to produce more goods and services or for 

investment abroad.

Investment in the capital stock is a principal source of growth in labor 

productivity, or output per hour worked.3

 Through its influence on real 

wages, labor productivity is the fundamental determinant of a nation’s 

standard of living. Minimum levels of investment in a nation’s physical and 

human capital are crucial just to maintain labor productivity and living 

standards. Equipment that wears out must be replaced; younger workers 

entering the labor force need to be trained in skills to replace older workers 

as they retire. Even as the population ages, the U.S. labor force itself will 

continue growing—although slowly, with annual growth in aggregate hours 

worked averaging about 0.1 percent after 20204

—and the demand for 

capital goods is likely to increase. Not only must capital goods be replaced 

as they depreciate, but new generations of workers must be comparably

3

According to neoclassical growth theory, the rate of growth of labor productivity depends 

on the growth rate in the capital-labor ratio, weighted by capital’s share and the growth rate 

of total factor productivity. See Robert M. Solow, “Technical Change in the Aggregate 

Production Function,” Review of Economics and Statistics, Vol. 39, No. 3 (1957), cited in 

Dean and Harper (1998), p. 7.

4

The labor force projection reflects the OASDI Trustees’ 2001 intermediate assumptions, 

including those for fertility, immigration, and labor force participation.
Section 3

National Saving and the Economy

Page 61 GAO-01-591SP National Saving

trained and equipped (capital widening).5 Otherwise, output per worker 

and living standards may fall.

Beyond the minimum level of investment needed to maintain the capital 

stock, additional investment to expand the capital stock is an important 

way to increase labor productivity, and thus future living standards. With 

the retired population projected to swell after 2010, investment in new 

capital is an important way to raise the productivity of the slowly growing 

labor force. Investment boosts labor productivity because workers can 

produce more per hour when they have more and better equipment and 

better skills (capital deepening). The essence of this point can be 

illustrated with a simple example. Consider the transformation of 

ditch-digging from a relatively slow and somewhat imprecise process 

involving several ordinary shovels, much labor effort, and low skill levels to 

a faster and more precise process often involving a single power digger 

controlled by a skilled operator. The elements of this example, repeated 

across millions of individual tasks, encapsulates the difference between an 

advanced industrial economy with a high standard of living and a less 

developed country with a low standard of living.

Growth in output per worker also depends on total factor productivity 

growth. A higher rate of technological change and improved efficiency in 

using labor and capital can boost GDP and thus future living standards. 

Even if there were no net investment—that is, if gross investment were 

only enough to replace depreciated capital—the economy could grow to 

some extent because the new capital tends to embody improved 

technology. However, there is no agreement on how to raise total factor 

productivity. Spending on education and R&D is thought to help because 

5

While the aging of the population is a commonly voiced argument for raising national 

saving, some analysts maintain that the projected decline in labor force growth will increase 

the capital-labor ratio and reduce the return to capital while raising the productivity of 

labor. They conclude that, under some circumstances, saving should actually decline 

slightly in response to population aging. Other analysts point out, however, that if the 

economy is operating below the optimal saving rate, saving can rise without overly 

depressing market rates of return and, therefore, provide significant improvement to future 

incomes. In addition, saving can be invested abroad without lowering the global rate of 

return. See Douglas W. Elmendorf and Louise M. Sheiner, “Should America Save for its Old 

Age? Fiscal Policy, Population Aging, and National Saving,” Journal of Economic

Perspectives, Vol. 14, No. 3, Summer 2000, pp. 57-74; and Barry Bosworth and Gary Burtless, 

“Social Security Reform in a Global Context,” in Social Security Reform Conference 

Proceedings: Links to Saving, Investment, and Growth, Steven A. Sass and Robert K. 

Triest, eds., Federal Reserve Bank of Boston, Conference Series No. 41, June 1997, pp. 243-

274.
Section 3

National Saving and the Economy

Page 62 GAO-01-591SP National Saving

education and training enhance the knowledge and skills of a nation’s work 

force—the nation’s human capital—and R&D can spur technological 

improvement. A legal and institutional environment that facilitates the 

development and enforcement of contracts and discourages crime and 

corruption may also contribute to economic growth. Thus, economic 

growth depends not only on the amount of saving and investment but also 

on an educated work force, an expanding base of knowledge, a continuing 

infusion of innovations, and a sound legal and institutional environment. 

Q3.2. Has the 

Relatively Low 

National Saving Rate 

Affected Investment 

and Economic 

Growth? What Factors 

Have Fostered 

Economic Growth in 

Recent Years?

A3.2. Although national saving as a share of GDP remains below the 1960s 

average, annual GDP growth in recent years reached levels similar to the 

1960s average of 4.2 percent. After slowing to 3.2 percent over the 1970s 

and 1980s and further to only 2.4 percent in the early 1990s, annual GDP 

growth accelerated to an average of 4.3 percent from 1995 to 2000. This 

higher growth stemmed, in part, from the rebound in national saving that 

was largely attributable to federal deficit reduction. The U.S. was also able 

to borrow from abroad to help finance domestic investment, as discussed 

further below. In addition, two domestic investment trends helped promote 

growth in GDP and living standards: (1) the price of investment goods 

declined relative to other goods and (2) investment in high-yielding 

information technology has risen rapidly. Thus, even though saving as a 

share of the economy has been low by historical standards, economic 

growth has been high because more and better investments were made.

A dollar of saving buys more investment goods now than in the past 

because the price of investment goods has decreased relative to other 

goods in recent years. From 1995 to 2000, the price index for nonresidential 

investment goods declined 0.9 percent per year on average, while overall 

prices as measured by the GDP price index rose, albeit at a modest 

annual rate of 1.8 percent. The major source of the overall decline in 

investment-good prices was the over 22 percent average annual decline in 

the price of computers and peripheral equipment since 1995. In other 

words, in each succeeding year, a dollar spent on computers purchased 

22 percent more computing power on average than it did the previous year.6

6

See J. Steven Landefeld and Bruce T. Grimm, “A Note on the Impact of Hedonics and 

Computers on Real GDP,” Survey of Current Business, Bureau of Economic Analysis, Vol. 

80, No. 12 (December 2000), pp. 17–22.
Section 3

National Saving and the Economy

Page 63 GAO-01-591SP National Saving

Not only has each dollar of saving bought more investment goods in recent 

years, but a greater share of that dollar was invested in information 

technology, including computers, software, and communications 

equipment. From 1990 to 2000, the share of business fixed investment 

devoted to information equipment and software rose from less than

28 percent to 39 percent.

The increasing share of investment going to information processing 

equipment and software helped boost overall economic growth over the 

1990s because information technology has appeared to be highly 

productive in recent years. This is true even though rapid depreciation and 

obsolescence characterize information technology. For example, 

computers and related equipment have an estimated annual depreciation 

rate of 31 percent,7

 and new versions of software applications are released 

every few years. Hence, for investment in information technology to be 

profitable, its gross rate of return must be quite high. Its high rate of return 

combined with its increasing share of total investment meant that 

information technology has been a major contributor to the rapid economic 

growth since 1995. Indeed, recent economic research suggests that 

investment in information technology explains most of the acceleration in 

labor productivity growth—a major component of overall economic 

growth—since 1995.8

 From 1995 to 2000, labor productivity growth 

averaged 2.8 percent per year compared to 1.6 percent from 1970 to 1995 

and 2.9 percent during the 1960s.9

7

Fixed Reproducible Tangible Wealth in the United States, 1925–94, Bureau of Economic 

Analysis (August 1999), p. M-29.

8

Stephen D. Oliner and Daniel E. Sichel, “The Resurgence of Growth in the Late 1990s: Is 

Information Technology the Story?” Journal of Economic Perspectives, Vol. 14, No. 4 (Fall 

2000), pp. 3–22; and Robert J. Gordon, “Does the ‘New Economy’ Measure Up to the Great 

Inventions of the Past,” Journal of Economic Perspectives, Vol. 14, No. 4 (Fall 2000), 

pp. 49−74.

9

Because of difficulties in measuring productivity of farms and nonmarket activities, the 

most widely used measure of labor productivity growth is the rate of increase in nonfarm 

business sector output per hour worked.
Section 3

National Saving and the Economy

Page 64 GAO-01-591SP National Saving

Economic research suggests investment in information technology also 

may have led to faster growth in total factor productivity since 1995.10 As 

noted earlier, total factor productivity growth reflects technological change 

and new and better ways of organizing production. Firms producing 

computers and semiconductors have achieved substantial operating 

efficiencies and high rates of return on capital investments in recent years, 

despite a large expansion in their capital stock. These high rates of return 

seem to contradict economists’ general expectations that increasing the 

supply of capital reduces its return and thus seems to indicate a rise in total 

factor productivity. Although total factor productivity growth appears to 

have risen, the pace of growth may decelerate. Technological advances 

generally come in waves that crest and eventually subside. 

Abundant saving alone does not always generate robust growth because 

the saving must also be invested well. Japan’s economy over the 1990s 

demonstrated that high saving can coincide with economic stagnation. 

Among the reasons offered for Japan’s lengthy slowdown is poor 

investment choices due in part to its less developed financial markets in 

which savers had fewer options and were left with low returns. Also, the 

government’s role both in investing in physical infrastructure and in 

allocating capital to industrial borrowers at preferential rates also resulted 

in many low-yielding investments. Finally, with its high postwar investment 

levels, Japan’s production processes became more capital intensive 

compared to most other advanced nations. With this greater capital 

intensity, diminishing returns to capital have reduced the return on 

investment in Japan over the years.11

10However, some economists are concerned that the acceleration may be concentrated in 

durable manufacturing rather than widely disseminated throughout the economy. See 

Robert J. Gordon, “Does the ‘New Economy’ Measure Up to the Great Inventions of the 

Past,” Journal of Economic Perspectives, Vol. 14, No. 4 (Fall 2000), pp. 49-74.

11Arthur J. Alexander, “Japan’s Economy in the 20th Century,” Japan Economic Institute 

Report, No. 3 (January 21, 2000), p. 3.
Section 3

National Saving and the Economy

Page 65 GAO-01-591SP National Saving

Q3.3. To What Extent 

Has the United States 

Supplemented Its 

Saving and Investment 

by Borrowing Saving 

From Abroad? How 

Does Such Borrowing 

Affect the Economy? 

A3.3. An economy that is not open to international trade and investment 

must rely solely on its own saving to provide the resources to invest in 

plant, equipment, and other forms of capital. In contrast, citizens, 

companies, and governments in an open economy such as the United 

States can finance the gap between domestic investment and national 

saving with foreign investment in the United States. In essence, the U.S. 

economy can borrow the saving of other countries to finance more 

investment than U.S. national saving would permit. Figure 3.2 shows the 

difference between domestic investment and national saving, which is 

defined in the NIPA as net foreign investment. Over most of the 1980s 

and 1990s, the U.S. was able to invest more than it saved by attracting 

financing from abroad. This means that the United States has been a net 

borrower of saving from other nations.
Section 3

National Saving and the Economy

Page 66 GAO-01-591SP National Saving

Figure 3.2: National Saving, Domestic Investment, and Net Foreign Investment (1960–2000)

Source: GAO analysis of NIPA data from the Bureau of Economic Analysis, Department of Commerce.

A nation’s net foreign investment, in theory, is the same as its current 

account balance, which is the combined balance on trade in goods and 

services, income, and net unilateral current transfers.12 That is, the 

international flow of financial assets and the international flow of goods, 

services, and income receipts can be described as two sides of the same 

coin. In effect, borrowing from abroad allows a nation to acquire more 

foreign goods and services than it sells to foreigners—the trade deficit. 

-5

0

5

10

15

20

25

1960 1965 1970 1975 1980 1985 1990 1995 2000

Percent of GDP

Net foreign investment

National saving

Domestic investment

12In practice, measurement errors create some divergence between these balances. For a 

more detailed discussion of the current account balance, see Douglas B. Weinberg, “U.S. 

International Transactions, Third Quarter 2000,” Survey of Current Business, Bureau of 

Economic Analysis, Vol. 81, No. 1 (January 2001), pp. 47–55; Craig Elwell, The U.S. Trade 

Deficit in 1999: Recent Trends and Policy Options, Congressional Research Service (May 

22, 2000); and CBO Memorandum: Causes and Consequences of the Trade Deficit: An

Overview, Congressional Budget Office (March 2000).
Section 3

National Saving and the Economy

Page 67 GAO-01-591SP National Saving

When the United States runs a trade deficit, foreigners buy less than a 

dollar’s worth of U.S. goods and services with every dollar they earn on 

their exports sold to the United States. They generally invest those excess 

dollars in U.S. assets. Their willingness to acquire U.S. assets —i.e., to lend 

to the United States— allows the United States to run trade deficits. In fact, 

U.S. trade deficits may be as much due to foreigners’ willingness to acquire 

U.S. assets as to the U.S. desire to acquire foreign goods and services.

While using foreign investors’ saving allows U.S. domestic investment to 

exceed national saving, these financial inflows have implications for the 

nation’s economic growth and for future living standards. This effect 

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. This augments future income, although a portion of the income 

generated by the investment will be paid to foreign lenders. However, if the 

borrowing from abroad is used to finance consumption, short-term 

wellbeing is improved but the ability to repay the borrowing in the future 

will not be enhanced. In this respect, U.S. experience in the 1990s differs 

from that of the 1980s. Over the 1980s, mounting federal deficits and the 

decline in personal saving reduced the supply of national saving available 

for investment. Although borrowing from abroad helped finance additional 

investment, consumption rose more than domestic investment during the 

1980s. In contrast, since 1992 there has been an upward trend in U.S. 

national saving while domestic investment has surged. Borrowing from 

abroad has allowed the United States to overcome its saving shortfall and 

take advantage of productive investment opportunities. The increased 

investment has contributed to higher GDP growth in recent years, and the 

stronger economy should help in servicing the debt owed to foreigners.

Persistent U.S. current account deficits have translated into a rising level of 

indebtedness to other countries. Figure 3.3 shows the net U.S. ownership of 

foreign assets—the net international investment position13—and net 

income receipts on net U.S. assets abroad. Prior to 1986, the United States 

had been a net creditor because its holdings of foreign assets exceeded 

foreign holdings of U.S. assets. The nation first became a net debtor in 

13The net international investment position is presented here with direct investment 

positions valued at current cost. BEA also publishes a measure with direct investment 

positions measured at market value. See Russell B. Scholl, “The International Investment 

Position of the United States at Yearend 1999,” Survey of Current Business, Bureau of 

Economic Analysis, Vol. 80, No. 7 (July 2000), pp. 46–56.
Section 3

National Saving and the Economy

Page 68 GAO-01-591SP National Saving

1986. Although foreign asset holdings in the United States have swelled in 

recent years, not until 1998 did the United States pay more in interest, 

dividends, and other investment returns to other countries than it received 

on the assets it held abroad. The lag reflects the fact that the rate of return 

on U.S. assets abroad consistently exceeded the return on foreign-owned 

assets in the United States.14 So far, the net payments from the United 

States to foreign lenders have been small as a share of GDP, as shown in 

figure 3.3.

Figure 3.3: Net U.S. Holdings of Foreign Assets and Net Income From Abroad (1977–1999)

Source: GAO analysis of data from the Bureau of Economic Analysis, Department of Commerce.

14Raymond J. Mataloni, Jr., “An Examination of the Low Rates of Return of Foreign-Owned 

U.S. Companies,” Survey of Current Business, Bureau of Economic Analysis, Vol. 80, No. 3 

(March 2000), pp. 55–73. 

-1500

-1000

-500

0

500

Net assets (billions)

-6

-4

-2

0

2

Net income (percent of GDP)

Net holdings of foreign assets

Net income from the rest of the world

Beginning in 1998, the U.S. paid more

on foreign investments here than

it earned on U.S. assets abroad

Beginning in 1986, foreign

holdings of U.S. assets

exceed U.S. holdings of

foreign assets

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Section 3

National Saving and the Economy

Page 69 GAO-01-591SP National Saving

Economists and policymakers are concerned about whether the United 

States can continue to increase its reliance on foreign capital inflows. 

Investors generally try to achieve some balance in the allocation of their 

portfolios, and U.S. assets already represent a significant share of foreign 

portfolios. Although the United States accounts for 30 percent of global 

GDP, it received two-thirds of the saving exported by countries with 

current account surpluses in 1999.15 Given this, it may not be realistic to 

expect ever-increasing foreign investment in the United States, as has been 

the case in recent years. Net foreign investment in the United States might 

even decrease from the recent high rates if foreign investors find more 

attractive opportunities elsewhere. Over the long term, many other nations 

currently financing investment in the United States will themselves be 

confronted with aging populations and declining national saving. Thus, 

continuing to rely on foreign lenders to finance such a large share of U.S. 

domestic investment is not a viable strategy over the long run.

If the net inflow of foreign investment were to diminish, the United States 

would no longer be able to invest so much more in the domestic capital 

stock than it saves. Although a nation can run current account deficits for 

extended periods of time, a low level of national saving implies a low level 

of domestic investment over the long run. According to recent empirical 

research, current account deficits eventually have been followed by 

periods of declining investment.16 Rather than forgo domestic investment 

opportunities that would enhance the nation’s future standard of living, the 

United States could increase national saving. Any increase in national

15Donald J. Mathieson and Garry J. Schinasi, eds., International Capital Markets: 

Developments, Prospects, and Key Policy Issues (Washington, D.C.: International Monetary 

Fund, September 2000), pp. 9–10.

16Giovanni P. Olivei, “The Role of Savings and Investment in Balancing the Current Account: 

Some Empirical Evidence from the United States,” New England Economic Review, 

(July/August, 2000), pp. 3–14; and Caroline Freund, “Current Account Adjustments in 

Industrial Nations,” International Finance Discussion Paper No. 2000-692, (Washington, 

D.C.: Federal Reserve Board of Governors, December 2000).
Section 3

National Saving and the Economy

Page 70 GAO-01-591SP National Saving

saving that did not finance domestic investment would increase net foreign 

investment and improve the current account balance.17

Q3.4. What Is the 

Current Long-Term 

Economic Outlook for 

U.S. National Saving 

and Investment? How 

Would the Long-Term 

Economic Outlook 

Change With Higher 

Levels of National 

Saving?

A3.4. The current long-term economic outlook for U.S. national saving and 

investment is subject to wide ranging uncertainty about economic changes 

and the responses to those changes. However, one certainty is that the U.S. 

population is aging and there will be fewer workers supporting each 

retiree. This demographic shift is expected to cause a decline in economic 

growth rates when labor force growth slows after 2010. Moreover, the aging 

of the population may exert negative pressure on national saving. As 

discussed in section 1, people tend to draw down their assets in their 

retirement years. As government spending on health and retirement 

programs for the growing elderly population swells, government saving is 

also likely to decline. Q4.3 examines the long-term outlook for federal 

government saving/dissaving. 

