Saving Incentives: What May Work, What May Not

Thomas L. Hungerford
Specialist in Public Finance

Saving is the portion of national output that is not consumed and represents resources that can be used to increase, replace, or improve the nation’s capital stock. The U.S. net national saving rate reached a post-war peak of 12.2% in 1965 and has then trended downward since to a low of -2.3% in 2009. Many analysts claim that saving is too low. Among the Organization for Economic Cooperation and Development (OECD) countries, the United States has the fifth lowest saving rate.

Survey evidence suggests that people know why they should save, but many do not save, especially lower-income individuals and families. Several reasons have been offered to explain the declining personal saving rate and the relatively high proportion of individuals and families that do not save. Economic reasons start from the premise that individuals and families are rational and make optimal decisions about consumption and saving throughout the life course. Low saving rates are then explained by economic disincentives induced by government policy or by life cycle changes in the propensity to save. Behavioral reasons start from the premise that individuals and families do not always make optimal decisions regarding consumption and saving.

The government offers tax incentives to individuals and families to save. The empirical evidence on the relationship of tax incentives to the saving rate mostly comes from examinations of traditional individual retirement accounts (IRAs) and 401(k) plans. The reported results are mixed, but generally indicate small effects. Be that as it may, the tax incentives tend to benefit higher-income individuals and families to a much greater extent than lower-income individuals and families. The primary reasons are (1) higher-income individuals are much more likely to save, and (2) higher-income individuals face higher marginal tax rates and benefit more from sheltering income from taxation.

Furthermore, the tax revenue loss for these incentives lower public saving by reducing the budget surplus or increasing the budget deficit. For FY2010, these tax incentives are estimated to cost the U.S. Treasury $108.2 billion in forgone tax revenues. The Bush Administration and the 2005 President’s Advisory Panel on Federal Tax Reform advocated expanding tax incentives as the primary policy to encourage personal saving. Research has shown that personal saving has been fairly unresponsive to tax incentives, however, and such incentives may substantially decrease public saving (that is, increase the budget deficit). The long-term net effect on national saving and economic growth is likely negative. The Obama Administration’s savings proposals are designed to remove behavioral barriers to saving.


Date of Report: June 10, 2011
Number of Pages: 17
Order Number: RL33482
Price: $29.95

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Mandatory Spending Since 1962

D. Andrew Austin
Analyst in Economic Policy

Mindy R. Levit
Analyst in Public Finance

Federal spending is often divided into three categories: discretionary spending, mandatory spending, and net interest. Mandatory spending includes federal government spending on entitlement programs as well as other budget outlays controlled by laws other than appropriation acts. Entitlement programs such as Social Security and Medicare make up the bulk of mandatory spending. Other mandatory spending programs include Temporary Assistance for Needy Families (TANF), Supplemental Security Income (SSI), unemployment insurance, some veterans’ benefits, federal employee retirement and disability, Supplemental Nutrition Assistance Program (SNAP), and the earned income tax credit (EITC). Discretionary spending is provided and controlled through appropriations acts.

In 2010, mandatory spending accounted for over half of total federal spending and over an eighth of gross domestic product (GDP). Social Security accounted for a fifth of federal spending. Medicare and the federal share of Medicaid, the fastest growing components of mandatory spending, together accounted for 23% of federal spending. Those three programs, therefore, made up over 43% of federal spending. The composition of mandatory spending has changed significantly over the past 40 years. In 1962, before the 1965 creation of Medicare and Medicaid, mandatory spending was less than 30% of all federal spending. At that time, Social Security accounted for about 13% of total federal spending or about half of all mandatory spending.

Federal spending has outrun federal revenues for the last nine fiscal years. In the long term, projections suggest that if current policies remain unchanged, the United States faces a major fiscal imbalance, largely due to rising health care costs and impending Baby Boomer retirements. Federal mandatory spending on health care is projected to expand from 5.5% of GDP in 2010 to 17.9% in 2084 according to a Congressional Budget Office (CBO) extended baseline projection. Social Security is projected to grow from 4.8% of GDP in 2010 to 6.3% of GDP by 2084.

