Savings and Wealth in Old Age - Essay Example

Introduction According to biology, old age can be defined as a stage where an individual experiences degeneration of body parts example grey hair, stooping, loss of eyesight, hearing and so on. According to the government one is considered old when they reach the set retirement age which is between 58 and 60 years. Savings on the other hand is accumulating wealth for later use or incase of emergency. In economics savings is considered as a prerequisite of investment. Wealth is the accumulation and abundance of resources an individual owns. It can terms of money, infrastructure or shares in the stock market. The government is responsible in setting up policies that will help individual to accumulate resources that will aid them when they reach the retirement age or old age. For this reason one finds pension policies, taxation policies, housing policies and policies that govern homes where the old can live. Savings behavior and effects of public policy on savings The economy of America depends on the saving behavior of the people. To come up with this kind of behavior, one has to look at the patterns at which people are saving or view savings. Patterns of saving reveal the economic conditions of a country. High savings mean that individuals have high disposable income thus their living standards are better (Graham et. al., 2003). The saving rates of Americans have lately decreased to 5.3% from 7.6% annually. This is because very many Americans have a problem with household debt which has been on the increase. This is because Americans are spending more money in purchasing things that are essential for their existence. There is the problem of the wealth effect where the more an individual owns the more he or she needs to pay for it. The taxation policy really discourages savings and thus when such a wealthy person gets old; they have nothing to spend because he or she spent it securing the wealth. This reduces the accumulation of wealth for usage during the old age (Graham et. al., 2003). For the past ten years, there has been a great increase in the labor productivity of the American people. Many individuals are depending on giving out their labor services which will most likely lead them to spend more in future. Moreover, the government and the central bank have relaxed in setting up policies to control the circulation of liquid cash within the economy. People can quickly acquire liquid cash easily than before. This is increasing the inflation rate thus making things become more expensive and savings reducing completely. When one spends time purchasing goods and services for the use of that particular time, then it means that they have no more cash to keep for later use or for emergencies. Thus wealth is not accumulated and its abundance is a long gone story. This is a negative impact to the people because they have nothing to sustain them when they reach old age (Paul M. et al., 1996). Since the government sets the particular policies that affect the savings behavior of the people, it has the responsibility of coming up with public policies that will increase national savings. These can only be done by making good public policies. It can first of all make contractionary monetary policies to control the circulation of liquid cash within the economy. This will reduce the amount of liquid cash that is circulating within the economy. The action will reduce inflation by making money become scarce to the people. Thus expenditure in goods and services will reduce prompting people to save more (Paul M. et al., 1996). Savings can not be done by the government alone. Americans need to balance their purchase of things to enable them to save for their future which is mostly old age. These can be done through campaigns that are being used to educate individuals against high rates of purchasing. They need to learn to purchase the most important things and leave out those that are less important (Paul M. et al., 1996). The taxation policy by the government is a complete discouragement to saving by individuals. The tax rates are very high and they make goods and services very expensive. This makes individuals to spend more and save less. Thus every cent they get goes to their daily needs and no money is kept for future use. It is important for the government to set up taxation policies that will discourage high rates of purchasing and increase savings. It can be done by reducing government expenditure to finance the budget because it will lead to low tax rates. To set up good savings policies, the government of America wants to com[pare its saving rate with other countries, then look at the past behaviors of savings and what made people save more then come up with a strong and effective policy to encourage people to save (Graham et. al., 2003). A government has the responsibility of ensuring that organizations implement the pension scheme it sets. Pension is a guaranteed income to an individual after retirement. A government or an organization is responsible to ensure that a person receives his or her pension after they retire. In the 1980's, America used the defined benefit as form of retirement plan but today the most common plan is defined contributions. There is a possibility of mixing both plans to have hybrid plans such as pension equity. It should be noted that the pension scheme is different from the Social Security of USA which mainly deals with giving benefits to the old, disabled and survivors. It provides insurance benefits upon retirement of a person. One gets such benefits when they attain the age of 62 and above (Burkhauser, 2000). One is entitled to this benefit if they were paying the amount of money that was needed by the Social Security while they were employed. When one reaches the retirement age, he or she can apply for the benefits or the Disability Insurance can automatically convert them. One pays for Social Security benefits through taxation of monthly income. It also depends on the number of years one has been