To get a sense of the long-term implications of alternative national saving 

paths, we examined the economic outlook over the next 75 years under 

two different assumptions: (1) gross national saving remains constant at its 

2000 share of GDP—18.3 percent—and (2) gross national saving varies 

depending on how much the federal government saves.18 One possible 

fiscal policy, which we used in our simulation, would be for the federal 

government to save only the Social Security surpluses and to spend the 

non−Social Security surpluses projected over the first 10 years on some mix 

of permanent tax cuts and spending increases. For simplicity, the Save the 

Social Security Surpluses simulation assumes that saving by households, 

businesses, and state and local governments remains constant as a share of 

17The current account balance would improve to the extent that the increase in saving is 

used to increase net foreign investment rather than domestic investment. Research suggests 

that for each additional dollar of saving, perhaps one-third is used to increase net foreign 

investment and two-thirds is used to increase domestic investment. See Martin Feldstein 

and Philippe Bacchetta, “National Saving and International Investment,” National Saving 

and Economic Performance, D. Bernheim and J. Shoven, eds., (Chicago: University of 

Chicago Press, 1991) pp. 201–226.

18Long-term simulations are useful for comparing the potential outcome of alternative 

national saving paths within a common economic framework. Such simulations can 

illustrate the long-term economic consequences of saving choices that are made today. 

Simulations should not be viewed as forecasts of economic outcomes 50 or 75 years in the 

future. Rather, they should be seen only as illustrations of the economic outcomes 

associated with alternative saving paths based on common demographic and economic 

assumptions. See appendix II for a detailed description of the modeling methodology.
Section 3

National Saving and the Economy

Page 71 GAO-01-591SP National Saving

GDP at 16.1 percent—average nonfederal saving as a share of GDP since 

1998.19 As figure 3.4 shows, gross national saving as a share of GDP remains 

fairly steady over the next decade under the Save the Social Security 

Surpluses simulation. After 2010, as spending for health and retirement 

programs mounts, dissaving by the federal government begins crowding 

out other saving, and national saving begins to decline. By 2024, gross 

national saving as a share of GDP drops below the mid 15 percent range 

experienced during the saving slump in the early 1990s. By 2042, gross 

national saving would plunge below 5 percent—lower than during the 

Great Depression. Under the Save the Social Security Surpluses simulation, 

gross national saving eventually disappears, and the nation begins 

dissaving in 2047.

19The 3-year period coincides with federal surpluses and its use avoids extending the 

unusually low nonfederal saving rate of 2000 throughout the simulation period. 
Section 3

National Saving and the Economy

Page 72 GAO-01-591SP National Saving

Figure 3.4: Gross National Saving as a Share of GDP Under the Save the Social 

Security Surpluses Simulation (1990–2075)

Note: Actual historical data shown through 2000; simulated data thereafter.

a

Gross nonfederal saving is held constant as a share of GDP at 16.1 percent (the ratio in 1999), and 

federal saving varies. Data end when the nation begins to dissave in 2047.

b

Gross national saving was 18.3 percent of GDP in 2000. (Gross national saving reached a high of 

24.6 percent of GDP in 1942.)

c

Gross national saving reached a low of 5.3 percent of GDP in 1932.

Source: GAO’s March 2001 analysis.

The Save the Social Security Surpluses simulation is not sustainable, but it 

is useful for illustrative purposes. Ultimately, this would be a doomsday 

scenario for the U.S. economy. National saving would be inadequate to 

finance even the investment necessary to maintain the nation’s capital 

stock. Figure 3.5 shows that, as the nation’s capital stock eroded, future 

living standards—measured in terms of GDP per capita—inevitably would 

fall. However, before such catastrophic effects, low national saving would 

probably result in higher interest rates, rising inflation, and the increasing 

reluctance of foreign investors to lend to a weakening U.S. economy. These 

more immediate consequences would force action before national saving 

plunged to the levels shown in the simulation. The simulation is not a 

prediction of what will happen in the future. Rather, it serves as a warning 

that the United States must both save more in the near term and reform 

0

5

10

15

20

1990 2000 2010 2020 2030 2040 2050 2060 2075

Percent of GDP

Gross national saving in 2000b

Gross national saving during the low 

point of the Great Depressionc

Save the

Social Security 

Surplusesa
Section 3

National Saving and the Economy

Page 73 GAO-01-591SP National Saving

entitlement programs for the elderly to put the budget on a more 

sustainable footing for the long term.

Figure 3.5: GDP Per Capita Under Alternative Gross National Saving Rates (2000–

2075)

a

Historically in the United States, GDP per capita has doubled on average from one 35-year generation 

to the next. 

b

Gross national saving is held constant as a share of GDP at 18.3 percent, the ratio in 2000.

c

Gross nonfederal saving is held constant as a share of GDP at 16.1 percent (the ratio in 1999). 

Federal non-Social Security surpluses are eliminated through 2010, and unified deficits emerge in 

2019. This simulation can be run only through 2056 due to elimination of the capital stock.

Source: GAO’s March 2001 analysis.

Figure 3.5 is not solely a warning. It also illustrates how saving more would 

improve the long-term economic outlook. Just as we enjoy a higher living 

standard today than our grandparents did, future generations of Americans 

will reasonably expect to enjoy rising standards of living. Living standards 

can be compared in terms of real GDP per capita, which historically in the

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2000 2010 2020 2030 2040 2050 2060 2075

Save the

Social Security

Surplusesc

Constant 2000

Saving Rateb

Double 2000 level by 2035a

Double 2035 level by 2070 Per capita 2000 dollars a
Section 3

National Saving and the Economy

Page 74 GAO-01-591SP National Saving

United States has doubled every 35 years.20 In considering future living 

standards, doubling every 35 years represents a way to gauge whether 

future generations will enjoy an improvement comparable to that enjoyed 

by previous generations. Suppose the United States could maintain gross 

national saving at its 2000 GDP share of 18.3 percent through some 

combination of personal, business, and government saving. This constant 

saving rate is roughly comparable to saving the Social Security surpluses 

over the next decade but is considerably higher after 2010 (as shown in 

figure 3.4). As shown in figure 3.5, GDP per capita under the Constant 2000 

National Saving Rate simulation would fall short of doubling every 

35 years. GDP per capita in 2035 would be nearly double the 2000 level 

(falling short by about 8 percent), and by 2070, GDP per capita would fall 

almost 13 percent short of doubling the 2035 level. Yet, the Constant 2000 

National Saving Rate simulation yields a vast improvement in future living 

standards compared to saving the Social Security surpluses. Although 

national saving in 2000 was relatively low compared to past U.S. 

experience, maintaining that level (18.3 percent of GDP) over the long run 

would not be easy as the population ages. The Constant 2000 National 

Saving Rate simulation is intended only to show how saving more results in 

higher economic growth over the long term. It should not be interpreted as 

a recommendation about how much the United States needs to save 

because saving is not free and there are other ways in which governments, 

businesses, and individuals can and will adjust. For example, as people live 

longer, rather than save more to finance more years of retirement, 

individuals could choose to work longer and postpone retirement.

Clearly, saving more would improve the nation’s long-term economic 

outlook—but how much more do we need to save? Establishing a tradeoff 

between the consumption of current and future generations entails value 

judgments that economic theory alone cannot provide. Initially, increasing 

saving and investment adds to the capital stock and boosts worker 

productivity and the economy’s rate of growth. In the long run, a larger 

capital stock also requires more saving just to replace depreciating capital. 

After reaching this long-run equilibrium, increased saving and investment 

yields a higher level of GDP per capita but does not boost worker 

productivity and economic growth. Permanently boosting the rate of GDP 

growth would require ever-increasing relative shares of saving and 

20Since World War II, annual growth in GDP per capita has averaged roughly 2 percent. Of 

course, growth was faster during some periods—the 1950s and 1960s, and the second half of 

the 1990s—and slower during other periods—the 1970s. 
Section 3

National Saving and the Economy

Page 75 GAO-01-591SP National Saving

investment. From a macroeconomic perspective, any increase in saving up 

to the “golden rule saving rate” allows a nation to increase consumption 

in the long run.21 Below the golden rule rate, saving and investing more 

today permits increased consumption. Saving beyond the golden rule rate 

is counterproductive and would reduce consumption not only initially but 

also in the long-term. However, the nation’s saving rate is unlikely to reach 

the golden rule level, much less exceed it. Given the steady decline in the 

personal saving rate, it is doubtful that Americans would willingly reduce 

consumption so much that the nation would be at risk of saving too much. 

Estimates based on our long-term growth model suggest that the golden 

rule saving rate for the United States would be more than 30 percent. These 

estimates also suggest that increasing U.S. national saving would not 

substantially decrease the return to capital and therefore could provide 

significant improvement to future incomes and consumption. Although the 

golden rule saving rate can be a useful analytical concept in evaluating a 

nation’s saving, the golden rule is not the best policy for saving. Maximizing 

consumption per capita over the long term may not be socially optimal if 

people value current consumption more than future consumption and 

discount the future. 

Another way to gauge national saving is to estimate how much we need to 

save to achieve specific national objectives. In simple terms, the nation 

could act like a “target saver.” For example, a key target would be saving 

enough to afford the nation’s costs for supporting the aging population. 

Boosting saving and GDP is unlikely to prevent a rise in the share of GDP 

devoted to government spending on the elderly because economic growth 

also tends to increase health spending and raise retirement benefits—

although with a lengthy lag for the latter. A more realistic goal would be to 

increase saving by an amount that would generate a rise in future GDP 

equivalent to the increase in spending on the elderly. Recent economic 

research estimated that increasing saving as a share of GDP by one 

percentage point above the 1999 rate would boost GDP enough to cover 

95 percent of the increase in elderly costs between now and 2050.22 This is 

21The golden rule saving rate maximizes consumption per capita over the long run. For a 

more extensive discussion, see N. Gregory Mankiw, Macroeconomics, Fourth Edition (New 

York, N.Y.: Worth Publishers, 2000), pp. 90–97; or Olivier Blanchard, Macroeconomics, 

Second Edition (Upper Saddle River, N.J.: Prentice Hall, 2000), pp. 214–220.

22See Barry Bosworth, “Challenges to Capital Flows,” CSIS Policy Summit on Global Aging, 

Washington, D.C., January 26, 2000. 
Section 3

National Saving and the Economy

Page 76 GAO-01-591SP National Saving

equivalent to increasing national saving to 19.3 percent of GDP from 

18.3 percent used in our Constant 2000 Saving Rate simulation.

While it is unclear just what the right level of saving is, it is clear that 

America needs to begin saving more if it is to avoid severe problems in the 

future. Saving now is vital because expanding the nation’s productive 

capacity through national saving and investment is a long-term process. 

While saving the Social Security surpluses is a laudable fiscal policy goal, 

Americans need to save more to ensure their own retirement security as 

well as the nation’s future prosperity. Increased saving by current 

generations would expand the nation’s capital stock, allowing future 

generations to better afford the nation’s retirement costs while also 

enjoying higher standards of living.
Page 77 GAO-01-591SP National Saving

Section 4

National Saving and the Government Secotin4

Q4.1. How Has Federal 

Fiscal Policy Affected 

U.S. National Saving?

A4.1. Federal fiscal policy affects the federal surplus or deficit which, 

when measured on a NIPA basis, represents the amount of federal 

government saving or dissaving, which in turn directly affects national 

saving. Federal deficits subtract from national saving by absorbing funds 

saved by households, businesses, and other levels of government that 

would otherwise be available for investment. To finance a budget deficit, 

the federal government borrows from the public by issuing debt securities, 

adding to its debt held by the public.

1

 Conversely, federal surpluses, as 

measured under NIPA, add to national saving and increase resources 

available for investment. When a budget surplus occurs, the federal 

government can use excess funds to reduce the debt held by the public.

Text box 4.1 explains how the NIPA surplus or deficit differs from the 

federal unified budget surplus or deficit. While the NIPA measure reflects 

how government saving affects national saving available for investment, 

the unified budget measure is the more common frame of reference for 

discussing federal fiscal policy issues. Given that the two measures are 

roughly similar as a share of GDP, in this section we use the unified budget 

measure unless otherwise specified.

1

Federal debt held by the public is also called “publicly held debt” but is not the same as 

“public debt.” Debt held by the public plus debt held by government accounts, such as 

budget trust funds, compose gross federal debt. For more information, see Federal Debt: 

Answers to Frequently Asked Questions—An Update (GAO/OCG-99-27, May 1999).
Section 4

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Page 78 GAO-01-591SP National Saving

Text Box 4.1: How do the NIPA and federal unified budget concepts of federal surpluses and deficits differ?

In 2000, the NIPA federal surplus was 2.2 percent of GDP while the unified budget surplus was 2.4 percent. Although the 

two measures are roughly similar, there are some conceptual differences. The federal unified budget measure is generally 

a cash or cash-equivalent measure in which receipts are recorded when received and expenditures are recorded when 

paid regardless of the accounting period in which the receipts are earned or the costs incurred. Thus, the unified surplus 

reflects the difference between federal receipts and all federal government outlays including those used to purchase 

capital goods, such as roads, buildings, and weapons systems. The NIPA federal budget surplus, however, reflects the 

current, or operating, account of the federal government and does not count purchases of capital goods as current 

spending. Instead, NIPA includes a depreciation charge (“consumption of general government fixed capital”) in current 

spending as a proxy for the contribution of capital to the output of government services.

The NIPA and federal unified budget measures also differ in their treatment of federal employees’ pension programs. In 

the unified budget, federal employee pension benefits are recorded as outlays when paid in cash; these outlays are offset, 

in whole or in part, by the government’s and employees’ contributions to the pension programs. NIPA, on the other hand, 

counts the government’s contribution to the pension programs as an outlay to the household sector, where the 

contribution is added to personal income and saving. The benefits paid by the pension programs are not counted as 

government outlays under NIPA but rather as a drawdown of accumulated household assets.

Other differences between the unified budget and NIPA measures arise because NIPA focuses on current income and 

production within the United States. For example, NIPA excludes capital transfers, like estate tax receipts, which are 

recorded as revenue in the unified budget, and investment grants-in-aid to state and local governments, which the unified 

budget records as outlays. Lastly, revenue and spending related to Puerto Rico, the Virgin Islands, and other U.S. 

territories are counted in the federal unified budget but not in NIPA.

The unified budget measure is useful in explaining annual changes in the federal debt held by the public. The NIPA 

measure is useful in explaining how government saving has affected net national saving available for investment. Again, 

these measures yield roughly similar estimates of the federal government’s budget position as a share of GDP. In order to 

provide a consistent frame of reference for discussing federal fiscal policy issues, this section refers to the unified budget 

measure unless otherwise specified.

Note: For more details, see Laura M. Beall and Sean P. Keehan, “Federal Budget Estimates, Fiscal Year 2001,” Survey of Current 

Business, Bureau of Economic Analysis, Vol. 80, No. 3 (March 2000), pp. 16–25; or Budget of the U.S. Government: Fiscal Year 2001, 

Analytical Perspectives, Office of Management and Budget (2000), pp. 361–365.
Section 4

National Saving and the Government

Page 79 GAO-01-591SP National Saving

From the 1970s through the mid 1990s, federal deficits consumed a large 

share of increasingly scarce private saving and reduced the amount of 

national saving available for investment.2

 Since 1990, the Congress and the 

President have taken action to eliminate the annual federal budget deficit 

through several initiatives including the Budget Enforcement Act of 1990, 

the Omnibus Budget Reconciliation Act of 1993, and the Balanced Budget 

Act of 1997. As noted in section 2, the combination of these policy actions 

and strong economic growth reduced federal government dissaving over 

the 1990s (see figure 4.1). With the swing to surplus in recent years, federal 

government saving added to the saving of other sectors to increase the 

amount of national saving available for investment. Unified budget 

surpluses since 1998 have been the longest-running surpluses in over 

50 years, and federal budget surpluses are projected for the next decade. 

So far, the federal government has used excess funds to reduce debt held 

by the public, paying down $223 billion in fiscal year 2000 alone.3

2

See figure 2.2 for the composition of net national saving from 1960 to 2000.

3

Federal Debt: Debt Management Actions and Future Challenges (GAO-01-317, February 

28, 2001). As discussed further in text box 4.2, if the projected budget surpluses materialize, 

the federal government will reach a point at which the projected surpluses will exceed the 

amount of federal debt available to be redeemed.
Section 4

National Saving and the Government

Page 80 GAO-01-591SP National Saving

Figure 4.1: The Effect of Federal Surpluses and Deficits on Net National Saving 

(1990–2000)

Note: The saving of households, businesses, and state and local governments makes up nonfederal 

saving. National saving data are on a NIPA basis. The NIPA federal surplus/deficit measure as a share 

of GDP is roughly similar to the unified budget measure.

Source: GAO analysis of NIPA data from the Department of Commerce, Bureau of Economic Analysis.

Although one might expect an increase in federal saving to lead to an 

increase in national saving, changes in federal saving do not flow through 

to changes in national saving and investment in a dollar-for-dollar 

relationship. Figure 4.1 illustrates that federal and nonfederal saving, which 

consist mainly of private saving, tend to be inversely related. In other 

words, when federal government saving increases (smaller deficits or 

larger surpluses), private saving may decrease somewhat. When federal 

saving decreases (smaller surpluses or larger deficits), private saving may 

increase. For example in figure 4.1, although federal government saving 

increased as a share of GDP by 5.5 percentage points from 1990 to 2000, net 

national saving increased by only 1.1 percentage points because private 

saving as a share of GDP decreased by 4.9 percentage points over the same 

period.4

4

The total change in net national saving from 1990 to 2000 was also affected by an increase 

in state and local government saving of about 0.6 percentage points.

-5

0

5

10

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Percent of GDP

Net nonfederal saving

Federal surplus/deficit

Net national saving 
Section 4

National Saving and the Government

Page 81 GAO-01-591SP National Saving

Q4.2. Why Do 

Government and 

Private Saving Tend to 

Move in Opposite 

Directions?

A4.2. Government and private saving tend to move in opposite directions 

for several reasons—three of which are discussed here. First, federal 

borrowing can be large enough to affect current interest rates, which in 

turn may influence private saving and investment. Government dissaving 

absorbs funds available for private investment and puts upward pressure 

on interest rates. Higher interest rates both raise the return on saving and 

reduce the market value of existing financial assets issued when rates were 

lower.5

 The combination of higher returns to saving and reduced wealth 

might encourage households and businesses to save more. Conversely, an 

increase in government saving adds to the supply of resources available for 

investment and may put downward pressure on interest rates. Lower 

interest rates both reduce the return on saving and increase the market 

value of existing financial assets issued when rates were higher. Lower 

returns to saving and increased wealth might dampen private saving.

Second, if federal budget surpluses are achieved, in part, through higher 

taxes, those higher taxes reduce households’ disposable personal income. 

As discussed in section 1, disposable personal income is the after-tax 

personal income (including government transfer payments) available for 

households’ consumption and saving. Households may choose to save less 

of their disposable income and maintain their current level of consumption 

especially if they consider the higher tax payments to be temporary. 

Reduced personal saving would tend to offset the increased government 

saving due to higher taxes.

Third, some economists believe that government saving has some effect on 

households’ expectations about future tax rates even across generations. 

This Ricardian equivalence hypothesis holds that people are 

forward-looking and recognize that current government surpluses or 

deficits affect government debt and future tax rates.6

 Thus, when the 

government runs deficits and accumulates debt, Ricardian consumers 

would save more to ensure that they or their descendants can pay the 

expected higher future taxes. Alternatively, when the government runs 

5

For example, market prices of interest-bearing securities, such as Treasury securities, 

fluctuate inversely with market interest rates. The market price of a Treasury security falls 

when the current interest rate on Treasury securities of equal maturity rises.

