A winning proposal to raise savings rates: What do you think?
December 22, 2010
Asset manager TIAA-CREF recently announced the winner of a contest for ideas to encourage higher savings rates. MoneyRates.com wants to know if this idea would work for you--and whether you have a better idea.
Savings rates need encouragement
Certainly, the idea behind the TIAA-CREF contest is a good one--savings rates badly need encouragement. Americans, as a whole, borrow too much, save too little and are facing a gap in retirement savings. Despite these well-documented problems, public policy has favored borrowing over saving, in several ways:
- Interest on savings accounts, CDs, and money market accounts has been driven to levels so low that it represents virtually no incentive to save.
- To ease the housing crisis, mortgage rates haven't just been kept reasonable, they've been driven to record low levels in an attempt to encourage new borrowers.
- Interest paid on mortgage debt is often tax deductible while interest earned on savings accounts, CDs, money market accounts, or other savings and investment vehicles is generally not.
How can the playing field be leveled to encourage savers as much as borrowers are actively encouraged? The TIAA-CREF contest solicited ideas for making this happen.
The winning idea
The winning idea was submitted by Jonathan Chan, a recent graduate of Northwestern University. His suggestion was that savings should count positively towards a person's credit score. This means that savers would find credit more readily available when needed, and would probably be able to obtain it at lower interest rates.
A representative of FICO, a company that compiles credit scores, said that the suggestion of including savings into a credit score calculation would be redundant, since banks generally take into account such things along side credit score when making lending decisions.
It's also questionable how much putting an incentive in the form of credit scores would drive savings--successful savers are less dependent on credit scores anyway.
Still, the contest and the winning suggestion are steps in the right direction: higher savings rates do need to be encouraged. What do you think would be a workable approach?