Garrett M. Vonk

If I said to you, “You can have $10,000 to spend now—or $9,500 to spend in 10 years,” which would you choose? Probably the $10,000 now. And in doing so, you would be making the same choice many Americans make when deciding whether to save or spend their hard-earned cash.

The problem is how we tax investment gains. Over the past 80 years, the average annual return on Treasury bills (a proxy for savings accounts) has been 3.7 percent per year. Inflation, meanwhile, has averaged 3.1 percent per year. This combination has produced a “real return” of a paltry 0.6 percent per year.

-Slate.com, Why U.S. tax policy makes saving a sucker’s game

It certainly makes some logical sense on its own. If inflation is 3% a year and taxes eat the rest of your gain, you accomplished nothing by saving that money. But there’s a huge omission in this strategy. Even if you lost a few bucks, you still didn’t spend that money.

It’s a point that my parents made to me early on. It matters very little where you put it or how you do it, but saving money and making sure that you are unable to easily spend it, even in “emergencies” is a key strategy. When I ran my list of prospective mutual funds by my dad for 401k advice, he basically said “Those all sound great; pick one that sounds good and don’t touch the money.”

And that’s the key point of saving that this article misses. It’s not about getting an awesome return on your money (although that’s definitely the goal for someone that’s already putting money into savings). It’s about saving money at all. People aren’t making the choice not to save their money because of oppressive taxation; I’m sure that a lot of families don’t even think about their return as compared to inflation. The people who aren’t saving don’t even get that far: they just don’t want to save their money, or are convinced they can’t afford to. The article does seem to acknowledge the real issues that demotivate saving– spending beyond your means with credit cards, “acquisitive consumers” spending to keep up with fashion or trends, etc.–but I think the author attributes far too much spending and non-saving behavior to tax disadvantages.

If I said to you, “You can have $10,000 to spend now—or $9,500 to spend in 10 years,” which would you choose?

He neglects to even consider the fact that if you come up with that $10,000 to save every year, in that tenth year, you’ll have $95,000 plus any compound interest on the earnings from each of the yearly contributions. If you spent the $10,000 on a life-saving surgery, well, yeah, it’s better to spend it now. But you’d probably spend it now even if you could be guaranteed to get a great return.

To slightly misapply a term from Econ 101, I just don’t think that the elasticity of the “demand” for saving money can be influenced all that much by a tax scheme. I just can’t imagine Joe and Flo Median Income looking at their paycheck and having this conversation:

Joe: “Golly gee, we can either buy a plasma TV or save this money for our retirement in treasury bills.”
Flo: “But if we save it for retirement in these T-bills, the inflation and taxes will just eat up any return we would have gotten!”
Joe: “Screw it, we’re buying the TV!”

It’s a false choice. It should really read “You’ll make $45,000 this year. Would you rather have $0 of it or $9,500 of it 10 years from now?”