6

Although this view is named after the 19th century economist David Ricardo who first 

explored the possible relationship, the seminal work on this theory is Robert Barro, “Are 

Government Bonds Net Wealth?” Journal of Political Economy, Vol. 82, No. 6 (1974), 

pp. 1095–1117.
Section 4

National Saving and the Government

Page 82 GAO-01-591SP National Saving

surpluses and reduces debt held by the public (as in 1998 through 2000), 

Ricardian consumers would save less in anticipation of future tax cuts. If 

all consumers were fully Ricardian, private saving would fully offset any 

change in government saving, and national saving would be unchanged. 

Economists continue to debate how well the Ricardian equivalence theory 

works in practice. People may be too shortsighted in their saving decisions 

to look ahead to the implications of current government debt on future 

generations. When federal budget deficits and debt mounted in the 1980s, 

private saving declined—the opposite of what the Ricardian equivalence 

hypothesis would suggest. However, in recent years, as figure 4.1 

illustrates, private saving—which is the major component of nonfederal 

saving—declined as federal saving rose—which is consistent with the 

Ricardian equivalence hypothesis.

In summary, it is unclear how much each additional dollar of government 

saving will ultimately increase national saving. Evidence shows that 

changes in saving by households and businesses tend to offset some of the 

changes in government saving. While economists disagree over the 

magnitude of the private saving offset, studies generally suggest it is less 

than one-for-one. This means that for each additional dollar of government 

saving, aggregate private saving falls by less than a dollar. To what extent 

the aggregate offset is due to the changes in interest rates, wealth, 

disposable personal income, expectations of future tax rates, or other 

reasons is ambiguous. Estimating the private saving offset is complicated 

by the fact that individuals may respond differently to changes in 

government saving.7

Q4.3. What Is the LongTerm Outlook for 

Federal Government 

Saving/Dissaving?

A4.3. While media attention has focused on budget surpluses projected for 

the next 10 years, the long-term outlook for federal government saving has 

received considerably less attention. The outlook for government saving 

over the next 75 years is subject to wide ranging uncertainty due to 

economic changes and future legislation. However, one certainty is that as 

life expectancy rises and the baby boom generation retires, the U.S. 

population will age, and fewer workers will support each retiree. The 

7

For example, some households live paycheck-to-paycheck and might spend all of a tax cut, 

whereas other households might spend only a portion; a Ricardian household might save all 

of a tax cut in anticipation of future tax increases. For further discussion about 

accommodating consumer behavior in modeling fiscal policy, see N. Gregory Mankiw, “The 

Saver-Spender Theory of Fiscal Policy,” NBER Working Paper 7571 (February 2000).
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federal budget will increasingly be driven by demographic trends. Absent 

changes to current law, government saving is likely to decline as 

government health and retirement programs for the growing elderly 

population claim a larger share of federal resources.

Any fiscal policy path in which some portion of the anticipated budget 

surpluses is saved ultimately leads to a stronger fiscal position than 

annually balancing the budget in each of the next 10 years. But what does it 

mean to “save the surplus”? If the surplus is not spent on government 

programs or used for tax cuts, it is “saved.” Saving some portion of the 

projected budget surpluses would allow the federal government to reduce 

the overhang of federal debt built over decades of deficit spending. Using 

surpluses to reduce debt held by the public results in lower interest costs 

today, all other things being equal, and a lower debt burden for future 

generations.8

 Within this decade, the projected surpluses may likely exceed 

the amount of debt held by the public available to be redeemed. Text box 

4.2 discusses government saving in an environment where reducing federal 

debt held by the public is not an option.

8

For more information on using surpluses to redeem debt held by the public, see Federal 

Debt: Answers to Frequently Asked Questions—An Update (GAO/OCG-99-27, May 28, 

1999), Federal Debt: Debt Management in a Period of Budget Surplus (GAO/AIMD-99-270, 

September 29, 1999), and Federal Debt: Debt Management Actions and Future Challenges 

(GAO-01-317, February 28, 2001).
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Text Box 4.2: Government Saving When Reducing Publicly Held Federal Debt is Not an Option 

If the projected budget surpluses materialize, the federal government will reach the point at which the annual surpluses 

will exceed the amount of debt available to be redeemed or that can be bought back at reasonable prices. Although 

estimates as to when this point will be reached vary depending on several assumptions, most analysts agree that it could 

occur within the decade; estimates range from the Congressional Budget Office’s (CBO) January 2001 estimate of 2006 to 

the Office of Management and Budget’s March 2001 estimate of 2008. This point will occur before the debt held by the 

public is eliminated, and the resulting accumulation of cash will require decisions about what to do with these cash 

balances. This raises the question of how the federal government can save if reducing federal debt held by the public is not 

an option.

Just as the flow of personal saving affects the stock of financial assets accumulated by households, government saving 

affects the stock of federal debt. The federal government borrows from the public to finance a deficit. Conversely, when a 

budget surplus occurs, the federal government can use excess funds to reduce the debt held by the public, accumulate cash 

balances, or acquire nonfederal financial assets. Holding cash or nonfederal financial assets would not reduce debt held by 

the public but would reduce the net debt of the federal government. Net debt represents the federal government’s total 

financial liabilities, including debt held by the public, less its total financial assets. Positive amounts of net debt reflect how 

much of the nation’s private wealth has been absorbed to finance federal deficits. Negative amounts of net debt reflect how 

much of the nation’s private financial assets have been acquired by the federal government.

Acquiring nonfederal financial assets could be another way to translate budget surpluses into resources available for 

investment. However, the issue of the federal ownership of nonfederal assets is controversial. Federal Reserve Chairman 

Greenspan, among others, has expressed concern that there would be tremendous political pressure to steer the federal 

government’s asset selection to achieve economic, social, or political purposes. Although the governance issues may not be 

insurmountable, another possible concern is that the federal government could become the largest single investor.

There is a growing body of experience by other governments that might help policymakers address the question of whether 

and how the federal government can or should acquire nonfederal financial instruments. Investing in the financial markets 

is a standard practice for state and local government pension funds in the United States. Also, other nations have decided 

that the potential risks of political interference can be managed and are outweighed by what those nations perceive as the 

risk of failing to save for the future or provide a cushion for contingencies. In the future, we plan to study how other 

nations invest in nongovernmental assets to learn more about how they deal with governance and other issues

Note: The net debt concept is based on the OECD definition of net financial liabilities that can be calculated by subtracting 

financial assets from financial liabilities.
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In recent years, the fiscal policy debate has focused on the importance of 

saving the Social Security portion of projected unified budget surpluses. 

While policymakers appear to have generally agreed to save Social Security 

surpluses, there is considerable debate over whether and how to use the 

non-Social Security surpluses. After recent years of fiscal discipline and 

focus on fiscal responsibility, the anticipated surpluses offer a chance to 

meet pent-up demand for discretionary domestic spending, increase 

defense spending, cut taxes, shore up Social Security and Medicare, reduce 

the debt, or do some combination of these. How the surpluses are used has 

long-term implications for federal government saving, national saving, and 

ultimately the nation’s future living standards.9

To get a sense of the long-term implications of broad fiscal policy choices, 

we examined the fiscal and economic outlook over the next 75 years under 

two alternatives: (1) assuming that the federal government saves only the 

Social Security surpluses and (2) assuming that the federal government 

saves the entire unified surpluses.10 For simplicity, these fiscal policy 

simulations assume that saving by households, businesses, and state and 

local governments remains constant as a share of GDP and that the 

surpluses saved are used to reduce debt held by the public.11 Once debt 

held by the public is eliminated, these simulations assume excess cash is 

used to acquire an unspecified mix of nonfederal assets with a rate of 

return equivalent to the average interest rate on Treasury securities.12

9

Federal Budget: The President’s Midsession Review (GAO/OCG-99-29, July 21, 1999).

10Since 1992, GAO has provided the Congress with a long-term perspective on alternative 

fiscal policy paths. See Budget Policy: Prompt Action Necessary to Avert Long-Term 

Damage to the Economy (GAO/OCG-92-2, June 5, 1992), The Deficit and the Economy: An 

Update of Long-Term Simulations (GAO/AIMD/OCE-95-119, April 26, 1995), Budget Issues: 

Deficit Reduction and the Long Term (GAO/T-AIMD-96-66, March 13, 1996), Budget Issues: 

Analysis of Long-Term Fiscal Outlook (GAO/AIMD/OCE-98-19, October 22, 1997), Budget 

Issues: Long-Term Fiscal Outlook (GAO/T-AIMD/OCE-98-83, February 25, 1998), Budget 

Issues: July 2000 Update of GAO’s Long-Term Simulations (GAO/AIMD-00-272R, July 26, 

2000), and Long-Term Budget Issues: Moving From Balancing the Budget to Balancing 

Fiscal Risk (GAO-01-385T, February 6, 2001).

11As noted in section 3, simulations are illustrative and do not represent forecasts. See 

appendix II for a detailed description of the long-term modeling methodology.

12Acquiring nonfederal financial assets would reduce the reported unified surplus or 

increase the unified deficit because, under current budget scoring rules, such acquisitions 

would be treated as spending.
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Saving the Social Security surpluses produces unified budget surpluses for 

almost 20 years, as shown in figure 4.2, and eliminates the debt held by the 

public by 2015. Under the Save the Social Security Surpluses simulation, 

the non-Social Security surpluses are eliminated by an unspecified mix of 

permanent tax cuts and spending increases. Under this scenario, unified 

budget deficits emerge again in 2019—just as the Social Security and 

Medicare programs are being strained by the retiring baby boom 

generation. As discussed in section 3, the large deficits and debt under this 

simulation imply a substantial reduction in national saving and investment 

in the capital stock leading to a decline in living standards—in terms of 

GDP per capita. Although policymakers would likely act to reduce the 

budget deficits and to promote higher national saving before facing the 

economic doomsday implied under the Save the Social Security Surpluses 

simulation, this scenario serves as a reminder to be cautious in committing 

surpluses to large permanent tax cuts and spending increases.

Figure 4.2: Unified Surpluses and Deficits as a Share of GDP Under Alternative 

Fiscal Policy Simulations (2000–2075) 

a

Data end when deficits reach 20 percent of GDP.

Source: GAO’s March 2001 analysis.

Figure 4.2 also shows an alternative fiscal policy path assuming the federal 

government saves all of the projected unified surpluses. Under the Save the 

Unified Surpluses simulation, federal budget surpluses would be higher 

over the next 40 years, but deficits would emerge in the 2040s. Although the 

20

15

10

-5

0

5

2000 2010 2020 2030 2040 2050 2060 2075

Percent of GDP

Save the

Unified

Surplusesa

Save the

Social Security

Surplusesa
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government would have to borrow again from the public to finance deficits 

over the long run, the simulation implies that, absent policy or economic 

change, debt held by the public could be fully eliminated before the end of 

the decade.13 Just as the Save the Social Security Surpluses simulation is an 

implausible doomsday scenario, the Save the Unified Surpluses simulation 

can also be viewed as implausible. Under this simulation, annual federal 

surpluses, which peak at 5 percent of GDP, would last longer than ever 

before in the nation’s history and the government would hold nonfederal 

financial assets for over 50 years. 

Q4.4. How Does Saving 

Affect Future 

Budgetary Flexibility?

A4.4. Government saving directly affects future budgetary flexibility 

through its effect on interest payment spending. In the past, interest 

payments contributed to deficits and helped fuel a rising debt burden. 

Rising debt, in turn, raised interest costs to the budget, and the federal 

government increased debt held by the public to finance these interest 

payments. A change from a budget deficit to a surplus reduces federal debt 

and replaces this “vicious cycle” with a “virtuous cycle” in which saving 

some portion of the budget surpluses results in lower debt levels. Lower 

debt levels lead to lower interest payments—possibly at lower interest 

rates. These lower interest payments in turn lead to larger potential 

surpluses and/or increased budget flexibility.

Figure 4.3 shows the long-term implications for budgetary flexibility of 

saving the Social Security surpluses. Again, this simulation assumes that 

nonfederal saving remains constant as a share of GDP at 16.1 percent, the 

average nonfederal saving rate since 1998. Absent program changes, saving 

the Social Security surpluses—and even the Medicare surpluses14—is not 

enough by itself to finance the retirement and health programs for the 

elderly. As figure 4.3 shows, saving only the Social Security surpluses will 

not be sufficient to accommodate both the projected growth in Social 

Security and health entitlements and other national priorities in the long 

term. These programs will eventually squeeze out most or all other 

spending. By 2030, saving the Social Security surpluses results in a 

13Although estimates as to when this point will be reached vary depending on several 

assumptions, most analysts agree that it could occur within the decade; see Federal Debt: 

Debt Management Actions and Future Challenges (GAO-01-317, February 28, 2001). 

14Budget Issues: July 2000 Update of GAO’s Long-Term Fiscal Simulations (GAO/AIMD00-272R, July 26, 2000).
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“haircut” for spending on programs other than Social Security, Medicare, 

and Medicaid. In other words, there is increasingly less room for other 

federal spending priorities such as national defense, law enforcement, and 

federal investment in infrastructure, education, and R&D.15 Absent changes 

in the structure of Social Security and Medicare, some time during the 

2040s, government would do little but mail checks to the elderly and their 

health care providers. Budget flexibility declines drastically so that by 2050, 

net interest on the debt would absorb roughly half of all federal revenue. 

Furthermore, Social Security and health spending alone would exceed total 

federal revenue.

15These fiscal policy simulations do not reflect other federal commitments and 

responsibilities not fully recognized in the federal budget, including the costs of federal 

insurance programs, clean-up costs from federal operations resulting in hazardous wastes, 

and the demand for new investment to modernize deteriorating or obsolete physical 

infrastructure (e.g., transportation systems, and sewage and water treatment plants). 
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Figure 4.3: Composition of Federal Spending as a Share of GDP Under the Save the Social Security Surpluses Simulation

Note: Revenue as a share of GDP declines from its 2000 level of 20.6 percent as a result of 

unspecified permanent policy actions. In this display, policy changes are allocated equally between 

revenue reductions and spending increases. The Save the Social Security Surpluses simulation can 

only be run through 2056 due to the elimination of the capital stock.

Source: GAO’s March 2001 analysis.

Over the long-term, meaningful Social Security and Medicare reform will be 

necessary to avert massive government dissaving, reduce the economic 

burden of government spending for an aging population, and restore 

budgetary flexibility to address other national priorities. Q4.10 and Q4.12 

discuss the need for Social Security and Medicare reform more fully.

Just as saving more of the anticipated budget surpluses would enhance 

future budgetary flexibility, increasing private saving would also improve 

the federal government’s budget outlook. As discussed in section 3, 

increasing national saving boosts investment and economic growth. 

Because the U.S. economy is essentially the tax base for the federal 

government, economic growth in turn increases government revenue. 

Increased economic growth, thus, could provide the resources to help 

0

10

20

30

40

50

2000 2030 2050

Percent of GDP

All other spending

Medicare and Medicaid

Social Security

Net interest

Revenue
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finance the retirement and health programs for the elderly as well as 

increase budget flexibility to pay for other federal programs and activities.

Q4.5. What are the 

Implications of Current 

Fiscal Policy Choices 

for Future Living 

Standards?

A4.5. Fiscal policy choices about how much of the surpluses to save affect 

not only the level of government saving but ultimately the nation’s longterm economic outlook. Saving the Social Security surpluses would allow 

Americans to enjoy higher standards of living in the future, as figure 4.4 

shows. However, under the Save the Social Security Surpluses simulation, 

GDP per capita growth slows and eventually turns negative. Even if the 

entire unified surplus were saved, GDP per capita would fall somewhat 

short of the U.S. historical average of doubling every 35 years. The 

implication of such simulations is that even if government saving is 

sustained at unprecedented levels, future generations of workers might not 

enjoy a rise in living standards comparable to that enjoyed by previous 

generations. Thus, saving Social Security surpluses is not enough to ensure 

retirement security for the aging population without placing a heavy 

burden on future generations. Q4.10 and Q4.12 discuss how Social Security 

and Medicare reform might affect national saving.
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Figure 4.4: GDP Per Capita Under Alternative Fiscal Policy Simulations (1960–2075)

Note: The Save the Social Security Surpluses simulation can only be run through 2056 due to the 

elimination of the capital stock.

Source: GAO’s March 2001 analysis.

It is tempting to push aside gloomy simulation results and to discount the 

significance of fiscal constraints several decades in the future, but recent 

good news about the budget does not mean that difficult budget choices 

are a thing of the past. The history of budget forecasts should be a reminder 

not to be complacent about the certainty that large surpluses will 

materialize over the next 10 years as projected. Not so long ago the 

forecasts were for “deficits as far as the eye can see.” Budget projections 

are inherently uncertain and even a small change in one assumption can 

lead to very large changes in the fiscal outlook over a decade.

The Congressional Budget Office (CBO) describes its projections as more 

tentative than usual because the increase in CBO’s productivity growth 

assumption is based on data only for the past few years.16 According to 

CBO, that limited time span is insufficient to determine whether the rate of 

16For more information about potential sources of uncertainty in CBO’s projections, see 

“The Uncertainties of Budget Projections,” Chapter 5, The Budget and Economic Outlook: 

Fiscal Years 2002–2011, Congressional Budget Office (January 2001), pp. 93–103.

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2075

Save the Social

Security Surpluses

Save the Unified Surpluses

2000 level is double

the level in 1967

Double 2000 level by 2035

Double 2035 level by 2070 Per capita 2000 dollars
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productivity growth has indeed accelerated or has just temporarily 

deviated from underlying historical trends as it has many times in the 

past.17 Some observers have declared that the U.S. economy has entered a 

new era of more rapid economic growth, and it is possible that future 

growth could be even more robust than CBO’s baseline economic 

projections assume. However, CBO has pointed out that the recent burst in 

productivity may prove temporary if the “new economy” turns out to be 

just a flash in the pan.

In addition to the greater-than-usual uncertainty about productivity growth, 

it is too soon to tell whether recent boosts in federal revenue reflect a 

structural change in the economy or a more temporary divergence from 

historical trends. CBO has pointed out that simply assuming a return to 

historical trends and slightly faster growth in health care spending would 

dramatically reduce the surpluses projected. Given these uncertainties, 

lower unified surpluses and even deficits are possible budget outcomes 

over the next decade.

Caution is warranted before committing the anticipated surpluses to 

permanent changes on either the revenue or spending side. Although 

policymakers appear to have generally agreed to save Social Security 

surpluses, there is considerable debate over whether and how to use the 

rest of the projected surpluses. Yet, the amounts available for new tax or 

spending initiatives may be considerably less than policymakers and the 

public anticipate.18 CBO’s budget projections are intended to provide 

estimates of federal spending and revenue assuming current law related to 

taxation and entitlement programs is unchanged. For this reason, CBO’s 

projections do not reflect the full cost of maintaining current policies if 

maintaining those policies would require enacting new legislation. For 

example, the budget projections do not reflect the costs of laws that are 

regularly extended for a few years at a time, such as continuing payments 

to farmers that have been provided for the last three years or extending tax 

credits due to expire. The projections also do not reflect the expected 

17See Congressional Budget Office, The Budget and Economic Outlook: An Update (July 

2000), pp. 34-35. 

