Not a Lot of IRA Savings in North Carolina

It turns out that making a contribution to your individual retirement account (IRA) is pretty hard. Only about 1 in 14 tax filers in North Carolina takes advantage of the opportunity to protect your income from taxes.

This number comes from data that I found through the IRS.  Only 7.4 percent of filers made an IRA contribution in 2007. That number includes people who made any kind of contribution to either a ROTH, a SEP, or a traditional IRA.  During 2006 and 2007, contributors were allowed to put $4,000 in a Roth if they were under 50, and $5,000 if they were older.

The IRA is one of the two main ways that middle-class households are able to protect their earnings from taxes. The other most common way is through the home mortgage deduction. For the well-off, there are all kinds of vehicles to protect earnings. For people that don’t make that much, there are very few incentives designed to stimulate savings. Individual Development Accounts (IDAs) sometimes provide matching funds to savers, but those are not able to reach a wide portion of the population.

Savings is an important problem facing our country. Until recently, we had a negative savings rate. In fact, during 2006 (for which those 2007 returns were filed), our national savings rate was -0.5 percent! We’re probably doing better now. It is hard to spend when your credit limit has been slashed.  A cash economy is a constricted economy, even if the money supply is exploding. By comparison, Business Week has a few estimates on savings rates elsewhere:

• Europe (average) 20 percent
• Japan 25 percent
• China 50 percent (estimate credited to International Monetary Fund)

In the short-run, our spending can act as its own stimulus. Unfortunately, the long-term repercussions are significant. The lack of available capital in our banking system servers to make sure that we will not reinvest in our businesses. For individuals, it means that many households will have a hard time retiring.  The Employee Benefits Research Institute estimates that 63 percent of households that include a person of more than 55 years old have some kind of debt. The average debt among seniors is over $70,000.

The IRA number (share of filers making a contribution) is probably even lower now, as people are now tightening their belts and trying to get through this recession.