What would get you to save more?
One idea to encourage savings is to lower the tax rate on interest earned on savings accounts.
Over the holiday break, I read about the winning idea in TIAA-CREF's Raise the Rate competition -- to "factor a person's savings habits into their credit score as a positive indicator of creditworthiness" -- and was surprised that it was selected as the winner.
I'm surprised because I wouldn't think savings would be a reliable factor in the probability that you would default, which is what the credit score is designed to measure, and because it would be a bit of a bear to implement.
My submission was to lower the tax rate you pay on the interest you earn from a savings account. You already receive this information as a 1099-INT, so the IRS already knows this is interest earned from an interest-bearing account. While it would fail a "difficulty of implementation" test, I bet you more people would save money if they knew they would be taxed less on the interest. (Many people invest in dividend-yielding stocks for this very reason.)
I'd go so far as to say you get the first $X in interest tax-free. Congress could set that at $500, $1,000 or higher. People respond to financial incentives, and removing the tax would give people an incentive. But unfortunately, at least right now, it goes against the government's goal of wanting to boost consumer spending.
While less novel, I thought the idea of the People's Choice Award winner to create a Women's Savings Club would be more effective than the winning idea at increasing people's savings rate.
Integrating savings rate into your credit score is certainly novel and interesting, especially since it's already being factored in by lenders, but I don't think it will increase people's saving. Do you?
You can't confuse savings and investing in your post (you mentioned dividend paying stocks but those carry much more risk than a savings account) ... and as Redd the Sock said, interest rates are almost non-existent and regular "savings" and tax rates on that "gain" are almost irrelevant.
Taxes are a destroyer of wealth, no doubt, but the middle to low income americans who aren't savings enough aren't being taxed much anyway.
Put simply, low to middle income Americans need to save and invest 15 to 20% of their income at all times if they ever expect to have any kind of financial security... high income Americans probably need to save and invest 20 to 25% at all times due to impact of taxes and other factors.
Most people just spend too much on lifestyle and then expect they'll get a bail out when over their head -- it's now the American way it seems.
Considering what banks pay in interest to most people (ie: the ones that need to save the most) I don't see much help in that proposal. (wee I got $25 tax fee this year. My tax savings can buy me a six pack) The credit score idea sounds like a return to the old days where to get a loan you have to have enough money to not need the loan.
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