18“How Much of the New CBO Surplus Is Available for Tax and Program Initiatives,” Center 

on Budget and Policy Priorities (July 18, 2000); and James Horney and Robert Greenstein, 

“How Much of the Enlarged Surplus Is Available for Tax and Program Initiatives? Available 

Funds Should Be Devoted to Real National Priorities,” Center on Budget and Policy 

Priorities (July 7, 2000).
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enactment of a law to alleviate the Alternative Minimum Tax for middleincome taxpayers. Moreover, CBO’s inflated baseline assumes that 

discretionary spending—which is controlled through annual 

appropriations—will grow after 2002 at the rate of inflation. However, 

discretionary spending historically has grown faster than the rate of 

inflation.

Q4.6. How Does 

Government 

Investment Affect 

National Saving and 

Economic Growth?

A4.6. Not only does government saving directly affect national saving 

available for private investment, but the federal government also is a key 

contributor to the nation’s capital stock and productivity through its own 

investment spending.19 For example, the federal government invests in 

building roads, training workers, and conducting scientific research. 

Although unified budget surpluses increase national saving available for 

private investment, increasing federal spending on infrastructure, if 

properly designed and administered, can be another way to increase 

national saving and investment. Federal spending on education and R&D—

while it does not count as NIPA investment—can, if properly designed and 

administered, also promote the nation’s long-term productivity and 

economic growth. GAO has reported that well-chosen federal spending for 

infrastructure, education, and R&D that is directly intended to enhance the 

private sector’s long-term productivity can be viewed as federal 

investment.20 However, CBO has questioned whether increasing federal 

investment spending could significantly increase economic growth.21

A sound public infrastructure plays a vital role in the nation’s capacity to 

produce goods and services in the future. Public facilities, such as 

transportation systems and water supplies, are vital to meeting the 

19Fiscal policy choices affect not only how much the government saves and invests but also 

affect how businesses and households save and invest. Q4.7 discusses federal policies 

aimed at encouraging private saving.

20For more information about defining federal investment for long-term economic growth, 

see Budget Issues: Choosing Public Investment Programs (GAO/AIMD-93-25, July 23, 

1993) and related GAO products listed in appendix V.

21CBO concluded that increased federal spending on investment in infrastructure, education 

and training, and R&D was unlikely to increase economic growth and could possibly reduce 

growth. According to CBO, many federal investments have little net economic benefit—

either because they are selected for political or other noneconomic reasons or because they 

displace more productive private-sector or state and local investments. See The Economic 

Effects of Federal Spending on Infrastructure and Other Investments, Congressional 

Budget Office (June 1998).
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immediate as well as long-term public demands for safety, health, and 

improved quality of life. While most infrastructure spending takes place at 

the state, local, or private-sector level, the federal government also invests 

in infrastructure such as highways, bridges, and air traffic control.22 As 

federal unified deficits declined over the 1990s, federal investment in 

nondefense physical assets remained relatively constant as a share of GDP. 

Federal spending on education and nondefense R&D, which is intended to 

enhance the nation’s long-term productivity, also remained relatively 

constant as a share of GDP over the 1990s.

At some point, reducing federal unified deficits or maintaining unified 

surpluses at the expense of federal R&D and education spending raises 

concerns about future workers’ skills, technological advancement, and, 

thus, economic growth. R&D and education have long been seen as areas 

for government activity given the private sector’s inability to capture all of 

the societal benefits that such investments provide. The federal 

government has played a central role in supporting R&D and thus 

enhancing the nation’s long-term productivity. One rationale for this has 

been that the societal gains from R&D, for example, are often not felt until 

far in the future and so might not provide much profit for an individual 

firm. The Internet, computers, communications satellites, jet aircraft, and 

semiconductors are all examples of benefits from federal R&D investments 

over the past 50 years. Federal R&D investment spending on genetic 

medicine and biotechnology has helped lead to the mapping of human 

genes. Although the Human Genome Project has been hailed as “the most 

important, most wondrous map ever produced by humankind,” its full 

societal benefits will not be seen for years to come.23

Fiscal policy choices about the allocation of government spending between 

consumption and investment are influenced in part by the federal budget 

process. The federal government’s cash-based budget process is largely a 

short-term plan focusing on the short- to medium-term cash implications of 

government obligations and fiscal decisions. The budget seeks to serve 

22For more on the federal government’s role in infrastructure investment, see U.S. 

Infrastructure: Funding Trends and Opportunities to Improve Investment Decisions

(GAO/RCED/AIMD-00-35, February 7, 2000).

23“Remarks by the President, Prime Minister Tony Blair of England (Via Satellite), Dr. 

Francis Collins, Director of the National Human Genome Research Institute, and Dr. Craig 

Venter, President and Chief Scientific Officer, Celera Genomics Corporation, on the 

Completion of the First Survey of the Entire Human Genome Project,” The White House, 

Office of the Press Secretary (June 26, 2000).
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many purposes, but one of its primary functions is to control obligations 

up-front before the government commitment is made. As a result, the 

budget process tends to view a dollar spent on consumption the same as a 

dollar spent on investment because both represent commitments by the 

government and represent resources taken out of the private sector for use 

by the government. Some have argued that the budget may actually favor 

short-term consumption because the cost of both must be scored up-front 

as part of the Budget Enforcement Act process even though most of the 

benefits from investment programs accrue in the future.24 In the past, GAO 

has suggested that the budget could better facilitate policymakers’

weighing choices between federal investment and consumption by 

incorporating an investment component with agreed-upon levels of 

investment spending. This could promote the consideration of spending 

intended to benefit the economy over the long term while maintaining 

overall fiscal discipline.25 As the Congress moves to modify the federal 

budget process with the expiration of the Budget Enforcement Act, 

attention is warranted as to how the process considers the long-term 

implications of alternative spending choices.

Q4.7. What Policies of 

the Federal 

Government Have 

Been Aimed at 

Encouraging 

Nonfederal Saving and 

Investment?

A4.7. Although increasing government saving is the most direct way for the 

federal government to increase national saving, the federal government can 

also encourage saving and investment by state and local governments and 

the private sector. For example, the federal government provides funding—

such as grants, loans, or loan guarantees—to state and local governments 

to finance the construction and improvement of the nation’s highways, 

mass transit systems, and water systems. The federal government also 

provides financial aid to encourage postsecondary education. In addition to 

its direct spending, the federal government offers tax incentives to 

encourage nonfederal saving and investment. The revenue loss associated 

with a tax incentive represents the federal government’s budgetary cost of 

promoting saving and investment for particular purposes.

The current income tax system provides preferential treatment—such as 

special exemptions, special deductions, and/or credits, as well as special 

24Budget Trends: Federal Investment Outlays, Fiscal Years 1981−2003 (GAO/AIMD-98-184, 

June 15, 1998).

25Budget Structure: Providing an Investment Focus in the Federal Budget (GAO/T-AIMD95-178, June 29, 1995).
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tax rates—for both businesses and individuals. Under current law, some 

types of saving and investment are exempt from taxes while other types are 

fully taxed; some forms of consumption—in particular, health care—

receive preferential treatment. Although a comprehensive discussion of 

income versus consumption taxes is beyond the scope of this primer, it is 

helpful to highlight various federal tax incentives for saving and 

investment.26

The federal government uses tax incentives to encourage particular forms 

of investment. Some tax provisions allow accelerated depreciation so that 

businesses can more quickly recover the costs of investing in certain types 

of equipment and structures. Other tax incentives encourage investment in 

the nation’s infrastructure. For example, interest income on state and local 

government bonds, which are used primarily for infrastructure purposes, 

are exempt from federal taxes. This tax preference allows state and local 

governments to borrow at lower rates to build highways, schools, mass 

transit facilities, and water systems. In addition, tax preferences may 

encourage particular forms of infrastructure investment, such as special 

tax credits for investments in developing low-income rental housing. Also, 

special tax credits and deductions are aimed at spurring private R&D.

The federal government also has sought to encourage personal saving both 

to enhance households’ financial security and to boost national saving. 

Table 4.1 highlights some tax provisions aimed at encouraging saving for 

retirement, buying homes, and investing in education.27 The largest tax 

incentive for saving—in terms of the tax revenue loss—is the preferential 

tax treatment of employer-sponsored pension plans; additional tax 

incentives encourage retirement saving outside of employer pensions. The 

second largest category of tax incentives aimed at encouraging saving 

promotes home ownership. Other tax incentives encourage college and 

other postsecondary education. While some tax incentives for education 

encourage households to accumulate assets such as U.S. Series EE savings 

26For more information about the differences between income and consumption taxes and 

the current tax treatment of saving and investment, see Tax Administration: Potential 

Impact of Alternative Taxes on Taxpayers and Administrators (GAO/GGD-98-37, January 

14, 1998), pp. 55–77.

27While this discussion focuses on tax incentives encouraging personal saving, some federal 

programs and tax provisions may actually discourage people from saving. As discussed in 

section 1, Social Security also affects people’s incentives to save for retirement. Capital 

gains taxation and estate transfer taxes may also affect household decisions about saving 

and asset accumulation.
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bonds or education savings accounts to pay for college, other provisions, 

such as the HOPE credit, are aimed more at making college more 

affordable.

Table 4.1: Selected Federal Income Tax Provisions That Influence Personal Saving

Note: This table does not represent all federal tax provisions related to personal saving. For a more 

comprehensive discussion, see Joint Committee on Taxation, Present Law and Background on 

Federal Tax Provisions Relating to Retirement Savings Incentives, Health and Long-Term Care, and 

Estate and Gift Taxes (JCX-29-99), June 15, 1999.

Source: GAO analysis based on information provided in Analytical Perspectives, Budget of the United 

States Government, Fiscal Year 2002.

For individual taxpayers, tax incentives increase the after-tax return on 

saving for particular purposes or on specific types of assets accumulated. 

This would narrow the wedge between the individual’s return on saving and 

society’s return on investment that results from the taxation of income 

from saving. As explained in section 1, higher rates of return may or may 

not encourage people to save more. For the federal government, tax 

incentives reduce tax revenue and hence government saving. How tax 

incentives affect personal saving, and ultimately, national saving is less 

certain. The net effect on national saving—discussed further in Q4.8—

depends on the interaction between any additional personal saving and 

government dissaving associated with financing the incentive.

Tax provision

FY 2000 revenue loss

estimate in millions

Encourage retirement saving

Net exclusion of pension contributions and earnings for: 

(1) qualified employer pension plans $89,120

(2) Individual Retirement Accounts (IRAs) $15,200

(3) Keogh plans $5,500

Encourage home ownership 

Deductions for mortgage interest on homes $60,270

Deductions for State and local property taxes on homes $22,140

Exclusion of capital gains income from home sales $18,540

Encourage personal investment in postsecondary education

HOPE scholarship tax credits for tuition payments for the first 2 years of college $4,210

Deductibility of student-loan interest $360

Exclusion of interest earned on U.S. Series EE savings bonds when used for qualified education 

expenses $10
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Tax incentives affect how people save for retirement but do not necessarily 

increase the overall level of personal saving. Since the 1970s, preferential 

tax treatment has been granted to Individual Retirement Accounts 

(IRAs) and employer-sponsored 401(k) pension plans. Even with these 

retirement saving incentives, the personal saving rate has steadily declined. 

Although the tax benefits indeed seem to encourage individuals to 

contribute to these kinds of accounts, the amounts contributed may not be 

totally new saving. Some contributions may represent saving that would 

have occurred even without the tax incentives or amounts merely shifted 

from taxable assets or even financed by borrowing. Economists disagree 

about whether tax incentives are effective in increasing the overall level of 

personal saving. In a 1996 symposium examining universal IRAs available 

in the early 1980s,28 researchers reached three widely divergent 

conclusions: (1) yes, most contributions represented new saving, (2) no, 

most IRA contributions were not new saving, and (3) maybe, about 26 cents 

of each dollar contributed may have represented new saving.29

Even if tax incentives do not increase personal saving much in the short 

term, they may encourage individual households to earmark resources 

specifically for retirement. Once the funds are earmarked in retirement 

accounts, the prospect of taxes and penalties for early withdrawals might 

induce some households to save more outside of retirement accounts to 

achieve nonretirement goals. However, if people can readily withdraw 

money from tax-preferred accounts for purposes other than retirement, 

there is no assurance that tax incentives would ultimately enhance 

individuals’ retirement security.

Allowing access to voluntary accounts like IRAs or 401(k) plans before 

retirement—through borrowing or early withdrawals to buy a home or to 

pay for education or medical expenses—is a double-edged sword. Access 

28The Journal of Economic Perspectives, Vol. 10, No. 4 (Fall 1996) presented three papers 

representing these viewpoints: James M. Poterba, Steven F. Venti, and David A. Wise, “How 

Retirement Saving Programs Increase Saving,” pp. 91-112; Eric M. Engen, William G. Gale, 

and John Karl Scholz, “The Illusory Effects of Saving Incentives on Saving,” pp. 113-138; and 

R. Glenn Hubbard and Jonathan S. Skinner, “Assessing the Effectiveness of Saving 

Incentives,” pp. 73-90.

29Researchers have also attempted to estimate the effect of employer-sponsored 401(k) 

plans on personal saving. For a recent summary of this empirical debate, see William Gale, 

“The Impact of Pensions and 401(k) Plans on Saving: A Critical Assessment of the State of 

the Literature,” paper presented at ERISA After 25 Years: A Framework for Evaluating 

Pension Reform, Washington, D.C., September 17, 1999.
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provisions may increase saving because more people may choose to 

participate and to contribute larger amounts.30 Yet, borrowing and early 

withdrawals can ultimately reduce individuals’ retirement income. There 

would be little benefit to national saving from allowing early access to 

mandatory accounts with set contribution levels—which has been 

proposed for Social Security (see Q4.10 and Q4.11).

Q4.8. Given That 

Experts Disagree 

About Whether 

Retirement Saving Tax 

Incentives Are 

Effective In Increasing 

Personal Saving 

Overall, How Do These 

Tax Incentives Affect 

National Saving?

A4.8. The net effect on national saving depends on whether a tax incentive 

induces enough additional saving by households to make up for the 

government’s revenue loss. To gain a better understanding of how tax 

incentives affect national saving, look at one example: how a tax deduction 

for a traditional tax-deferred IRA may affect government and ultimately 

national saving. For simplicity, consider a married couple in which neither 

spouse is covered by an employer-sponsored pension plan and each 

contributes $2,000—the maximum per person per year allowed under 

current law—to a traditional IRA. As shown in table 4.2, how much the 

couple’s $4,000 annual contribution adds to national saving that year 

depends on (1) how much their IRA tax deduction costs the government 

and (2) whether their contributions represent new saving or were shifted 

from existing assets. Further assume, for simplicity, that our hypothetical 

couple’s marginal tax rate is 28 percent, so their deduction costs the federal 

government $1,120 (28 percent of $4,000). In other words, government 

saving decreases by $1,120 (or government dissaving increases by that 

amount, depending on the government’s surplus/deficit position for the 

year). If the couple would have otherwise spent the $4,000 (i.e., their 

contributions represent new saving), national saving would increase by 

$2,880—the $4,000 increase in personal saving less the $1,120 decrease in 

government saving. At the other extreme, if the couple merely shifted the 

funds from another account or asset to the IRAs (i.e., no increase in 

personal saving), national saving would fall by the amount of the 

government’s tax loss. The actual change in national saving probably falls 

somewhere between these two examples. Table 4.2 also provides a third 

scenario—the impact on national saving if about 26 percent of the couple’s 

contributions represent new saving. In this case, national saving would 

drop slightly, but the couple would have saved more and expressly 

earmarked more of their assets for retirement.

30401(k) Pension Plans: Loan Provisions Enhance Participation But May Affect Income 

Security for Some (GAO/HEHS-98-5, October 1, 1997).
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Table 4.2: Change in Government and National Saving Resulting From a $4,000 Tax-Deductible IRA Contribution Under 

Alternative Personal Saving Assumptions

Note: This table illustrates a hypothetical couple in which neither spouse is covered by an employersponsored retirement plan and each contributes $2,000 to a traditional IRA. Their $4,000 IRA 

contributions are fully deductible. If either spouse is covered by an employer-sponsored plan, their 

contributions may not be fully deductible depending on their income.

a

Change in personal saving depends on how much of the $4,000 IRA contribution represents new 

saving. These assumptions were drawn from three papers presented in the Fall 1996 Journal of 

Economic Perspectives; see footnote 28.

b

Change in government saving represents tax revenue loss in first year due solely to tax deduction for 

IRA contribution. Amount does not include revenue forgone as a result of tax-deferral on investment 

income. Taxes on contribution and investment income are deferred until amounts are withdrawn.

c

Change in national saving represents the sum of the change in personal and government saving for a 

simplified example focused on one household and one type of IRA. The ultimate effect of any tax 

incentive on national saving would depend on how households in aggregate respond.

Source: GAO analysis based on 1999 individual income tax rates and IRS publication 590 Individual 

Retirement Arrangements.

Alternative personal saving assumptionsa

Change in personal

saving

Change in government

savingb

Change in national

savingc

15-percent marginal tax bracket (annual income under $43,050)

No new saving $0 -$600 -$600

26-percent new saving +1,040 -600 +440

All new saving +4,000 -600 +3,400

28-percent marginal tax bracket (annual income over $43,050, but not over $104,050)

No new saving $0 -$1,120 -$1,120

26-percent new saving +1,040 -1,120 -80

All new saving +4,000 -1,120 +2,880

39.6-percent marginal tax bracket (annual income over $183,150)

No new saving $0 -$1,584 -$1,584

26-percent new saving +1,040 -1,584 -544

All new saving +4,000 -1,584 +2,416
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Table 4.2 also shows the effect on national saving of tax-deductible IRA 

contributions under different tax brackets. If our hypothetical couple were 

in the highest income tax bracket and their contributions represented all 

new saving, their $4,000 deduction would cost the government $1,584 and 

add $2,416 to national saving. If they were in the lowest tax bracket, their 

deduction would cost the government $600 and add as much as $3,400 to 

national saving. Of course, this simplified example focuses on one 

household and one type of IRA.31 The ultimate effect of any tax incentive on 

national saving would depend on how households in aggregate respond. A 

tax incentive for retirement saving may encourage some households to 

save more while encouraging others to shift their existing balances into 

tax-preferred accounts. 

Again, the net effect of a tax incentive on national saving depends on 

whether the tax incentive induces enough additional personal saving to 

make up for the government’s revenue loss. As illustrated in table 4.2, 

deductions for taxpayers in higher tax brackets are more costly for the 

government. Although deductions for lower-income taxpayers appear to 

yield a greater net increase in national saving because they are less costly 

for the government, they also offer relatively less incentive for lowerincome families to save. Low- and moderate-income households have 

fewer resources and may have less capacity to contribute to an IRA or to 

earmark more assets for retirement. Most people saving through taxpreferred retirement accounts are middle- to upper-income. Although 

higher-income households might be encouraged to save more by increasing 

the annual contribution limits to IRAs and employer-sponsored 401(k) 

plans—currently $2,000 and $10,500, respectively—increasing contribution 

limits alone is not likely to induce more saving from low-income 

households. Nonrefundable tax incentives may not be particularly effective 

in encouraging saving by lower-income taxpayers, who already owe 

relatively little or no federal income taxes.