The share of mandatory spending has increased as a portion of total federal spending and as a percentage of GDP for four reasons. First, discretionary spending, defined as non-entitlement spending that is provided through appropriations acts, has fallen relative to mandatory spending. Second, domestic discretionary spending has been relatively stable as a share of GDP compared to mandatory spending, which has grown more quickly. Third, the number of beneficiaries of entitlement programs has grown as the average age of population has risen. Fourth, health care costs per capita have grown far faster than the overall economy.

In an effort to reform the private insurance market and expand health insurance coverage to the uninsured as federal spending on health care increases, the Patient Protection and Affordable Care Act (PPACA; P.L. 111-148) and the Health Care and Education Reconciliation Act of 2010 (HCERA; P.L. 111-152) were signed into law on March 23 and March 30, 2010, respectively. As a result of this legislation, mandatory federal outlays for health programs are projected to increase. Revenue increases are projected to offset the additional mandatory outlays.

Because discretionary spending is a smaller proportion of total federal outlays compared to mandatory spending, some budget experts contend that any significant reductions in federal spending must include cuts in entitlement spending. Other budget and social policy experts contend that cuts in entitlement spending could compromise their goals: the economic security of the elderly and the poor.


Date of Report: June 15, 2011
Number of Pages: 19
Order Number: RL33074
Price: $29.95

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Social Security Reform: Legal Analysis of Social Security Benefit Entitlement Issues

Kathleen S. Swendiman
Legislative Attorney

Thomas J. Nicola
Legislative Attorney

Calculations indicating that in the long run the Social Security program will not be financially sustainable under the present statutory scheme have fueled the current debate regarding Social Security reform. This report addresses selected legal issues which may be raised regarding entitlement to Social Security benefits as Congress considers possible changes to the Social Security program, and in view of projected long-range shortfalls in the Social Security Trust Funds.

Social Security is a statutory entitlement program. Beneficiaries have a legal entitlement to receive Social Security benefits as set forth under the Social Security Act. The fact that Social Security benefits are financed by taxes on an employee’s wages, however, does not limit Congress’s power to fix the levels of benefits under the Social Security Act, or the conditions upon which they may be paid. Congress’s authority to modify provisions of the Social Security program was affirmed in the 1960 Supreme Court decision in Flemming v. Nestor, wherein the Court held that an individual does not have an accrued “property right” in his or her Social Security benefits. The Court has made clear in subsequent court decisions that the payment of Social Security taxes conveys no contractual rights to Social Security benefits.

Congress has the power to legislatively promise to pay individuals a certain level of Social Security benefits, and to provide legal evidence of Congress’s “guarantee” of the obligation of the federal government to provide for the payment of such benefits in the future. While Congress may decide to take whatever measures necessary to fulfill such an obligation, courts would be unlikely to find that Congress’s unilateral promise constitutes a contract which could not be modified in the future. In addition, a congressional promise not to reduce a specific level of Social Security benefits payable to certain eligible individuals would likely not overcome the constitutional principle, subject to due process considerations, that one Congress may not bind a subsequent Congress to legislative action or inaction.

The calculations concerning the possible future insolvency of the Social Security Trust Funds raise a question whether that result would affect the legal right of beneficiaries to receive full Social Security benefits. While an entitlement by definition legally obligates the United States to make payments to any person who meets the eligibility requirements established in the statute that creates the entitlement, a provision of the Antideficiency Act prevents an agency from paying more in benefits than the amount available in the source of funds available to pay the benefits. The Social Security Act states that Social Security benefits shall be paid only from the Social Security Trust Funds, and the act appropriates all payroll taxes to pay benefits. Although the legal right of beneficiaries to receive full benefits would not be extinguished by an insufficient amount of funds in the Social Security Trust Funds, it appears that beneficiaries would have to wait until the Trust Funds receive an amount sufficient to pay full benefits in the case of a shortfall, unless Congress amends applicable laws.


Date of Report: June 13, 2011
Number of Pages: 15
Order Number: RL32822
Price: $29.95

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Unemployment Insurance: Legislative Issues in the 112th Congress

Katelin P. Isaacs
Analyst in Income Security

Julie M. Whittaker
Specialist in Income Security

The 112th Congress may consider a number of issues related to currently available unemployment insurance programs: Unemployment Compensation (UC), the temporary Emergency Unemployment Compensation (EUC08), and Extended Benefits (EB). With the national unemployment rate predicted to remain high into next year, the increased demand for regular and extended unemployment benefits will continue. At the same time, the authorization for several key unemployment insurance provisions is temporary and will end in the next year. For instance, the EUC08 program, which currently provides the bulk of extended unemployment benefits, is scheduled to expire the week ending on or before January 3, 2012. The 100% federal financing of the EB program will expire on January 4, 2012. In addition, a temporary 0.2% federal unemployment tax (FUTA) surtax expires at the end of June 2011.

