- The Washington Times - Tuesday, April 18, 2000

Get ready for a lecture from the Treasury Department about the need to save money.

Like a cross, rich relative, Uncle Sam is eyeing the declining national savings rate with growing alarm as many households spend more than they make. The government doesn't want spendthrift baby boomers to come crying for help in their retirement years, when Social Security funds could be overdrawn.

Americans saved only 0.8 percent of their after-tax personal income in February, according to the most recent data from the Commerce Department. The savings rate has been declining for several years, but the only people who have voiced concern to date have been economists worried about the long-term impact on the cost of capital.

The Clinton administration's hand-wringing purportedly is driven by concern that people see no need to save.

"The average American spends several hours per day watching television," Treasury Secretary Lawrence Summers says in a speech prepared for the kickoff of the savings drive. "Even a small portion of that time diverted into managing one's personal finances could yield big dividends."

The government's financial literacy campaign will try to convince the public that it is important to save money. To convey this message, a coalition of consumer groups, banks and other financial institutions will conduct national workshops on managing finances. A Web site is planned to provide a central clearinghouse of information.

Schools and businesses will be encouraged to adopt financial education programs. With businesses, the emphasis will be on expanding participation in 401(k) retirement plans.

As with many government initiatives, however, it pays to look at actions, not words. If the government truly were concerned about savings, would it have allowed the once-popular individual retirement account (IRA) program to decline into a thicket of exceptions and convoluted rule-making that has severely crimped participation in IRA plans?

The IRA program was adopted 25 years ago. In the beginning, it was a simple idea. People could set aside a portion of their yearly income in a tax-deferred account to be withdrawn upon retirement. There were steep penalties for early withdrawal, a feature that discouraged people from raiding their nest eggs.

At one point, taxpayers could deduct their contributions up to a $2,000 a year, which fueled the growth of the accounts. Congress phased out this tax break for higher income levels and slowly has been adding exceptions to the penalty rule for early withdrawals.

These rule changes create "inappropriate temptations" to use retirement money for current expenses, says Richard L. Kaplan, a University of Illinois law professor who has conducted an in-depth analysis of the IRA. One can use IRA funds without paying a penalty to buy a new house and pay for college tuition and medical expenses.

"With all the education-specific tax incentives already in place, educational costs hardly seem to warrant an IRA penalty exception, particularly one that might jeopardize an IRA holder's retirement security," Mr. Kaplan writes in the university's Elder Law Journal. Mr. Kaplan takes special exception to the use of IRA funds for medical expenses a benefit that Congress adopted in 1996 after the failure of the Clinton administration's universal health care program.

"Encouraging people to raid their IRAs to deal with the problem of uninsured Americans is an inadequate approach to the societal dilemma of Americans who are not covered by health insurance programs," he says.

If Congress really wanted to improve the savings rate, Mr. Kaplan argues, it would get rid of the special exceptions to the IRA withdrawal rules.

Meanwhile, baby boomers who find themselves looking at inadequately funded retirement plans need not panic. There are many options for increasing savings that people in their 40s and 50s who haven't properly planned can use to improve their financial readiness for retirement, according to Barbara O'Neill, professor in the family and consumer sciences department at Rutgers University:

• Use an automatic payroll deduction to invest money in savings plans or stock and mutual-fund purchases.

• Invest aggressively and be willing to deal with volatility trends show the payoffs are higher over a 10-year period.

• Maximize tax deferral opportunities, such as IRAs.

• Take the maximum deduction allowable for an employer-sponsored 401(k) plan.

• Cut spending, especially on costly credit-card loans.

Have a question on work or family finances? Get in touch with Anne Veigle at 202/636-3014 or e-mail (evie1@infi.net).

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