In recent years, policymakers have explored providing refundable tax 

incentives and government matching to encourage Americans to save 

more. Text box 4.3 describes two federal initiatives allowing governmentsubsidized saving accounts for low-income families. First, the 1996 welfare 

31Besides the tax-deductible traditional IRA, other retirement saving vehicles also receive 

preferential tax treatment. Depending on their circumstances, people may also be able to 

choose from nondeductible traditional IRAs, new Roth IRAs, SEP IRAs for the selfemployed, SIMPLE IRAs sponsored by small employers, and the popular 401(k) employersponsored saving plans. The oddly named education IRA is not a retirement arrangement.
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reform law allowed states to use Temporary Assistance for Needy Families 

(TANF) funds to establish subsidized saving accounts for TANF recipients. 

Second, the Assets for Independence Act of 1998 authorized federal 

funding for a 5-year demonstration project to evaluate the effectiveness of 

matching incentives for certain low-income savers.

Recent proposals have aimed at creating a broader system of subsidized 

accounts to encourage more Americans to save for retirement. For 

example, President Clinton’s 2000 Retirement Savings Accounts (RSAs) 

proposal would have provided government matching on voluntary

Text Box 4.3: Individual Development Accounts for Low-Income Savers

Individual development accounts (IDAs) are special saving accounts for low-income families. In theory, IDAs help lowincome families save, accumulate assets, and achieve economic self-sufficiency. IDAs are like the better known IRAs in 

the sense that the assets accumulated are to be used only for limited purposes. Whereas IRAs are for retirement, IDAs can 

be used to buy a first home, to pay for college or other job training, or to start a small business. IDAs are special in that 

low-income savers receive matching funds from federal and state governments as well as private sector organizations as 

an incentive to save. Usually, IDA account holders must undergo economic literacy training as a condition of participation.

The 1996 welfare reform law allowed states to use Temporary Assistance for Needy Family (TANF) funds to establish 

subsidized saving accounts for TANF recipients. TANF recipients are to make contributions from earnings, and state 

matching funds used for IDAs count towards a state’s maintenance-of-effort spending requirement. IDA balances generally 

are not to be considered in determining eligibility and benefits for means-tested federal programs. According to the Center 

for Social Development, as of January 2001, 29 states had passed legislation establishing IDA programs, and 32 states had 

incorporated IDAs into their TANF plans. Matching rates and dollar limits vary by state. Matching rates range from two-toone in Virginia to three-to-one in Indiana and Missouri. Limits on IDA balances range from $4,000 in Virginia to $10,000 in 

South Carolina and $50,000 in Missouri. Some states restrict IDA use to paying for education or training.

The Assets for Independence Act of 1998 authorized federal funding for a 5-year demonstration project to evaluate the 

effectiveness of matching incentives for low-income savers. The IDA demonstration project provides direct federal 

funding to state and local governments as well as nonprofit community organizations to match saving contributions by 

low-income families eligible for TANF or the Earned Income Tax Credit. In fiscal years 1999 and 2000, $10 million was 

appropriated each year for the demonstration project. In those 2 years, awards totaling $17.7 million were made to 65 

grantees sponsoring IDA programs. For fiscal year 2001, $25 million was appropriated for the IDA demonstration. Because 

the first grants were awarded in September 1999, it is too soon in the demonstration project to fully evaluate the 

effectiveness of IDAs as a saving incentive.

Sources: The Center for Social Development, Washington University in St. Louis, and Vee Burke, Temporary Assistance 

for Needy Families and Individual Development Accounts, Congressional Research Service, January 17, 2001.
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retirement contributions for low- and moderate-income families.32 Under 

the RSA proposal, a worker between the ages of 25 and 60 with family 

earnings of at least $5,000 could contribute up to $1,000 annually through 

either an employer-sponsored saving plan or a tax-deferred individual 

account.33 A worker earning up to $12,500 was to receive a two-to-one (200 

percent) match on the first $100 contributed each year and a one-to-one 

match (100 percent) on additional contributions. The progressive matching 

formula was to phase down as income increased. A worker earning 

between $25,000 and $40,000 was to receive a 20 percent match on the first 

$100 contributed and additional contributions. For individuals who did not 

owe federal income taxes, the government match was to be in the form of a 

tax credit to the employer or financial institution holding the taxpayer’s 

account. Although the RSAs were aimed at accumulating assets for 

retirement, the proposal would have allowed limited withdrawals after 5 

years for such purposes as buying a home or paying educational or medical 

expenses.

At this time, it is unclear how new tax-subsidized saving accounts might 

affect personal saving and ultimately national saving. Like any tax 

incentive, matching tax credits would clearly reduce federal revenue and 

government saving. The tax credits by themselves would have no net effect 

on national saving: absent any change in household consumption, personal 

saving would increase by the amount of the government match, but 

government saving would decrease by the same amount. Of course, the 

purpose of matching is to change household behavior. Government 

matching of voluntary contributions could increase national saving if these 

incentives indeed induce people to save more.34 A progressive match—

providing a higher match for low-income workers and eliminating the 

match for high-income workers—would serve to target low-income 

32President Clinton’s 1999 Universal Savings Accounts (USA) proposal would have created a 

more costly centralized system of accounts with a flat annual general tax credit of up to 

$300 for low- and moderate-income workers plus a 50 to 100 percent government match on 

voluntary contributions. Low-income workers were to receive a one-to-one match on their 

contributions, and the match progressively declined based on income so that higher-income 

workers would receive a lower match or none at all.

33Contribution limits and eligibility thresholds for RSAs for a couple were twice the amount 

for an individual. For example, a couple could contribute up to $2,000 annually.

34Depending on the design and implementation, government matching could potentially 

reduce national saving. For example, a household could transfer amounts from existing 

assets to get the government match and then increase consumption in response to its 

increased wealth.
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workers who now receive little tax benefit from existing retirement saving 

incentives. Even with generous matching, low-income workers may not 

voluntarily save more for retirement. In light of the conflicting expert views 

on how existing tax incentives affect personal saving, it is unclear how new 

matching incentives might affect individuals’ saving choices and retirement 

security.

Q4.9. What Is the 

Federal Government 

Doing to Educate the 

Public About Why 

Saving Matters?

A4.9. While a great deal of attention focuses on how much retirement 

saving tax incentives cost the government and how much, if any, new 

personal saving they generate, what is sometimes overlooked is that tax 

incentives remind people to save for retirement. The existence of IRAs and 

401(k)s serves to raise public awareness about retirement saving 

opportunities. Advertising by financial institutions offering IRAs and 

information about employer-sponsored 401(k) options serve as reminders 

about ways to save for retirement. Yet, even as the tax code provides more 

opportunities than ever to save for retirement, Americans may not 

understand why saving matters.

In the “Savings Are Vital for Everyone’s Retirement Act of 1997” (SAVER 

Act), the Congress found that a leading obstacle to expanding retirement 

saving is that many Americans do not know how to save for retirement, let 

alone how much. According to the 1998 National Summit on Retirement 

Savings, the nation must do a better job of educating the public—

employers and individuals alike—about the importance of saving more 

today to secure the nation’s retirement security.35 Increasing personal 

saving is vital to enhancing individual households’ retirement security, to 

increasing national saving available to invest in the nation’s capital stock, 

and ultimately to reducing the burden on future generations of financing 

government programs for the elderly.

As mandated by the SAVER Act, the Department of Labor maintains an 

outreach program to raise public awareness about the advantages of saving 

and to help educate workers about how much they need to save for 

retirement. The Department of Labor’s original Retirement Savings 

Education Campaign was launched in 1995 in partnership with the

35Final Report on The National Summit on Retirement Savings, Department of Labor 

(September 1998). This bipartisan summit, held June 4–5, 1998, was mandated by the 

SAVER Act. Additional national summits are to be held in 2001 and 2005.
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Department of the Treasury and other public and private organizations.36

The SAVER Act also requires the Department of Labor to coordinate with 

similar efforts undertaken by other public and private organizations. In 

addition to the Department of Labor’s outreach program, other federal 

agencies also play a role in saving education. The Securities and Exchange 

Commission’s Office of Investor Education and Assistance promotes 

financial literacy and seeks to encourage Americans to save wisely and 

plan for the future. The Administration on Aging and FirstGov for Seniors 

also provide information to educate the public about how they can better 

prepare for a more financially secure retirement. In 2000, the Department 

of the Treasury launched the National Partners for Financial 

Empowerment. This new coalition planned to raise public awareness about 

the importance of financial literacy and saving and to help Americans 

develop the skills they need to take charge of their financial future.

Education campaigns to promote financial literacy and retirement saving 

represent a potentially valuable tool for encouraging people to save more. 

Building on policymakers’ efforts to enhance tax incentives for retirement 

saving, education campaigns are a means to convey easy-to-understand 

information about the variety of saving vehicles available.37 Efforts such as 

the Department of Labor’s saving outreach program can serve as a catalyst 

to educate employers about pension plan options they can offer to their 

employees as well as to encourage individuals to save more on their own 

behalf. Public education campaigns are one way to get people started with 

retirement planning. The key steps are to calculate how much income they 

need to retire, estimate how much retirement income they can expect from 

Social Security and employer-sponsored pensions, and decide how much 

more they need to save.

Individualized Social Security statements now sent annually by the Social 

Security Administration to most workers aged 25 and older provide 

important information for personal retirement planning. The statement 

provides estimates of potential retirement, disability, and survivor benefits. 

It also asks statement recipients to check their listed earnings to help 

correct errors and ensure benefits are correct when workers retire, 

become disabled, or die. The newly revised statement more successfully 

36These public-private partnerships were a catalyst in 1995 for forming the American Savings 

Education Council. This coalition of public and private entities undertakes initiatives aimed 

at raising public awareness about personal finance and retirement planning.

37Appendix IV includes a list of educational websites on saving.
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meets its purpose of providing basic information to individual workers, but 

further improvement is always possible.38 For example, readers may not 

understand that the “current dollar” estimates provided reflect today’s 

price level, not the price level that will exist when they actually start to 

receive benefits. The Social Security Administration will need to continue 

to review and streamline the statement to make it clearer and easier to 

understand.

Individualized Social Security statements also explain that Social Security 

benefits were not intended to be the only source of retirement income, and 

the statements encourage workers to supplement their benefits with 

pensions and personal saving. Once they know their Social Security 

benefits promised under current law, workers can calculate how much they 

can expect from employer-sponsored pension plans and how much they 

need to save on their own for retirement.39 Knowing more about Social 

Security’s financial status would help workers to understand how to view 

their personal benefit estimates. As discussed in section 1, Social Security 

benefits are projected to exceed the program’s cash revenue in 2016, and 

the trust fund will be depleted in 2038. At that time, Social Security revenue 

would only be sufficient to pay for roughly 73 percent of promised benefits. 

The individualized statements disclose that, absent a change in the law, 

only a portion of the benefits estimated may be payable. Knowing this can 

help workers understand that some combination of revenue increases and 

benefit reductions will be necessary to restore the program’s long-term 

solvency.

Q4.10. How Would 

Social Security Reform 

Affect National Saving?

A4.10. Restoring Social Security to sustainable solvency and increasing 

saving are intertwined national goals. Saving more today would alleviate 

the burden of financing Social Security commitments. Increased saving and 

investing can lead to greater economic growth, and a larger economy in 

turn would mean higher real wages, resulting in more government revenue 

to pay benefits. Social Security reform—depending on the elements of the 

reform package and the timing of implementation—could foster saving and 

38Social Security: Providing Useful Information to the Public (GAO/T-HEHS-00-101, April 

11, 2000).

39The Social Security Administration also offers an online retirement planner with 

calculators to help workers understand how much they can expect from Social Security 

under different retirement scenarios.
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provide resources for capital formation and economic growth. Prompt 

action is vital because economic growth is a long-term process. A bigger 

economic pie would make it easier for future workers to meet the dual 

challenges of paying for the baby boomers’ retirement while achieving a 

rising standard of living for themselves.

For individuals and the nation as a whole, saving more means forgoing 

consumption today in order to consume more in the future. However, this 

trade-off between today’s consumption and tomorrow’s consumption is 

somewhat different for an individual than for the nation. When an 

individual delays retirement saving, that individual enjoys the additional 

consumption in the early years and then personally bears the burden of 

saving larger amounts later, working longer, or accepting a lower standard 

of living in retirement. From the nation’s perspective, if current generations 

forgo saving for their retirement costs, they also forgo investment 

opportunities and the economic growth that would result. Therefore, their 

saving choices affect not only their own retirement income but also 

potentially affect the standard of living for future workers. Greater 

economic growth from saving more now could alleviate the burden that a 

slow-growing workforce will bear in producing the goods and services to 

be consumed by a society with a large retired population that consumes but 

does not work.

In other respects, saving for the nation’s retirement costs is analogous to an 

individual’s retirement preparations. The sooner we begin, the less we have 

to save per year and the greater our benefit from compounding growth. The 

conventional measure of Social Security solvency is gauged in terms of the 

actuarial balance of the program’s trust fund over a 75-year period. 

According to the Social Security Trustees’ 2001 intermediate projections, 

restoring the program’s actuarial balance over the next 75 years would 

require a combination of reform options equal to 1.86 percent of taxable 

payroll. In simple terms, increasing payroll taxes by 1.86 percent (a 15-

percent increase over the 2001 rate paid by employers and workers) now 

could head off a Social Security shortfall for 75 years. Delaying reform until 

Social Security’s insolvency is imminent would necessitate drastic changes 

over a shorter period. Absent reform, by 2038, Social Security’s annual 

deficit would require cutting benefits by about a quarter (26 percent) or 

raising payroll taxes by about a third (35 percent) just to restore balance 

for that year.

Restoring Social Security’s long-term solvency will require some 

combination of increased revenues and reduced expenditures. Various 
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options are available within the current structure of the program including 

raising the retirement age, reducing the cost-of-living adjustment, altering 

the benefit formula, increasing payroll taxes, and investing trust fund 

surpluses in higher-yielding assets. In addition, some proposals would 

fundamentally alter the program structure by setting up individual 

retirement accounts.

Before trying to explore how various reform options might affect national 

saving, it is useful to highlight how the current Social Security program 

affects personal saving, the Social Security trust fund, and government 

saving.

• Personal saving. As discussed in Q1.5, some evidence suggests that the 

existence of Social Security may have reduced personal saving. The 

retirement benefits promised under current law reduce the amount 

people believe they need to save on their own for retirement. Although 

some may view their payroll tax contributions as a form of retirement 

saving, workers need to understand that their contributions are not 

deposited into interest-bearing accounts for each individual but are 

largely used to finance current benefits.

• Social Security trust fund. In the federal budget, a “trust fund” is 

simply an accounting mechanism to record earmarked receipts and 

expenditures.40 From Social Security’s perspective, its annual cash 

surpluses are saved in the trust fund, and the trust fund balance 

represents resources accumulated to help pay future benefits. However, 

the accumulation and exhaustion of the trust fund’s balance does not 

reflect how Social Security finances affect federal government and 

national saving. The extent to which cash surpluses “saved” in the Social 

Security trust fund translate into increased national saving depends on 

federal saving as a whole. Although the trust fund appears solvent until 

2038, Social Security will begin dissaving at the point that program cash 

deficits emerge in 2016 (shown in figure 1.8).

• Government saving. For the years since the 1983 reforms until 1998, 

Social Security surpluses partially offset a deficit in all other

40For more information about trust funds in the federal budget, see Federal Trust and Other 

Earmarked Funds: Answers to Frequently Asked Questions (GAO-01-199SP, January 

2001).
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government accounts within the unified budget.41 In effect, Social 

Security surpluses reduced the magnitude of government dissaving and 

the government’s need to borrow from the public. Since 1998, when the 

federal government began running unified surpluses, policymakers 

appear to have agreed to using the Social Security surpluses to reduce 

federal debt held by the public, and these amounts would translate 

dollar-for-dollar into government saving. When the trust fund begins 

running cash deficits in 2016, the government as a whole must come up 

with the cash to finance Social Security’s cash deficit by reducing any 

projected non-Social Security surpluses, borrowing from the public, 

raising other taxes, or reducing other government spending. The Save 

the Social Security Surpluses simulation illustrates the magnitude of 

fiscal challenges associated with our aging society. Absent reform, 

Social Security deficits would contribute to government dissaving 

(shown in figure 4.2) and greatly constrain budgetary flexibility over the 

long run (shown in figure 4.3).

In evaluating reform proposals, it is important to consider whether a 

reform package will truly increase national saving and “grow the economic 

pie.” From a macroeconomic perspective, increasing the trust fund’s 

balance, without underlying reform, does nothing to enhance the 

government’s fiscal capacity to finance future benefits. For example, 

crediting additional securities to the trust fund or increasing the interest 

rate paid on the trust fund’s securities would commit additional future 

general revenue to the Social Security program but does not increase the 

government’s overall revenue or reduce its costs.

Reforms that reallocate the composition of the nation’s saving and asset 

portfolio may serve only to redistribute the existing pie. For example, 

individual accounts—discussed more fully in Q4.11—affect the 

contributions of government and personal saving relative to national 

saving. Investing Social Security surpluses in the stock market affects the 

government’s asset holdings but does not directly increase national saving. 

As we reported in 1998, potentially higher returns—albeit with greater 

risk—on the government’s stock holdings could boost Social Security’s 

financing and reduce the size of other revenue increases or benefit 

41During the late 1970s and early 1980s, Social Security’s expenditures regularly exceeded 

revenues, causing a rapid decline in the trust fund’s balance and raising concerns about the 

program’s solvency. In response, the Congress passed reforms in 1977 and 1983 that 

together were intended to assure Social Security’s solvency for a 75-year period.
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reductions needed to restore solvency.42 Acquiring stocks or other 

nonfederal financial assets would have approximately the same effect on 

national saving as using the same amount of money to reduce debt held by 

the public. If reducing federal debt held by the public is not an option, as 

discussed in text box 4.2, investing in nonfederal financial assets on behalf 

of the Social Security trust fund could be another way for government 

saving to provide resources for private investment.

Most traditional reform options involve workers paying more for promised 

benefits or getting lower benefits. From the government’s perspective, 

increasing payroll taxes or reducing benefits would improve Social 

Security’s finances and increase government saving—assuming no other 

changes in government spending or taxes. 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. The way in which Social 

Security is reformed will influence both the magnitude and timing of any 

increase in national saving. To illustrate the complexities in evaluating how 

traditional program reforms might affect national saving, let’s examine two 

basic options that would directly improve Social Security’s financial 

imbalance—increasing payroll taxes and reducing benefits.

• Payroll tax increases. At first glance, increasing payroll taxes appears 

to be a straightforward way to increase saving now to take advantage of 

compounding growth. Payroll tax increases are easy to implement and 

directly improve the trust fund’s finances. However, the extent to which 

payroll tax increases would translate into increased government saving 

depends on whether the cash generated by the payroll tax increase is 

used to finance new spending or a general tax cut. Thus, increased 

Social Security surpluses will not necessarily increase government 

saving. Even if the federal government saves all of the increased Social 

Security surpluses, national saving would not increase dollar-for-dollar. 

Changes in personal saving may counterbalance any increase in 

government saving resulting from higher taxes. Higher payroll taxes 

may depress personal saving to the extent that households have less 

disposable income to save. How people adjust their saving in response 

to payroll tax increases may also depend on the form of the increase.

