On the Other Hand...

by Jim Davies 

Why Saving Is Hardly Worth It


Every so often you and I get criticised by some professor of economics, or - worse - by some politician, for failing to save enough.

They say that Americans fail to invest in their own country, and that all sorts of evils flow from that failure, and they contrast us with other nations like Japan, whose people have a much higher savings rate and have prospered more than we have because the people invest so much more in industry.

I sense that these "experts", who often get paid out of our tax dollars either directly (the pols) or indirectly through tenured appointments at State Colleges (the profs), would kind of like to force us to save, if they could.

Well, I'm not disputing their figures. If their research shows that Japanese squirrel away more than we do, no doubt they do. And no doubt, it helps account for the high growth they have enjoyed since 1945 in their standard of living.

But some cultures are more subservient to Authority than others, and I'm very happy that Americans have never scored high on that scale. The reason we save less than we might isn't because nobody's given us a stick, but that someone has taken away the carrot; sadly, saving just isn't worth it.

The Carrot

I write here each week to invite attention to the idea of a free society; one where each person makes his own decisions for his own life, but none for anyone else's. It's my position that such a society would be vastly more prosperous, peaceful and happy than the one we have today.

I do so by contrasting, topic by topic, that vision of how things could be, with the way they actually are. Let's do it again now, with regard to savings.

Suppose John and Jane Q earn $30,000 a year and decide to save 10% of it. We'll simplify things by assuming their earnings stay constant, for 40 years.

Suppose also that they do a bit of research and find that they can invest that $3,000 a year at 12%, provided they watch their investments with care, like all good squirrels do. That 12% is slightly less than the increase in stock market prices, for the last half century; so the assumption is conservative.

After 40 years, their nestegg has grown (check it for yourself!) to over two million dollars. Compare THAT with a Social "Security" check!

Well, they enjoy a luxurious retirement, but go on investing it well so that when they die they leave $1 million each to their two kids, Tom and Mary.

And Tom and Mary each decide to salt their million away (at the same 12% p.a.) until they, too, die 20 years later. Guess what each leaves? Hold your breath: nearly ten million dollars. Each. That's just one family, with average earnings, over just 60 years. That's exactly what would happen, in a free society where nobody could make anyone else's decisions.

Within a couple of generations, every family would be multi-millionaires. The Japanese, and all the others, would wonder how we did it. America would, once again, be the envy of the world; head, shoulders and torso above the rest.

Carrot Zappers

But that doesn't happen today. Here's why.

First, John and Jane Q, though they EARN $30,000 a year, only get to keep about $16,500. One way and another, our 3 levels of government soak away over 45% of all we earn. Fact! The Feds ALONE take 25%! And having only $16,500 to take home, it's almost impossible for them to save anything at all! And even if somehow they did rack the belt in tight and still set aside 10% of what they have, it's only just over half as much.

Then, what do you know; if they did invest that $1,650 a year and grow it to just over $1 million (not $2M), they would find after those 40 years that $1M doesn't buy nearly what $1M used to. In terms of the dollars they knew when they got married, in fact, it would buy only about $128,000 worth of goods and services, assuming that government-generated inflation holds to the very modest average rate of 5% a year.

So just by these two devices - taxation and inflation - government has taken John's and Jane's two million dollar nestegg and zapped $1,872,000 of it; a ruination rate of 93.6%.

The Destroyers, from D.C. to Your Home Town Hall, are not done yet, of course. There is Death Tax to come, before Tom and Mary can inherit.

Now, it's quite true that $128,000 would pass down, today, without death tax (they call it something else, but that's what it is; a tax on death.) But the ugly precedent has long ago been set: government may tax inheritances, so as soon as they get short of cash (they always will) they will hike the rates. It's by no means impossible, in our lifetimes, that a $128,000 legacy will be taxed at 50%. Now what does that $20M, 2-generation family fortune look like for our ordinary, working-class family? - I daren't even look.

You get the point. It was made well by our first President, George Washington: "the power to tax is the power to destroy."

He ought to know. As well as being the hero of America's first Tax Rebellion, he was also the terror of its second: he savagely suppressed the whiskey distillers of Western Pennsylvania, who dared to try to keep their own money.

As Lord Acton so well said, "Power corrupts." Best to take it away from them.

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