Printed in The Hill, June 14, 2000:

When first quarter economic figures were released recently, they showed that America’s economy is continuing to grow at an unprecedented pace. Yet, there was a dark side to the data.

America’s savings rate, already at a historically low level, had sunk even further. In fact, much of the recent growth in the U.S. economy has been fueled by consumer spending that is so vigorous that policymakers—most notably the Federal Reserve—believe that economic demand is outpacing supply. Encouraging Americans to save more, while still spending enough to achieve sustainable growth, may be the key challenge facing the economy today.

A low savings rate threatens our continued economic growth by limiting business capital, increasing our reliance on foreign investment and goods, and creating an environment for higher interest rates. Just as troublesome, the savings crisis creates uncertainty for the future financial security of the baby boom generation, a group that has fallen well behind in saving for retirement.

Despite the need for Americans to save more, we lack a clear national savings policy. In fact, America’s tax laws discourage saving in a number of ways and, to the extent savings incentives have been provided at all, they have been eroded over time by inflation.

For example, the maximum Individual Retirement Account (IRA) contribution has been frozen at the same $2,000 level for almost 20 years. If the $2,000 IRA limit had merely been indexed for inflation when the IRA was first created, Americans would be able to save $5,000 a year in their IRAs today. Similar limits that apply to savings through employment-based plans also have not kept pace with inflation.

The good news is that the tide may finally be turning in Washington. Leaders of both parties, including President Clinton, House Speaker J. Dennis Hastert (R-Ill.), and presidential candidates, Vice President Al Gore (D) and Texas Gov. George W. Bush (R), have acknowledged that we must do more to help Americans save. Bipartisan legislation that is scheduled for consideration by the House of Representatives this month would make changes that would give Americans the tools they need to save.

Changes that will be considered include restoring the power of the IRA by raising the contribution limit to $5,000 each year. Similar increases would be provided for 401(k) and other salary deferral plans. For those approaching retirement, additional "catch-up" contributions would be permitted to both IRAs and salary deferral plans.

For those participating in retirement plans at work, the proposed reforms would make it easier to move retirement savings when changing jobs, provide faster vesting on employer matching contributions, and reduce administrative costs by streamlining overly burdensome rules and regulations.

We must do something to rescue our sinking savings rate before it undermines our expanding economy. In the past, large federal budget deficits forced policymakers to reach decisions based on shortsighted revenue constraints. While balancing the federal budget was an important step in reshaping the American economy, we now must concentrate on increasing private savings, while continuing to generate federal surpluses to retire the national debt.

The solution is to show Americans a clear path to the right savings choices for their future. Congress and the White House should reach an agreement now, before it is too late for the baby boom generation. Incentives that increase savings, like improving IRAs and strengthening employment-based retirement plans, are the best investments Americans can make.

Stanley E. O’Neal is president of U.S. Private Client of Merrill Lynch.