42Social Security Financing: Implications of Government Stock Investing for the Trust 

Fund, the Federal Budget, and the Economy (GAO/AIMD/HEHS-98-74, April 22, 1998).
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Raising the payroll tax rate would affect all workers whereas increasing 

the maximum taxable earning level would affect high-income earners.

• Benefit reductions. Options reducing initial benefits or raising the 

retirement age take time to implement or phase in, allowing time for 

people to adjust their retirement plans. Reducing future benefits 

obviously reduces future spending for Social Security retirement 

benefits and stems government dissaving. At first glance, reducing 

future benefits promised to current workers would not seem to increase 

resources available to invest now. However, changes in personal saving 

may complement any increase in government saving resulting from 

benefit reductions. If Social Security reform reduces anticipated 

retirement income, many analysts expect that workers might, to some 

degree, want to offset this effect by increasing their saving outside the 

Social Security system. If people adjust their retirement plan to reflect 

benefit reductions, increased personal saving today could provide new 

resources to invest. For example, raising the retirement age reduces 

benefits and could induce some individuals to save more now in order to 

retire before they are eligible for Social Security.

In evaluating a Social Security reform proposal, it is important to consider 

that increasing national saving is one criterion in assessing the extent to 

which the proposal achieves sustainable solvency. Beyond weighing how a 

proposal would affect the federal budget and the economy, policymakers 

need to consider the balance struck between the twin goals of income 

adequacy (level and certainty of benefits) and individual equity (rates of 

return on individual contributions).43 Reform elements that could increase 

national saving may not satisfy these adequacy and equity goals. For 

example, benefit cuts, depending on how they are structured, could leave 

those most reliant on Social Security with inadequate retirement income. 

Also, increasing payroll taxes reduces the implicit rate of return for future 

beneficiaries. It is crucial to evaluate the effects of an entire reform 

package considering interactions between individual reform elements as 

well as how the package as a whole achieves policymakers’ most important 

goals for Social Security.

43For more information about the analytical framework for assessing Social Security reform 

proposals offered by GAO, see Social Security: Criteria for Evaluating Social Security 

Reform Proposals (GAO/T-HEHS-99-94, March 25, 1999) and Social Security: Evaluating 

Reform Proposals (GAO/AIMD/HEHS-00-29, November 4, 1999).
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Q4.11. How Would 

Establishing Individual 

Accounts Affect 

National Saving?

A4.11. Evaluating the potential effect of proposals to establish individual 

accounts can be confusing. Various proposals have been advanced that 

would create a new system of individual accounts as part of comprehensive 

Social Security reform, while other proposals would create new accounts 

outside of Social Security. Individual account proposals also differ as to 

whether individuals’ participation would be mandatory or voluntary. As we 

have previously reported, the extent to which individual accounts would 

affect national saving depends on how they are financed, how the program 

is structured, and how people adjust their own saving behavior in response 

to individual accounts.44

To understand how individual accounts might affect national saving, it is 

necessary to examine the first-order effects accounting for how the 

government might fund the accounts and then to consider how people 

might adjust their saving in response to a new account program.

One important determinant of the effect on national saving is the funding 

source for the individual accounts. Shifting funds from the federal 

government would affect the relative contributions of the federal 

government and households to national saving. For instance, diverting 

funding from the Social Security trust fund—such as a carve-out from 

current payroll taxes—would likely reduce government saving by the same 

amount that the accounts increase personal saving. Although national 

saving would be unchanged, financing of the Social Security program—

absent other changes—would be worsened. If accounts are funded outside 

of the Social Security system using general revenues, the effect on national 

saving is unclear and would depend on what would have been done instead 

with the general funds.

• If the general funds would have been used to redeem federal debt held 

by the public or acquire nonfederal financial assets, national saving 

initially would be unchanged because personal saving would increase by 

the amount that government saving decreases. In a sense, individual 

accounts could serve as a way to channel saving through the 

government into resources for private investment while avoiding issues 

associated with government ownership of nonfederal assets.

44See Social Security: Capital Markets and Educational Issues Associated With 

Individual Accounts (GAO/GGD-99-115, June 28, 1999).
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• If the general funds would have been spent on additional government 

consumption, then any increase in personal saving due to the individual 

accounts would represent an increase in national saving. If the general 

funds would have been used for infrastructure investment, national 

saving would be unchanged but more funds would be available for 

private investment.

• If the general funds would have been used for a general tax cut, then 

national saving would initially increase because personal saving would 

increase by the amount of individual accounts whereas some portion of 

a tax cut would be consumed.

National saving also would be affected by how households and businesses 

respond to individual accounts. Regardless of the financing source, the 

effect of individual accounts would be to raise, at least to some extent, the 

level of personal saving unless households fully offset the new accounts by 

reducing their other saving. Households for whom individual accounts 

closely resemble 401(k)s and IRAs and who are currently saving as much as 

they choose for retirement would probably reduce their own saving in the 

presence of individual accounts. The extent of the behavioral effects would 

depend in part on the structure of the individual account program and any 

limits on accessing the funds. For instance, mandatory account proposals 

are more likely to increase private saving because such a program would 

require households that do not currently save—such as many low-income 

individuals or families—to place some amount in an individual account. 

Prohibitions or restrictions on borrowing or other forms of pre-retirement 

distributions could limit the ability of some households to reduce their 

other saving in response to individual accounts. In addition to the effects 

on household saving choices, individual accounts may also affect the 

relationship and interactions between Social Security and private 

pensions.45

45Social Security Reform: Implications for Private Pensions (GAO/HEHS-00-187, 

September 14, 2000).
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Q4.12. How Would 

Medicare Reform 

Affect National Saving?

A4.12. As we have reported, the current Medicare program, without 

improvements, is ill-suited to serve future generations of Americans.46 The 

program is fiscally unsustainable in its current form, and growing Medicare 

spending is expected to drive federal government dissaving over the long 

run. Despite this looming financial problem, pressure is mounting to update 

Medicare’s outdated benefit design. Given the aging of the U.S. population 

and the increasing cost of modern medical technology, it is inevitable that 

demands on the Medicare program will grow.

In addition to the aging population and the increasing cost of modern 

medical technology, the current Medicare program lacks incentives to 

control health care consumption. The actual costs of health care are not 

transparent, and third-party payers generally insulate consumers from the 

cost of health care decisions. In traditional Medicare, for example, the 

effect of cost-sharing provisions designed to curb the use of services is 

muted because many Medicare beneficiaries have some form of 

supplemental health care coverage—such as Medigap insurance—that pays 

these costs. For these reasons, among others, Medicare presents a great 

fiscal challenge over the long term.

In the past, Medicare’s fiscal health has generally been gauged by the 

solvency of the HI trust fund projected over a 75-year period. Although the 

HI trust fund is viewed as solvent through 2029, HI outlays are predicted to 

exceed HI revenues beginning in 2016. According to the Medicare Trustees’

2001 intermediate assumption, restoring the HI program’s actuarial balance 

over the next 75 years would require a combination of reform options equal 

to 1.97 percent of taxable payroll. In other words, averting a HI shortfall for 

75 years now would require an increase in payroll taxes by 1.97 percent (a 

68-percent increase over the 2001 rate paid by employers and workers47), a 

cut in HI spending by 37 percent, or some combination of the two. 

According to the Office of the Actuary at the Health Care Financing 

Administration, the estimated net present value of future additional 

resources needed to fund HI benefits alone over the 75 years is $4.6 trillion. 

46Medicare: Higher Expected Spending and Call for New Benefit Underscore Need for 

Meaningful Reform (GAO-01-539T, March 22, 2001). See appendix V for other GAO 

products related to Medicare financing and reform.

47Medicare payroll taxes are paid on all earnings whereas Social Security payroll taxes apply 

to earnings up to an annual maximum—$76,200 in 2000.
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But, these estimates do not reflect the growing cost of the SMI component, 

which accounts for somewhat more than 40 percent of Medicare spending.

When viewed from the perspective of federal saving and the economy, the 

growth in total Medicare spending will be become increasingly 

burdensome over the long run. According to the Medicare Trustees’ 2001 

intermediate estimates, Medicare costs will grow at 1 percentage point 

above the growth in GDP per capita each year.48 As shown in figure 4.5, 

total Medicare spending (Part A HI and Part B SMI combined) is expected 

to consume 5 percent of GDP by 2035—more than double today’s share of 2 

percent. By 2075, Medicare would consume over 8 percent of GDP, 

according to the Medicare Trustees’ 2001 intermediate estimates.49 Under 

the Save the Social Security Surpluses simulation, federal health care 

spending will greatly constrain budgetary flexibility (shown in figure 4.3). 

Absent cost containment reforms, Medicare spending would contribute to 

federal dissaving over the long term even if the unified surpluses projected 

over the next decade are saved.

48These latest actuarial projections incorporate more realistic assumptions about long-term 

health care spending, and as result, Medicare spending is expected to grow faster than 

previously estimated. For further discussion of the Medicare Trustees’ 2001 estimates, see 

Medicare: Higher Expected Spending and Call for New Benefit Underscore Need for 

Meaningful Reform (GAO-01-539T, March 22, 2001).

49Including federal Medicaid spending, federal health care spending would grow to 14.5 

percent of GDP compared to today’s 3.5 percent.
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Figure 4.5: Medicare HI and SMI Spending as a Share of GDP (2000–2075)

Notes: Medicare gross outlay projections based on intermediate assumptions of the 2001 HI and SMI 

Trustees’ reports.

Source: GAO analysis of data from the Office of the Actuary, Health Care Financing Administration.

Although future Medicare costs are expected to consume a growing share 

of the federal budget and the economy, pressure is mounting to expand 

Medicare’s benefit package to cover prescription drugs, which will add 

billions to Medicare program costs. It is a given that prescription drugs play 

a far greater role in health care now than when Medicare was created. 

Today, Medicare beneficiaries tend to need and use more drugs than other 

Americans. Overall, the nation’s spending on prescription drugs has been 

increasing about twice as fast as spending on other health care services, 

and it is expected to keep growing. Adding a prescription drug benefit to 

Medicare will be costly, but the cost consequences ultimately depend on 

choices about the benefit’s scope and financing. Any option to expand 

Medicare’s benefit package—absent other reforms—runs the risk of 

exacerbating the program’s fiscal imbalance and increasing government 

dissaving. Any substantial benefit reform should be coupled with adequate 

and effective cost containment measures to avoid worsening Medicare’s 

long-range financial condition.

Ultimately, we will need to look at broader health care reforms to balance 

health care spending with other societal priorities. It is important to note 

the fundamental differences between health care wants, which are virtually 

unlimited; needs, which should be defined and addressed; and overall 

0

2

4

6

8

10

2000 2010 2020 2030 2040 2050 2060 2075

Percent of GDP

HI

SMI
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affordability, which has a limit. Realistically, reforms to address Medicare’s 

huge long-range financial imbalance will need to proceed incrementally. To 

avoid more painful and disruptive changes once the baby boomers begin 

retiring, the time to begin these difficult but necessary steps is now.

Reform options that reduce Medicare’s growth rates or strengthen the 

program’s underlying sustainability would raise future levels of government 

saving (assuming no other changes in government spending and taxes). 

However, the effect of reduced federal Medicare spending on national 

saving depends on how the private sector responds to the reductions. For 

example, greater private spending for elderly health care—by beneficiaries 

themselves or by employers and insurers on beneficiaries’ behalf—could 

offset some or all of the improvement in government saving in the short 

run. Over time, personal saving could increase if individuals choose to save 

more to pay for health care in their old age. 
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Section 5

National Saving and Current Policy Issues Secotin5

Q5.1. What Are Key 

Issues in Evaluating 

National Saving?

A5.1. 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. The federal government 

has gone from the budget deficits of recent decades to surplus as a result of 

a growing economy and difficult decisions to reduce deficits . We 

appear—at least for the near future—to have slain the deficit dragon. 

However, today’s fiscal good fortune will not survive over the long run. If 

the prospect of surpluses over the next decade lulls us into complacency, 

the nation could face daunting demographic challenges without having 

changed the path of programs for the elderly or having built the economic 

capacity to bear the costs of the programs as currently structured.

Economic growth will help society bear the burden of financing Social 

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

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

process. Thus, saving now and making meaningful Social Security and 

Medicare reform sooner rather than later are important. Because every 

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

today’s fiscal policy choices must be informed by the long-term. Common 

sense tells us that the nation needs to save more when it has a healthy 

economy, sufficient resources to meet some current needs while still 

building our capacity for the future, and a relatively large workforce. 

National saving pays future dividends—but we need to begin soon to 

permit compounding to work for us.

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 save some portion of its anticipated budget 

surpluses. 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-for-dollar basis.

In considering how much of the anticipated budget surpluses to save, 

policy choices must balance today’s unmet needs and tomorrow’s fiscal 

challenges. Saving the surpluses would allow the federal government to 

reduce the debt overhang from past deficit spending and enhance future 
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budgetary flexibility. Choices about federal spending for infrastructure, 

education, and R&D as well as tax incentives for private saving and 

investment also have implications for future economic growth.

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

Over the long term, the federal government cannot avoid massive dissaving 

without reforming retirement and health programs for the elderly. 

Increasing national saving and thus long-term economic growth is crucial 

to the long-term sustainable solvency of Social Security and Medicare. 

Since the economy provides the tax base for the government, economic 

growth increases government revenue, which helps finance these programs 

as well as other federal programs and activities, and increases budget 

flexibility. But saving and economic growth alone cannot solve the looming 

demographic challenges. Saving the Social Security surpluses—and even 

the Medicare surpluses—is not enough by itself to finance the 

government’s commitments to the elderly. Program reform is needed as 

well, or Social Security and Medicare will constitute a heavy drain on the 

earnings of future workers. In a sense, saving more yields a bigger pie, but 

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

between retirees and workers.

The federal government can also undertake steps to encourage personal 

saving. Saving education campaigns are one tool to encourage people to 

save more for their own retirement. To participate in the debate over how 

to reform Social Security and Medicare, the public needs to understand the 

difficult choices the nation faces. Announcing any benefits changes sooner 

rather than later would make it easier for individuals to plan for retirement 

and to adjust their saving behavior accordingly. The federal government 

can explore how to design tax incentives that induce households to save 

enough to make up for the government’s revenue loss and the lower 

government saving that would result.
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Appendix I

Objectives, Scope, and Methodology ApApenednxidexiIs

This report is designed to present information about national saving and its 

implications for economic growth and retirement security. Specifically, this 

report addresses the following questions: (1) What is personal saving, how 

is it related to national saving, and what are the implications of low 

personal saving for Americans’ retirement security? (2) What is national 

saving and how does current saving in the United States compare to 

historical trends and saving in other countries? (3) How does national 

saving affect the economy and how would higher saving affect the longterm outlook? (4) How does federal fiscal policy affect national saving, 

what federal policies have been aimed at increasing private saving, and 

how would Social Security and Medicare reform affect national saving? 

And, (5) what are key issues in evaluating national saving?

Personal Saving, Household 

Wealth, and Retirement 

Security

Because this report focuses on the macroeconomic implications of saving 

and investment, we used saving data from the National Income and 

Product Accounts (NIPA) compiled by the Bureau of Economic Analysis 

(BEA).1

 This report presents the trend in the personal saving rate as 

measured on a NIPA basis. As a comparison point, we also examined an 

alternative personal saving rate available from the Federal Reserve’s Flow 

of Funds Accounts (FFA).2

 Because FFA counts household purchases of 

consumer durables as saving, the FFA personal saving rate is somewhat 

higher than the NIPA personal saving rate but also shows a downward 

trend. Both the NIPA and FFA measures focus on saving as a flow from the 

economy’s current production and do not include changes in the market 

value of households’ existing portfolios. For information about the stock of 

wealth accumulated by households, we obtained net worth data from the 

FFAs’ balance sheet aggregated for the household sector. In addition to

1

The NIPA data presented throughout this report reflect changes made in the 11th 

comprehensive revision of the national accounts in 1999, including the reclassification of 

software purchases as investment, which is discussed in Q2.5. Historical NIPA data were 

downloaded from BEA’s website (www.bea.doc.gov/bea.dnl.htm) and reflect recent data 

presented in Survey of Current Business, Bureau of Economic Analysis, Vol. 81, No. 4 

(April 2001). 

2

Historical FFA data were downloaded from the Federal Reserve Board website: 

www.federalreserve.gov/releases/Z1/Current/data.htm and reflect data presented in Flow of 

Funds Accounts of the United States: Flows and Outstandings, Fourth Quarter 2000

(Board of Governors of the Federal Reserve System, March 9, 2001).
Appendix I

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Page 123 GAO-01-591SP National Saving

these macroeconomic data, we used results from the Federal Reserve’s 

1998 Survey of Consumer Finance to present a snapshot of individual 

households’ net worth by income level.3

Fully exploring the dynamics of personal saving behavior and gauging the 

adequacy of retirement saving are beyond the scope of this national saving 

report. The literature attempting to explain why and how people save—or 

do not save as the case may be—is extensive, and the empirical research is 

conflicting. For this report, we provide an overview of the major theories 

about why people save and describe various factors associated with the 

decline in personal saving. Appendix IV lists the major references used in 

preparing this report.

For demographic trends and the financial outlook for the Social Security 

and Medicare Hospital Insurance programs, we used the intermediate 

actuarial projections, which reflect the best estimate of the Social Security 

and Medicare Boards of Trustees. We also examined income sources and 

amounts for those aged 65 and older using the Social Security 

Administration’s Income of the Population, 55 or Older, 1998.

4

National Saving and 

Investment

We also used NIPA data to describe historical trends in (1) U.S. national 

saving by component, (2) domestic and foreign investment in the United 

States, and (3) the U.S. net international investment position. To provide a 

long-term perspective we focused on saving trends over the last 4 

decades—from 1960 to 2000. We also compared U.S. national saving to the 

saving of other major industrialized nations. Specifically, we relied on 

national saving data for the G-7 nations—Canada, France, Germany, Italy,

3

The Survey of Consumer Finances is a triennial survey of U.S. families sponsored by the 

Board of Governors of the Federal Reserve with the cooperation of the Department of the 

Treasury. For results from the latest Survey of Consumer Finance, see Arthur B. Kennickell, 

Martha Starr-McCluer, and Brian J. Surette, “Recent Changes in U.S. Family Finances: 

Results from the 1998 Survey of Consumer Finances,” Federal Reserve Bulletin (January 

2000).

4

Social Security Administration, Income of the Population, 55 or Older, 1998, (Washington, 

D.C.: U.S. Government Printing Office, March 2000). This biennial report presents 

information combined for the population aged 55 and older as well as separately for those 

aged 65 and older. The report reflects U.S. Census Bureau data from the Current Population 

Survey.
Appendix I

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Page 124 GAO-01-591SP National Saving

Japan, the United Kingdom, and the United States—compiled by the 

Organization for Economic Cooperation and Development.5

Our national saving trend analysis is based on current NIPA definitions of 

saving and investment. We also examined literature that presents other 

ways of thinking about national saving. For example, a broader saving and 

investment measure might encompass spending on education as well as 

research and development. These are not included in the conventional 

NIPA measures but are related to long-term productive capacity.

