Striving to Boost Savings

By Charles Alexander

Americans are reacting slowly to attractive new investments

Since last December, few Americans have escaped the impassioned pitches from banks, brokerage houses and virtually all other kinds of financial institutions to sign up for tax-sheltered Individual Retirement Accounts. The Fidelity Group of mutual funds in Boston has produced a slick color film about its IRAs that is now playing at workplaces that range from factory floors to coal mines. In Birmingham, Ala., the Robinson-Humphrey Co. brokerage firm rented a hotel ballroom to tell people of the virtues of IRAs. Western Federal Savings & Loan Association in Los Angeles calls its retirement plans "fat-cat accounts" and promotes them with posters, balloons and badges that depict a smirking feline figure even plumper than Garfield.

The IRA hoopla and hard sell are part of an all-out push to turn Americans into big savers instead of big spenders. This drive began last summer when Congress passed the new tax law that slashed the rates people must pay on income from savings, created the tax-free All Savers Certificates and made some 50 million more Americans eligible for IRAs.

Last week federal regulators authorized yet another new savings vehicle: a 91-day certificate with interest pegged to the rate on high-yielding 13-week Treasury bills (current rate: 12.55%). The certificates, which will require a $7,500 minimum deposit, will become available May 1. The rate paid by thrift institutions will be .25% more than that given by banks, just as it now is for passbook accounts.

The campaign to boost savings is a cornerstone of Reaganomics. The more Americans put away, the greater is the pool of money that can be borrowed by either the Government or the private sector. The President is thus counting on increased saving to help finance record federal budget deficits, drive down interest rates and provide new capital that companies need to modernize equipment and build factories.

In trying to spur saving, Reagan and Congress are bucking a spend-and-spend trend that has been gathering force in the U.S. for several years. Between 1971 and 1975, Americans stashed away an average 8.1% of their after-tax income. During January the amount of money put away was just 5.3% of income. In an era of ubiquitous credit cards and write-yourself-a-loan checking accounts, saving has become as outdated as a Ronald Reagan movie.

Economic policy has also had much to do with the decline of thrift. During more than a decade of high inflation, it was sensible to be a spendthrift because products would almost always be much more expensive later, and money saved lost buying power quickly.

Last summer Congress reduced the top tax rate on interest and dividend income from 70% to 50%. It also created new kinds of tax shelters that were intended to stimulate savings directly.

The first of these financial gimmicks to appear was the much heralded All Savers Certificate, which banks and savings and loan associations unfurled last October. Savers can earn up to $ 1,000 in tax-free interest on these one-year investments, which require a minimum deposit of $500. Despite an extravagant advertising blitz, though, the ASCs have proved to be a flop. Financial institutions were expecting All Savers deposits of up to $250 billion by the end of this year, but the total so far has reached only $46 billion, and customer interest is waning fast. There is no strong sentiment in Congress to renew the program when it expires in December.

The ASCs have also failed in their mission of helping to rescue beleaguered savings banks and S and Ls from financial failure. These thrift institutions are losing money at a catastrophic clip because they must now pay an average of 11.6% interest to attract deposits, while the mortgages and other assets on their books are earning only an average of 10.1%. Richard Pratt, chairman of the Federal Home Loan Bank Board, said last week that about 80% of the 3,900 federally insured savings and loan associations lost money in 1981 and that some 400 of them will run out of capital to absorb losses by the end of the year unless interest rates fall sharply.

Last week bank regulators concluded a merger between The New York Bank for Savings (assets: $3.4 billion) and the Buffalo Savings Bank (assets: $5.6 billion). The Buffalo bank had already picked up two other failing savings banks since the start of December, and is now the largest mutual savings bank in the U.S.

Customer response to the newly expanded Individual Retirement Account program has been eager in some sections but chilly in many others. Created by Congress in 1974, IRAs now allow wage earners to save up to $2,000 a year in special accounts, where the money earns interest tax free until it is withdrawn during retirement years. Before Jan. 1, only people not covered by company pension plans were eligible, but now virtually all workers can open IRAS. Administration officials predicted that $20 billion would pour into IRAS this year. So far investors have put an estimated $6 billion into the accounts.

At the Decatur Federal Savings & Loan Association in Georgia, more than 2,600 savers started IRAS in the first six weeks of the year. Says Decatur Federal President Robin Harris: "I was stunned when I saw the figures."

Many bankers and brokers, though, have been disappointed. Provident Institution for Savings in Boston has drawn about $1 million a month from outside the bank into retirement accounts, only half what it expected. Provident's president, Thomas S. Zocco, thinks many customers are confused by the bewildering array of IRA plans and are holding back until they can figure out which IRA offer is best.

Mutual fund companies and brokerage houses, for example, are trying to wrest IRA dollars away from banks and S and Ls by offering investments in stocks, bonds, money-market securities and even oil ventures. Insurance companies are touting so-called fixed-annuity plans that guarantee predetermined annual payouts during retirement. Many investment firms are encouraging corporations to set up programs that allow employees to invest in IRAs through payroll deductions. The Dreyfus Corp. of New York City, for example, already manages employee IRAs for more than 50 companies, including Warner Communications, RCA Corp. and Esmark.

Tax rules may also be slowing down the start of IRAs. Investors can open an account any time before April 15, 1983, and still get all the tax benefits for this year. Moneymen believe some savers are putting off opening an IRA until later.

Many people, of course, cannot think of putting money into an IRA simply because they are already having problems making their paychecks stretch to meet monthly bills. Young families have not been investing heavily in IRAs. Wachovia Bank & Trust Co. in Winston-Salem, N.C., reports that 70% of its customers for new IRA accounts are more than 45 years old. Says Terry Gray, 33, a father of two who works as a security guard in Jackson, Miss.: "Inflation really keeps us from saving. We're not making enough to save."

Middle-aged and middle-income breadwinners are also being forced to postpone retirement saving. Barry Murphy, 49, is a Boston stockbroker who sells IRA plans, but he cannot afford to start one for himself because he has one child in college and three in private schools. Says he: "Annual jumps in tuition prevent anyone in my age bracket and socioeconomic group from saving. My friends are in the same financial bind." So far, such family budget considerations are proving to be more important in decisions on whether to save than all the tax breaks Congress dreamed up.

--By Charles Alexander. Reported by David Beckwith/Washington and Marc Levinson/Atlanta

With reporting by David Beckwith, Marc Levinson

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