The 112th Congress faces these upcoming expirations as well as other likely unemployment insurance policy issues, including unemployment insurance financing. In addition, recent policy discussions have focused on the appropriate length of unemployment benefits. This discussion includes consideration of whether additional weeks of unemployment benefits—the creation of a tier V of the EUC08 program, for instance—is warranted.

This report provides a brief overview of the three unemployment insurance programs—UC, EUC08, and EB—that may currently pay benefits to eligible unemployed workers. It summarizes unemployment insurance legislation in the previous (111th) Congress. This report also discusses relevant legislation introduced in the 112th Congress; specifically, H.R. 1745, S. 386, H.R. 650, H.R. 589, H.R. 1663, H.R. 235, S. 310, H.R. 569, H.R. 2001, H.R. 2120, H.R. 2137, as well as a proposal outlined in the President’s Budget Proposal FY2012.


Date of Report: June 16, 2011
Number of Pages: 16
Order Number: R41662
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Small Business Administration 504/CDC Loan Guaranty Program

Robert Jay Dilger
Senior Specialist in American National Government

The Small Business Administration (SBA) administers programs to support small businesses, including several loan guaranty programs designed to encourage lenders to provide loans to small businesses “that might not otherwise obtain financing on reasonable terms and conditions.” The SBA’s 504 Certified Development Company (504/CDC) loan guaranty program is administered through non-profit Certified Development Companies (CDC). It provides long-term fixed rate financing for major fixed assets, such as land, buildings, equipment, and machinery. Of the total project costs, a third-party lender must provide at least 50% of the financing, the CDC provides up to 40% of the financing through a 100% SBA-guaranteed debenture, and the applicant provides at least 10% of the financing. It is named from Section 504 of the Small Business Investment Act of 1958 (P.L. 85-699, as amended), which authorized the program. In FY2010, the SBA approved 7,833 504/CDC loans amounting to about $4.4 billion.

Congressional interest in the 504/CDC program has increased in recent years because of increased concern that small businesses might be prevented from accessing sufficient capital to assist in the economic recovery. Congress authorized several changes to the 504/CDC program during the 111th Congress in an effort to increase the number, and amount, of 504/CDC loans. For example, P.L. 111-240, the Small Business Jobs Act of 2010, increased the 504/CDC program’s loan guaranty limits from $1.5 million to $5 million for “regular” borrowers, from $2 million to $5 million if the loan proceeds are directed toward one or more specified public policy goals, and from $4 million to $5.5 million for manufacturers. It also temporarily expands the use of the program to refinance existing debt, creates an alternative 504/CDC size standard to increase the number of businesses eligible for assistance, and provides $510 million to extend through December 31, 2010, the temporary subsidization of 504/CDC and 7(a) loan guaranty program fees and the temporary increase in the 7(a) program’s maximum loan guaranty percentage to 90% for all standard 7(a) loans. The fee subsidies and 90% loan guaranty percentage were initially funded under P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA), and had expired on May 31, 2010. P.L. 111-322, the Continuing Appropriations and Surface Transportation Extensions Act, 2011, authorized the SBA to continue the fee subsidies and the 7(a) program’s 90% maximum loan guaranty percentage through March 4, 2011, or until available funding was exhausted (which occurred on January 3, 2011).

This report opens with a discussion of the rationale provided for the 504/CDC program, the program’s borrower and lender eligibility standards, program requirements, and program statistics, including loan volume, loss rates, use of the proceeds, borrower satisfaction, and borrower demographics.

It then examines congressional action taken during the 111th Congress to help small businesses gain greater access to capital, including the enactment of ARRA and P.L. 111-240, the Small Business Jobs Act of 2010. It also examines issues raised concerning the SBA’s administration of the program, including the oversight of 504/CDC lenders.


Date of Report: June 16, 2011
Number of Pages: 29
Order Number: RS41184
Price: $29.95

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