Long-Term Simulations We used our long-term economic growth model to simulate alternative 

fiscal policies and national saving rates. Long-term simulations are useful 

for comparing the potential outcomes of alternative saving rates within a 

common economic framework. Such simulations can help policymakers 

assess the long-term consequences of fiscal policy and saving choices made 

today.

While long-term simulations provide a useful perspective, they should be 

interpreted carefully. Given the range of uncertainty about future economic 

changes and the responses to those changes, the simulation results should 

not be viewed as forecasts of budgetary or economic outcomes 50 or 75 

years in the future. Rather, they should be seen only as illustrations of the 

different budget and economic outcomes associated with alternative fiscal 

policy and saving paths based on common demographic and economic 

assumptions.

In our simulations, we used a model originally developed by economists at 

the Federal Reserve Bank of New York that relates long-term economic 

growth—measured in terms of gross domestic product (GDP)—to 

economic and budget factors. The key interaction between the budget and 

the economy is the effect of the federal deficit/surplus on the amount of 

national saving available for investment.6

 Conversely, the rate of economic 

growth helps determine the overall federal surplus or deficit through its 

effect on federal revenue and spending. In our model, the level of national 

saving affects investment and, in turn, GDP growth.

5

OECD National Income Account data were downloaded from Standard and Poor’s DRI 

database.

6

Text box 4.1 explains how the NIPA surplus or deficit differs from the federal unified 

budget surplus or deficit. Both measures are roughly similar as a share of GDP.
Appendix I

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Page 125 GAO-01-591SP National Saving

In general, federal deficits measured on a NIPA basis represent 

dissaving—they subtract from national saving by absorbing nonfederal 

funds that otherwise would be used for investment. Conversely, federal 

surpluses add to national saving. While the NIPA measure of government 

saving directly affects national saving, the unified budget measure is the 

more common frame of reference for discussing federal fiscal policy 

issues. Our simulation results reflect unified budget deficits/surpluses.

Our simulations are based on the Congressional Budget Office’s (CBO) 

January 2001, 10-year budgetary and economic projections7

 through 

calendar year 2010.8

 Beyond that, we used long-term actuarial projections 

for Social Security and Medicare.9

 We assume that current-law benefits are 

paid in full (i.e., we assume that all promised Social Security benefits are 

paid even after the projected exhaustion of the OASDI Trust Funds in 

2038). For Medicaid in the out-years, we used the growth rates from CBO’s 

October 2000 long-term analysis.10 Interest spending is determined by 

interest rates—which are held constant over the long-term—and the level 

of federal debt held by the public, which depends on the path of budget 

deficits/surpluses within each simulation. All other spending as well as 

federal revenue are assumed to grow at essentially the same rate as the 

economy. In other words, other spending and revenue both remain 

constant as shares of GDP. Appendix II presents a more detailed 

description of the model and the assumptions we used.

We present two fiscal policy simulations: (1) Save the Unified Surpluses 

and (2) Save the Social Security Surpluses. The Save the Unified Surpluses 

simulation assumes the entire unified surpluses are saved and used to 

reduce federal debt held by the public. The Save the Social Security 

7

The Budget and Economic Outlook: Fiscal Years 2002–2011, Congressional Budget Office 

(January 2001).

8

In our modeling, all CBO budget projections were converted from a fiscal year to a calendar 

year basis. The last year of CBO’s projection period was 2011, permitting the calculation of 

calendar year values through 2010.

9

The 2001 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors 

Insurance and Disability Insurance Trust Funds (March 2001), The 2001 Annual Report 

of the Board of Trustees of the Federal Supplementary Medical Insurance Trust Fund

(March 2001), and The 2001 Annual Report of the Board of Trustees of the Federal Hospital 

Insurance Trust (March 2001).

10The Long-Term Budget Outlook, Congressional Budget Office (October 2000). See 

appendix II for more details about the Medicaid assumption.
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Objectives, Scope, and Methodolog

Page 126 GAO-01-591SP National Saving

Surpluses simulation assumes that only the Social Security surpluses are 

saved and used to reduce federal debt held by the public. Unspecified 

policy actions—spending increases and/or tax cuts—are taken that 

eliminate the non-Social Security surpluses through 2010. These 

unspecified policy actions are left in place through the end of the 

simulation period. For simplicity, we assumed nonfederal saving—saving 

by households, businesses, and state and local governments—would 

remain constant as a share of GDP in both fiscal policy simulations.

As a reference point, we also simulated a path assuming that national 

saving remains constant at the 2000 level of 18.3 percent of GDP. The 

Constant 2000 National Saving Rate simulation reflects an unspecified mix 

of saving by households, businesses, and all levels of government. To 

provide a useful perspective on how alternative levels of national saving 

affect future living standards, we also compared our simulation results to a 

historical benchmark. In the United States, GDP per capita has doubled 

about every 35 years. Since World War II, annual growth in GDP per capita 

has averaged roughly 2 percent. Of course, growth was faster during some 

periods—the 1950s and 1960s, and the second half of the 1990s—and 

slower during other periods—the 1970s. Doubling GDP per capita every 35 

years represents a way to gauge whether future generations will enjoy a 

rise in living standards comparable to that enjoyed by previous 

generations.

While this report discusses the potential consequences of alternative saving 

paths, it does not suggest any particular course of action. The choice of the 

most appropriate fiscal policy path is a policy decision to be made by the 

Congress and the President. While fiscal policy is the most direct way to 

increase national saving, how much the nation saves also depends on the 

saving choices of households and businesses.

We did our work in accordance with generally accepted government 

auditing standards from December 1999 through May 2001 in Washington, 

D.C. We requested comments from BEA, OMB, and several subject matter 

experts. Staff from BEA and OMB and the experts we consulted provided 

technical and clarifying comments, which we incorporated in this report 

where appropriate.
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Appendix II

The Economic Model and Key Assumptions ApendxiI

In this report, we simulated the effect of different saving rates on the 

nation’s standard of living using a standard model of economic growth 

originally developed by economists at the Federal Reserve Bank of New 

York. The major determinants of economic growth in the model are 

changes in the labor force, capital formation, and the growth in total factor 

productivity. To analyze the effect of fiscal policy on saving and growth, we 

modified the original model to include a set of relationships that describe 

the federal budget and its links to the economy, using the framework of the 

National Income and Product Accounts (NIPA). To isolate the effect of 

changes in saving on growth, we varied the saving rate while using the 

same assumptions for the growth in the labor force and total factor 

productivity.

The model is helpful for exploring the long-term implications of national 

saving and fiscal policy and for comparing alternative paths within a 

common economic framework. Since 1992, GAO has provided the 

Congress with a long-term perspective on alternative fiscal policy paths.1

The results provide illustrations rather than precise forecasts of the 

economic outcomes associated with alternative policy or saving rate 

assumptions. The model depicts the links between saving and the economy 

over the long term and does not reflect their interrelationships during 

short-term business cycles. We have made several simplifying assumptions 

such as holding interest rates and total factor productivity growth constant, 

but sensitivity analyses suggest that variations in these assumptions 

generally would not affect the relative outcomes of alternative policies. 

These simulations are not predictions of what will happen in the future as 

policymakers would likely take action to prevent damaging out-year fiscal 

and economic consequences.

Overview of the Model In the model, GDP is determined by the labor force, capital stock, and total 

factor productivity. GDP in turn influences nonfederal saving, which 

1

See Budget Policy: Prompt Action Necessary to Avert Long-Term Damage to the Economy 

(GAO/OCG-92-2, June 5, 1992), The Deficit and the Economy: An Update of Long-Term 

Simulations (GAO/AIMD/OCE-95-119, April 26, 1995), Budget Issues: Deficit Reduction 

and the Long-Term (GAO/T-AIMD-96-66, March 13, 1996), Budget Issues: Analysis of LongTerm Fiscal Outlook (GAO/AIMD/OCE-98-19, October 22, 1997), Budget Issues: Long-Term 

Fiscal Outlook (GAO/T-AIMD/OCE-98-83, February 25, 1998), Budget Issues: July 2000 

Update of GAO’s Long-Term Simulations (GAO/AIMD-00-272R, July 26, 2000), and LongTerm Budget Issues: Moving From Balancing the Budget to Balancing Fiscal Risk (GAO01-385T, February 6, 2001).
Appendix II

The Economic Model and Key Assumptions

Page 128 GAO-01-591SP National Saving

consists of the saving of the private sector and state and local government 

surpluses or deficits. Through its effects on federal revenues and spending, 

GDP also helps determine the NIPA federal budget surplus or deficit. 

Nonfederal and federal saving together compose national saving, which 

influences investment and the next period’s capital stock. Capital combines 

with labor and total factor productivity to determine GDP in the next 

period, and the process continues.

The model allows us to focus on the contribution of national saving to 

output and living standards through the linkage between saving and the 

capital stock. In particular, the model provides a useful framework for 

assessing the long-term implications of alternative budget policies through 

their effect on national saving. Our model does not differentiate between 

tax policy changes and spending changes. The aggregate effect on the 

amount of federal government saving is what affects the level of national 

saving and economic growth. Federal surpluses increase national saving 

while deficits reduce national saving, and higher saving translates into 

higher GDP. Higher GDP in turn lessens the share of the nation’s output 

dedicated to government transfer programs in our modeling because we 

use a simplifying assumption that such programs do not simply keep pace 

with overall economic growth.2

In our simulations, we make the simplifying assumption that the combined 

saving rate of the household, business, and state and local government 

sectors will remain constant throughout the simulation period at 16.1 

percent of GDP—average nonfederal saving as a share of GDP since 1998.3

Future saving rates of these sectors will of course vary in response to a 

variety of influences, such as demographics, expectations, and changes in 

preferences. Nonetheless, this simplifying assumption allows us to assess 

the effect of budget policy on saving, investment, and output in the future.

Labor Input Economic growth is partly dependent on how much labor is employed. In 

our simulations, we used the labor input assumptions of the Social Security 

Administration actuaries underlying the intermediate projections in 

2

A more sophisticated approach would be to model the feedbacks between the economy 

and government transfer programs because economic growth tends to increase health 

spending and raise retirement benefits—although with a lengthy lag for the latter.

3

The 3-year period coincides with federal surpluses and its use avoids extending the 

unusually low nonfederal saving rate of 2000 throughout the simulation period.
Appendix II

The Economic Model and Key Assumptions

Page 129 GAO-01-591SP National Saving

The 2001 Annual Report of the Board of Trustees of the Federal Old-Age 

and Survivors Insurance and Disability Trust Funds. The intermediate 

projections, which reflect the Trustees’ best estimate, reflect changes in the 

working age population, particularly the increasing rate of retirement by 

the baby boom generation after 2010. They also reflect projections of labor 

force participation rates, unemployment rates, and weekly hours worked. 

The demographic and economic assumptions imply a sharp drop in the 

average annual growth of aggregate hours worked from 0.7 percent 

through 2010 to 0.2 percent from 2020 through 2075.

Total Factor Productivity The three sources of economic growth in the model are increased labor 

input, capital accumulation, and the advance of total factor productivity.4

The latter is a catch-all category reflecting sources of growth not captured 

in straightforward measures of aggregate labor input and aggregate 

physical capital employed. These include not only the improvements in 

products and processes yielded by advancing technology but also the 

improved quality of labor and capital inputs, reallocation of inputs to uses 

where they are more productive, and improvements in physical and social 

infrastructure.

Our simulations assume that total factor productivity growth in the 

nonfarm business sector will average 1.5 percent annually over the 75-year 

period. Basically, we used the productivity assumption underlying CBO’s 

January 2001, 10-year budget projections. In its most recent long-term 

modeling report, CBO assumed total factor productivity growth of 1.7 

percent beyond 2010.5

 The intermediate projections in the 2001 OASDI 

Trustees’ report assume that labor productivity for the entire economy will 

increase 1.5 percent annually over the next 75 years. The Trustees’ longterm assumption reflects the average labor productivity growth over the

4

The Bureau of Labor Statistics (BLS) publishes an official measure of output per unit of 

combined labor and capital inputs—multifactor productivity. BLS’ measure of labor input 

not only takes into account changes in the size of the labor force, but also changes in its 

composition as measured by education and work experience. Capital inputs are measured 

in terms of efficiency or service flow rather than price or value. For more information on 

multifactor productivity, see “Productivity Measure: Business Sector and Major Subsectors,”

BLS Handbook of Methods, Bureau of Labor Statistics (April 1997), pp. 89–98; and Edwin R. 

Dean and Michael J. Harper, “The BLS Productivity Measurement Program,” Bureau of 

Labor Statistics (July 5, 2000), paper presented to the NBER Conference on Research in 

Income and Wealth on New Directions in Productivity Analysis, March 20–21, 1998.

5

The Long-Term Budget Outlook, Congressional Budget Office (October 2000).
Appendix II

The Economic Model and Key Assumptions

Page 130 GAO-01-591SP National Saving

last 30 years and would correspond to a lower assumption for total factor 

productivity growth than CBO’s most recent assumption. Our use of CBO’s 

January 2001, 10-year assumption for total factor productivity growth 

throughout the 75-year simulation period places our long-term assumption 

between the Trustees’ and CBO’s current long-term assumptions.

International Financial 

Flows

There are also important links between national saving and investment and 

the international sector. In an open economy such as the United States, an 

increase in saving due to, for example, an increase in the federal budget 

surplus may not result in an equivalent increase in domestic investment. 

Instead, part of the increased saving may flow abroad in the form of an 

increase in U.S. net foreign investment. The income earned on U.S.-owned 

foreign assets adds to the nation’s income (GNP). The portion of an 

increase in national saving used for domestic investment adds to the capital 

stock available for workers to produce goods and services in the United 

States (GDP).

The model incorporates a simple representation of net financial flows 

between the U.S. economy and the rest of the world. Essentially the rest of 

the world is treated as analogous to a bank where the United States can 

make deposits or withdrawals or draw on a credit line. Every year there are 

income flows to or from this bank corresponding to interest received on 

deposits or paid on advances. The amount corresponding to the bank 

balance (positive or negative) is called the net international investment 

position (NIIP) of the United States, which generates a net flow of income 

receipts.

A key model assumption affecting international flows is the allocation of 

gross saving between its foreign and domestic investment uses. Over the 

long run, we assume that market forces such as adjustments in exchange 

rates, interest rates, and prices will tend to move net foreign investment 

and the current account balance towards zero. To reflect this tendency to 

move towards equilibrium, we hold net foreign investment constant at the 

nominal dollar level in 2000. This reduces the ratio of net foreign 

investment to GDP over time as GDP grows. Changes in national saving 

cause the ratio of net foreign investment to GDP to move around its longterm trend. We assume that net foreign investment rises by one-third of any 

increase in the national saving rate. Basically, for each additional dollar 

saved, about 66.6 cents are used for domestic investment and 33.3 cents are 

invested abroad. Conversely, each dollar decrease in national saving is 

offset by 33.3 cents in foreign investment in the United States. Our 
Appendix II

The Economic Model and Key Assumptions

Page 131 GAO-01-591SP National Saving

assumption is consistent with the strong correlation between national 

saving and domestic investment that persists even in the context of a global 

economy.6

This is a highly stylized representation of the foreign sector of one country 

in isolation. A more sophisticated approach would be to model a changing 

international environment in detail. A more detailed approach would 

confront major uncertainties concerning the actual course of world 

economic development, exchange rates, and rates of return.

Budget and Other 

Assumptions

Table II.1 lists the key assumptions incorporated in the model. Several of 

the assumptions used tend to provide conservative estimates of the benefit 

of running surpluses or lower deficits and of the harm of increasing 

deficits. The interest rate on the national debt is held constant, for 

example, even when deficits climb and the national saving rate plummets. 

Under such conditions, the more likely result would be a rise in the rate of 

interest and a more rapid increase in federal interest payments than our 

simulations display. Another conservative assumption is that the rate of 

total factor productivity growth is unaffected by the amount of investment. 

Productivity is assumed to advance 1.5 percent each year through the end 

of the simulation period even if investment collapses. Finally, one-third of 

any saving decline is assumed to be offset by net inflows of foreign capital, 

even in the event of a dramatic saving decline that might set off a flight of 

capital from the United States. Such assumptions tend to moderate the 

effect of changes in national saving in our simulations. Sensitivity analyses 

reveal that variations in these assumptions generally would not affect the 

relative outcomes of alternative policies.

6

See Martin Feldstein and Philippe Bacchetta, “National Saving and International 

Investment,” National Saving and Economic Performance, D. Bernheim and J. Shoven, 

eds. (Chicago: University of Chicago Press, 1991) pp. 201–226; and Maurice Obstfeld and 

Kenneth Rogoff, “The Six Major Puzzles in International Macroeconomics: Is There a 

Common Cause?” NBER Working Paper No. 7777 (July 2000).
Appendix II

The Economic Model and Key Assumptions

Page 132 GAO-01-591SP National Saving

Table II.1: Key Assumptions of the Economic Model

Note 1: These assumptions apply to our base simulation, Save the Unified Surpluses. For alternative 

fiscal policy simulations, certain assumptions are varied, as discussed in the alternative paths.

Note 2: In our work, all CBO budget projections were converted from a fiscal year to a calendar year 

basis. The last year of CBO’s projection period is fiscal year 2011, permitting the calculations of 

calendar year values through 2010.

Our Save the Unified Surpluses base simulation reflects CBO’s January 

20017

 assumption that discretionary spending increases at the rate of 

inflation over the 10-year budget projection period.8

 After 2010, we 

assumed discretionary spending would grow at the same rate as GDP. As a 

Model Inputs Assumptions

Surplus/deficit (federal saving) CBO’s January 2001 baseline through 2010; GAO simulations 

thereafter

Social Security spending (OASDI) 2001 Social Security Trustees’ intermediate projections

Medicare spending (HI and SMI) 2001 Medicare Trustees’ intermediate projections

Medicaid spending CBO’s October 2000 long-term projections

Other mandatory spending CBO’s January 2001 baseline through 2010; thereafter increases at 

the rate of economic growth (i.e., remains constant as a share of 

GDP)

Discretionary spending CBO January 2001 baseline through 2010; thereafter increases at 

the rate of economic growth

Receipts CBO’s January 2001 baseline through 2010; in subsequent years 

receipts held constant at 20.2% of GDP on NIPA basis, 20.4% on 

unified budget basis (ratios in 2010)

Nonfederal saving: gross saving of the private sector and state and 

local government sector

16.1% of GDP

Share of gross national saving change that flows abroad 33.3% of annual change in gross national saving

Labor: growth in hours worked 2001 Social Security Trustees’ intermediate projections

Total factor productivity growth 1.5% (CBO’s January 2001 assumption for 2000–2011)

Inflation (GDP price index) CBO’s through 2011; 1.9% thereafter (CBO’s projection in 2011)

Interest rate (average on net debt of the federal government) Average rate implied by CBO’s January 2001 baseline interest 

payment projections through 2005; 5.4% thereafter (based on 

CBO’s assumption for the average rate on Treasury securities)

7

The Budget and Economic Outlook: Fiscal Years 2002–2011, Congressional Budget Office 

(January 2001).

