There is considerable debate about why the U.S. savings rate is low, and several factors are often discussed. U.S. citizens may simply choose to enjoy more of their income in the form of current consumption than people in nations where living standards have historically been lower. During the housing bubble of the early 21st century, when home prices increased, on average, year after year from 2000 to 2005, many people felt it was safe to spend money and take on debt, counting on the future value of their home to meet their obligations. But other considerations may also be important. There are significant differences among nations in how savings, dividends, investment income, housing expenditures, and retirement programs are taxed and financed. These differences may lead to different decisions about saving.

For example, many other nations do not tax interest on savings accounts as much as they do other forms of income, and some countries do not tax at least part of the income people earn on savings accounts at all. In the United States, such favorable tax treatment does not apply to regular savings accounts. The government does offer more limited advantages on special retirement accounts, but such accounts have many restrictions on how much people can deposit or withdraw before retirement without facing tax penalties. See also Retirement Plans.

In addition, U.S. consumers can deduct from their taxes the interest they pay on mortgages for the homes they live in. That encourages people to spend more on housing than they otherwise would. As a result, some funds that would otherwise be saved are, instead, put into housing. Another factor that has a direct effect on the U.S. savings rate is the Social Security system, the government program that provides some retirement income to most older people. The money that workers pay into the Social Security system does not go into individual savings accounts for those workers. Instead, it is used to make Social Security payments to current retirees. No savings are created under this system unless it happens that the total amount being paid into the system is greater than the current payments to retirees. Even when that has happened in the past, the federal government often used the surplus to pay for some of its other expenditures. Individuals are also likely to save less for their own retirement because they expect to receive Social Security benefits when they retire. The low U.S. savings rate has two significant consequences. First, with fewer dollars available as savings to banks and other financial institutions, interest rates are higher for both savers and borrowers than they would otherwise be.

Personal computer. Encarta

That makes it more costly to finance investment in factories, equipment, and other goods, which slows growth in national output and income levels. Second, the higher U.S. interest rates attract funds from savers and investors in other nations. As we will see below, such foreign investments can have several effects on the U.S. economy. Encarta