Bush to Push Savings Plan to Foster Frugality in U.S.

The Bush Administration is getting ready to offer a new enticement to encourage Americans to be more thrifty, hoping to boost the country’s low savings rate.

President Bush will ask Congress to create a new “family savings account” that would allow people to earn tax-free interest and dividends on money that is squirreled away for a specified number of years, Administration officials said.

These officials, who spoke on condition that their names not be used, said the savings accounts will be part of the President’s 1991 budget, due to be released on Jan. 29, and would also be featured in Bush’s State of the Union address to Congress on Jan. 31.

The Administration is touting the proposal as a key to bolstering the country’s lagging international economic fortunes, by increasing the pool of money available for investment and thus lowering the costs American businesses must pay to expand and modernize.

Officials said that the Bush proposal is still being fine-tuned, but they gave the following details of what the final plan is expected to look like.

It will allow families to contribute as much as $5,000 per year and individuals to contribute as much as $2,500 annually. The accounts would be limited to families with incomes below $120,000 a year and to individuals making below $60,000 annually.

Unlike Individual Retirement Accounts, taxpayers would not be able to deduct their annual contributions from their taxable income. But the interest and dividends would accumulate tax-free. At the end of the required holding period, the accumulated savings could be withdrawn and spent without any tax bite from Uncle Sam.

Sources said the Administration was still mulling how long a period to require. Seven years was mentioned as the most likely choice, although there was some sentiment for a longer period, possibly 10 years.

The holding period, whether seven or 10 years, would be a radical departure from IRAs, which require that the investment be held until the taxpayer turns 59 1/2. If the money is withdrawn before that time, a 10% penalty is imposed.

The new account has been promoted within the Administration by Treasury Secretary Nicholas F. Brady, whose department has been studying ways to boost America’s competitive standing, noting that Americans managed to save only 4.4% of their after-tax income in 1988, just one-fourth of the Japanese savings rate.