8

In our modeling, all CBO budget projections were converted from a fiscal year to a calendar 

year basis. The last year of CBO’s projection period was 2011, permitting the calculation of 

calendar year values through 2010.
Appendix II

The Economic Model and Key Assumptions

Page 133 GAO-01-591SP National Saving

result, discretionary spending stays the same as share of GDP from 2011 

through the end of the projection period.9

Mandatory spending includes Old-Age, Survivors, and Disability Insurance 

(OASDI, or Social Security), Health (Medicare and Medicaid), and a 

residual category covering other mandatory spending. The long-term 

OASDI spending path reflects the intermediate projections of the 2001 

OASDI Trustees’ Report.10 Long-term Medicare spending reflects the 

intermediate projections of the 2001 HI and SMI Trustees Reports;11 the 

long-term Medicaid spending path reflects CBO’s October 2000 long-term 

projections.12 We assume that current-law benefits are paid in full even 

after the projected exhaustion of the OASDI and HI Trust Funds.

Other mandatory spending is a residual category consisting of all 

non-Social Security, nonhealth mandatory spending. It is equivalent to 

CBO’s NIPA projection for Transfers, Grants, and Subsidies less Health, 

OASDI, and other discretionary spending. Through 2010, CBO assumptions 

are the main determinant of other mandatory spending, after which it 

grows at the same rate as GDP.

In our Save the Unified Surpluses base simulation, receipts follow CBO’s 

dollar projections through 2010. Thereafter, receipts remain at 20.2 percent 

of GAO’s simulated GDP on a NIPA basis, which is the rate that CBO 

projects for 2010. On a unified budget basis, revenues remain at 20.4 

percent of GDP after 2010.

9

If spending were to keep pace with population growth and inflation over the long term, 

discretionary spending would generally grow slower than the economy and the long-term 

budget surplus/deficit would be improved. For example, see Analytical Perspectives, 

Budget of the United States Government: Fiscal Year 2001, Executive Office of the 

President, Office of Management and Budget (February 2000), pp. 30–31.

10The 2001 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors 

Insurance and Disability Insurance Trust Funds (March 2001).

11The 2001 Annual Report of the Board of Trustees of the Federal Supplementary Medical 

Insurance Trust Fund (March 2001) and The 2001 Annual Report of the Board of Trustees 

of the Federal Hospital Insurance Trust Fund (March 2001).

12CBO’s long-term health care cost growth assumptions are generally consistent with those 

in the 2001 Medicare Trustees’ Reports. Both CBO and the Medicare Trustees generally 

assume per-beneficiary costs to grow at GDP per capita plus 1 percentage point over the 

long-term. See The Long-Term Budget Outlook, Congressional Budget Office (October 2000) 

and the 2001 HI and SMI Trustees Reports.
Appendix II

The Economic Model and Key Assumptions

Page 134 GAO-01-591SP National Saving

Our interest rate assumption for 2000 through 2005 is consistent with the 

average rate on the debt held by the public implied by CBO’s interest 

payment projections in its baseline. To avoid the substantial volatility in the 

implied interest rate after 2005 as a result of declining debt, interest rates 

are held constant at 5.4 percent—the average interest rate assumed by CBO 

on short- and long-term Treasury securities—from 2005 through the end of 

the simulation period. This interest rate is both paid on outstanding debt 

held by the public and earned on nonfederal financial assets acquired by 

the government once debt held by the public is eliminated.13

Our simulation period—from 2000 through 2075—coincides with the 75-

year period used for the Social Security Trustees’ Report where actuaries 

calculate trust fund solvency over a long-term horizon that is at least as 

long as an individual’s working life.

Because our model assumptions are based on current budget projections 

and recent long-term actuarial projections for Social Security and 

Medicare, our current model assumptions differ somewhat from those used 

in our earlier reports. Also, these simulations reflect discretionary spending 

growing with inflation after 2001; in our earlier reports, discretionary 

spending was assumed to comply with statutory caps in effect through 

2002. As a result, these simulation results should not be compared directly 

to those in our earlier reports.

13Under this interest rate assumption, the level of net interest payments and net debt would 

be the same if the government began acquiring nonfederal financial assets before debt held 

by the public was eliminated. 
Page 135 GAO-01-591SP National Saving

Appendix III

Glossary ApendxiI

These definitions are intended to provide assistance to the general reader. 

Readers interested in authoritative definitions should consult 

documentation on concepts, data sources, and methods published by the 

Bureau of Economic Analysis, the Bureau of Labor Statistics, and the 

Federal Reserve.

Bequest saving motive Saving in order to build up assets to bequeath wealth to future generations.

Big-ticket saving motive Relatively short-term saving to accommodate a mismatch between current 

income and expenses during the life-cycle. People may save to pay for bigticket items such as cars, other consumer durables, or vacations. Some 

individuals must save in advance because they cannot borrow, while others 

may prefer to save and avoid borrowing.

Business saving Net business saving is undistributed corporate profits (retained earnings). 

Gross business saving consists of undistributed corporate profits plus 

consumption of fixed capital (depreciation).

Capital deepening The process of accumulating capital at a faster rate than the growth of the 

labor force, thus increasing the capital/labor ratio.

Capital widening The process of accumulating capital at a rate sufficient to provide new 

workers with the same amount of capital as current workers.

Capital stock Stock of capital goods to be used in further production. In the national 

income and product accounts, fixed capital consists of business and 

government purchases of equipment, software, and structures, as well as 

household purchases of residential dwellings.

Consumer durables Goods that can be stored or inventoried and that have an average life of at 

least 3 years, such as cars and major household appliances.

Consumption of fixed capital A charge for capital goods that have been worn out or used up in producing 

goods and services, also called depreciation.

Current account balance The combined balances on trade in goods and services, income, and net 

unilateral current transfers.
Appendix III

Glossary

Page 136 GAO-01-591SP National Saving

Debt held by the public Debt issued by the federal government held by nonfederal investors, 

including the Federal Reserve System.

Deficit The amount by which outlays exceed revenue in a given period. See also 

government saving and unified budget.

Depreciation See consumption of fixed capital.

Disposable personal income The income available for personal spending and saving after federal, state, 

and local taxes as well as Social Security and Medicare payroll taxes are 

paid.

Flow of Funds Accounts (FFA) FFA measures the acquisition of financial and nonfinancial assets 

throughout the U.S. economy and the sources of funds used to acquire the 

assets.

401(k) plan Employer-sponsored plan whereby an employee may elect, as an 

alternative to receiving taxable cash, to contribute pretax dollars to a 

qualified tax-deferred retirement plan.

GDP price index A measure of the price level for the whole economy covering the prices of 

goods and services produced in a country.

Golden rule saving rate The saving rate that leads to the steady state in which consumption per 

worker is maximized.

Government saving Net government saving equals government receipts minus current 

expenditures. Gross government saving equals net government saving and 

consumption of fixed capital (depreciation). Government saving can be 

separated into federal saving and state and local government saving. 

Although historically generally similar in magnitude, net government 

saving, or the NIPA surplus/deficit, and unified budget surplus/deficit 

measures differ in several ways, including the treatment of investment and 

depreciation, lending and financial transactions, geographic coverage, and 

timing adjustments. (For the differences between NIPA and unified budget 

surplus/deficits, see text box 4.1.)
Appendix III

Glossary

Page 137 GAO-01-591SP National Saving

Gross domestic product (GDP) The output of all goods and services produced by labor and property 

located in a nation during a given period. GDP serves as the principal 

measure of the size of a nation’s economy.

Gross national product (GNP) The output of all goods and services produced in a given period by labor 

and capital supplied by residents of a nation, regardless of the location of 

the labor and capital. The principal difference from GDP is that GNP 

includes the income that residents earn from investments abroad and 

excludes the capital income that nonresidents earn from domestic 

investments.

Gross national saving See national saving.

Income effect The tendency for a higher interest rate to reduce saving because in order to 

obtain a given level of future consumption, it is no longer necessary to save 

as much. With a higher interest rate, it is possible to save less now and 

consume more both in the present and in the future. However, higher 

interest rates also generate a substitution effect that encourages saving. 

The net effect of the substitution and income effects is theoretically 

ambiguous and can only be resolved through empirical analysis.

Individual Retirement Account 

(IRA)

An IRA is a personal, tax-deferred retirement account that an employed 

person can set up with a tax-deductible deposit limited to $2,000 per year 

($4,000 for a couple when both work, or $2,250 for a couple when one 

works and the other’s income is $250 or less). Besides the tax-deductible 

traditional IRA, other retirement saving vehicles also receive preferential 

tax treatment. Depending on individual circumstances, people can also 

choose from nondeductible traditional IRAs, new Roth IRAs, SEP IRAs for 

the self-employed, SIMPLE IRAs sponsored by small employers, and 401(k) 

employer-sponsored saving plans.

Investment The purchase of capital goods—plant, equipment, software, housing, and 

inventories—by businesses and governments.
Appendix III

Glossary

Page 138 GAO-01-591SP National Saving

Labor productivity Average real output per unit of input. The growth of labor productivity is 

the growth of real output that is not explained by the growth of labor input 

(e.g., hours worked) alone. Increases in capital per worker raise labor 

productivity but not total factor productivity.

Life-cycle saving hypothesis The theory that emphasizes the role of saving and borrowing in order to 

smooth consumption over one’s life. A principal implication of the 

hypothesis is that a household saves during the pre-retirement period to 

maintain consumption during retirement.

National Income and Product 

Accounts (NIPA)

The NIPA are the comprehensive set of accounts that measure the total 

value of goods and services (gross domestic product, or GDP) produced by 

the U.S. economy and the total of incomes earned in producing that output.

National saving National saving is the portion of the nation’s income not used for 

consumption during a given period. Gross national saving includes the 

saving of all sectors—households, businesses, and government; net 

national saving is gross national saving less consumption of fixed capital 

(depreciation). See also business saving, government saving, nonfederal 

saving, personal saving, and private saving.

Net debt Net debt represents the government’s total financial liabilities, including 

debt held by the public, less its total financial assets. The net debt concept 

is based on the OECD definition, which consolidates the assets and 

liabilities of all levels of government. In this report, the concept is applied 

to the federal government.

Net foreign investment U.S. exports of goods and services, receipts of factor income, and net 

capital grants received by the United States, less imports of goods and 

services by the United States, payments of factor income, and transfer 

payments to the rest of the world. It may also be viewed as the acquisition 

of foreign assets by U.S. residents less the acquisition of U.S. assets by 

foreign residents. It includes the statistical discrepancy of the balance of 

payments accounts.

Net international investment 

position

U.S.-owned assets abroad less foreign-owned assets in the United States. 

The direct investment components may be valued either at current cost or 

market value.
Appendix III

Glossary

Page 139 GAO-01-591SP National Saving

Net national saving See national saving.

Net worth Net worth is the amount by which assets exceed liabilities. For an 

individual, net worth is the total value of all possessions, such as a house, 

stocks, bonds, and other securities, minus all outstanding debts, such as 

mortgage and revolving-credit loans.

Nonfederal saving A saving measure used in GAO’s long-term economic model equal to the 

sum of personal, business, and state and local government saving. The 

separation of national saving into federal and nonfederal components 

permits using the model to analyze the federal budget’s effect on saving and 

economic growth.

Pay-as-you-go basis A financing structure in which tax revenues are scheduled to produce 

enough income to pay for current spending. For example, the Social 

Security program is financed largely on a pay-as-you-go basis. Payroll tax 

revenues collected from today’s workers are used to pay the benefits of 

today’s beneficiaries. Any excess of revenues over expenditures is credited 

to the Social Security trust fund.

Personal saving Personal saving is the saving by households, proprietors, pension funds, 

private trust funds, and nonprofit institutions serving individuals. It equals 

disposable personal income minus consumption and interest payments. 

(See also personal saving rate.)

Personal saving rate The personal saving rate—expressed as a percentage—is calculated as the 

ratio of personal saving to disposable personal income. See personal 

saving and disposable personal income.

Precautionary saving motive Saving as a way of protecting against uncertainty, such as unexpected 

expenses or emergencies.

Private saving Private saving is the sum of personal saving and business saving.

Retirement effect Additional personal saving meant to supplement Social Security retirement 

benefits, especially when the goal is early retirement.
Appendix III

Glossary

Page 140 GAO-01-591SP National Saving

Ricardian equivalence The theory that debt- and tax-financed government spending are equivalent 

in their economic effect because forward-looking consumers fully 

anticipate the future taxes implied by government debt. A debt-financed 

tax cut leaves consumption unaffected because households save the extra 

disposable income to pay the future tax liability that the tax cut implies. 

The increase in private saving offsets the decrease in public saving.

Standard of living The material well-being of the population, often measured as GDP per 

capita.

Substitution effect The tendency for a higher interest rate to promote more saving. A higher 

interest rate decreases the present cost of purchasing a dollar of future 

consumption and encourages the substitution of future consumption for 

current consumption. However, higher interest rates also generate an 

income effect that discourages saving. The net effect of the substitution and 

income effects is theoretically ambiguous and can only be resolved through 

empirical analysis.

Surplus The amount by which revenues exceed outlays in a given period. See also 

government saving and unified budget.

Total factor productivity Average real output per unit of input of combined labor and capital inputs. 

The growth of total factor productivity is the growth of real output that is 

not explained by the growth of labor and capital and is generally associated 

with the level of technology and managerial efficiency.

Trade surplus/deficit Exports less imports of goods and services.

Unified budget A comprehensive budget in which receipts and outlays from federal and 

trust funds are consolidated; generally a cash or cash equivalent measure in 

which receipts are recorded when received and expenditures are recorded 

when paid, regardless of the accounting period in which the receipts are 

earned or the costs incurred.

Wealth Wealth in a broad sense is anything that has a market value and can be 

exchanged for money or goods. It can include both fixed assets such as 

structures and equipment and financial assets such as stocks and bonds. 

One way to measure a household’s wealth is net worth.
Appendix III

Glossary

Page 141 GAO-01-591SP National Saving

Wealth effect The change in consumption and saving associated with a change in wealth. 

For example, households may consume more (or save less) in response to 

their greater wealth due to rising stock or housing values.
Page 142 GAO-01-591SP National Saving

Appendix IV

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Cashell, Brian W., and Gail Makinen. The Collapse of Household Saving: 

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Cashell, Brian W., and Gail Makinen. Saving the United States: How Has It 

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Appendix V

Related GAO Products ApendxiV

Long-Term Simulations Long-Term Budget Issues: Moving From Balancing the Budget to 

Balancing Fiscal Risk (GAO-01-385T, February 6, 2001).

Budget Issues: July 2000 Update of GAO’s Long-Term Fiscal Simulations 

(GAO/AIMD-00-272R, July 26, 2000).

Federal Budget: The President’s Midsession Review (GAO/OCG-99-29, 

July 21, 1999).

Budget Issues: Long-Term Fiscal Outlook (GAO/T-AIMD/OCE-98-83, 

February 25, 1998).

Budget Issues: Analysis of Long-Term Fiscal Outlook (GAO/AIMD/OCE98-19, October 22, 1997).

Budget Issues: Deficit Reduction and the Long Term (GAO/T-AIMD-96-66, 

March 13, 1996).

The Deficit and the Economy: An Update of Long-Term Simulations

(GAO/AIMD/OCE-95-119, April 26, 1995).

Budget Policy: Prompt Action Necessary to Avert Long-Term Damage to 

the Economy (GAO/OCG-92-2, June 5, 1992).

Other Budget Issues Federal Debt: Debt Management Actions and Future Challenges (GAO-01-

317, February 28, 2001).

Federal Trust and Other Earmarked Funds: Answers to Frequently Asked 

Questions (GAO-01-199SP, January 2001).

Federal Debt: Debt Management in a Period of Budget Surplus

(GAO/AIMD-99-270, September 29, 1999).

Federal Debt: Answers to Frequently Asked Questions—An Update

(GAO/OCG-99-27, May 28, 1999).

Government Investment U.S. Infrastructure: Funding Trends and Opportunities to Improve 

Investment Decisions (GAO/RCED/AIMD-00-35, February 7, 2000).
Appendix V

Related GAO Products

Page 154 GAO-01-591SP National Saving

Budget Trends: Federal Investment Outlays, Fiscal Years 1981–2003 

(GAO/AIMD-98-184, June 15, 1998).

Budget Structure: Providing an Investment Focus in the Federal Budget 

(GAO/T-AIMD-95-178, June 29, 1995).

Budget Issues: Incorporating an Investment Component in the Federal 

Budget (GAO/AIMD-94-40, November 9, 1993).

Federal Budget: Choosing Public Investment Programs (GAO/AIMD-93-25, 

July 23, 1993).

Social Security and Private 

Pensions

Social Security Reform: Implications for Private Pensions (GAO/HEHS00-187, September 14, 2000). 

Pension Plans: Characteristics of Persons in the Labor Force Without 

Pension Coverage (GAO/HEHS-00-131, August 22, 2000).

Social Security: Providing Useful Information to the Public (GAO/THEHS-00-101, April 11, 2000).

Social Security: The President’s Proposal (GAO/T-HEHS-AIMD-00-43, 

November 9, 1999).

Social Security: Evaluating Reform Proposals (GAO/AIMD/HEHS-00-29, 

November 4, 1999).

Social Security: Capital Markets and Educational Issues Associated With 

Individual Accounts (GAO/GGD-99-115, June 28, 1999).

Social Security: Criteria for Evaluating Social Security Reform 

Proposals (GAO/T-HEHS-99-94, March 25, 1999).

Social Security: Different Approaches for Addressing Program Solvency 

(GAO/HEHS-98-33, July 22, 1998).

Social Security Financing: Implications of Government Stock Investing 

for the Trust Fund, the Federal Budget, and the Economy

(GAO/AIMD/HEHS-98-74, April 22, 1998)
Appendix V

Related GAO Products

Page 155 GAO-01-591SP National Saving

401(k) Pension Plans: Loan Provisions Enhance Participation But May 

Affect Income Security for Some (GAO/HEHS-98-5, October 1, 1997).

Medicare Medicare: Higher Expected Spending and Call for New Benefit 

Underscore Need for Meaningful Reform (GAO-01-539T, March 22, 2001).

Medicare: 21st Century Challenges Prompt Fresh Thinking About 

Program’s Administrative Structure (GAO/T-HEHS-00-108, May 4, 2000).

Medicare Reform: Issues Associated With General Revenue Financing 

(GAO/T-AIMD-00-126, March 27, 2000).

Medicare Reform: Leading Proposals Lay Groundwork, While Design 

Decisions Lie Ahead (GAO/T-HEHS/AIMD-00-103, February 24, 2000).

Prescription Drugs: Increasing Medicare Beneficiary Access and Related 

Implications (GAO/T-HEHS/AIMD-00-99, February 15, 2000).

Medicare: Program Reform and Modernization Are Needed But Entail 

Considerable Challenges (GAO/T-HEHS/AIMD-00-77, February 8, 2000).

Medicare Reform: Ensuring Fiscal Sustainability While Modernizing the 

Program Will Be Challenging (GAO/T-HEHS/AIMD-99-294, September 22, 

1999).

Medicare Reform: Observations on the President’s July 1999 Proposal

(GAO/T-AIMD/HEHS-99-236, July 22, 1999).

Medicare and Budget Surpluses: GAO’s Perspective on the President’s 

Proposal and the Need for Reform (GAO/T-AIMD/HEHS-99-113, March 10, 

1999).

Other Tax Administration: Potential Impact of Alternative Taxes on Taxpayers 

and Administrators (GAO/GGD-98-37, January 14, 1998).

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Related GAO Products

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