working. The quarters of coverage (QC) is used to measure the amount of time one has spent in working. To gain social security benefits, a person must have at least 1QC annually. The amount of benefits paid to a person depends on different factors like: taxes paid in the social security trust fund, the age to claim benefits, currently earned income and services offered to the military. The biggest short coming with the government is where it allows casual workers. Such workers can in no way have social security trust fund because they are not taxed directly. This is because they are not employed permanently and do not have a defined payroll. For such employees, it becomes very hard for them to survive when they are old because they can not access any funds from the Social Security (Burkhauser, 2000). Housing wealth and accessibility The home equity is a government policy that wants to see that every individual has the ability to own a house permanently. The policy by the government is guided by attaining the American dream of fighting poverty completely. For this reason, it needs to keep houses accessible to all low and high income earners. The main aim of the policy is to encourage people to have permanent ownership of houses and to increase the opportunities of affording housing. The issues of home equity led to many Americans borrowing secured loans from banks for the sake of consumption and buying houses. These borrowings have led to the increase in debt by the people. There is more spending of disposable income in consumption than in saving (John, 2006). The fact that loaners were ready to utilize the chance of home equity to give secured loans, led to the change of saving behaviors of the consumers. It was very easy for consumers to borrow money to purchase houses or for consumption purposes. This led to a decline of savings thus individual's disposable income was used to finance the loans and their interests. Thus savings reduced. For such a problem, the government needs to revisit its strategy because it has reduced savings by increasing current consumption. This means that as individuals get older, they will not have much to sustain them thus becoming a burden to the society. The deposit interest rates have to be risen to encourage people to save more. Discouragement of excessive borrowing can be done by raising the loan able interest rates. This will make sure that the consumption rates of individuals have gone down while their saving rates have increased. The increase in savings will enable an individual to comfortably save for his or her old age (John, 2006). Bequest behavior and wealth taxation Since 1797, America has used the wealth transfer tax system. This is where one is taxed after inheriting a particular resource and this includes gifts too. When a particular house is passed to a person, then it means that the inheritor will have to pay all the mortgages or any other fee that needs to be paid to the government. This policy has affected the Americans' bequest behavior because some people who are left behind to inherit particular property find it a burden to sustain them through paying the transfer of wealth taxes (Joint Committee on Taxation, 2008). The taxes further more, increase as the amount of wealth increases. This leads to the break up of family ties because individuals have no motivator to save on something that will not be used by their own blood. However, there are some positive arguments in regard to the wealth tax transfer. It is a way to ensure that there is no concentration of economic power in one family. Another reason is that it can lead to equality of opportunity because a rich child now will not necessarily have access to the same amount of wealth later in life. This will make both the rich child and the poor child then to be equal later in life. The most important point of taxing inherited wealth is that there is continuous revenue to the government. This enables it to gain funds for the budget (Joint Committee on Taxation, 2008). There are many ways in which the government of America and foreign jurisdiction tax wealth transfers. The transferor is imposed on a tax and such occurs in the issuance of a gift or estate. There is gift tax and estate tax left by an individual. Other generations are skipped when it comes to paying taxes for a particular property that has been inherited. A transferee can also be taxed on the gift or bequest offered. A tax is imposed on anything that has been inherited. Sometimes the gifts and bequests are treated like the gross income thus taxed like any other income (Joint Committee on Taxation, 2008). It is argued that the recipient is always at a loss because either he or she is taxed or if the transferor is taxed, he or she gains a less amount of wealth. Such deductions made on both the transferor and the transferees are a great discouragement to saving. If an owner is going to be taxed highly because of giving out property, then it is better for them to have less property for the sake of reducing the tax rates. It is discouraging because it will lead to the inheritor having a less amount of wealth that was left for him or her. If one inherits property, they continue paying taxes for it until their death. This is a burden to an old person because they are not acquiring any income that can sustain them as they are being taxed (Joint Committee on Taxation, 2008). Bequest to Number of Bequests Bequests per Return Spouse 4698 0.6 son 4674 0.5 Daughter 4807 0.6 Grandchild 5547 0.7 Sibling 1794 0.2 Not related 11847 1.4 Table to show the number of bequest tax returns and their recipients. Housing choice and physical infirmity It is evident that as an individual gets older, they are prone to diseases or physical infirmity. This can lead to them having poor housing conditions as they can not take care of themselves and their houses as well. Despite the fact that the government has an influence in influencing housing on the elderly, it also depends with the individuals. The choices that an individual makes as they are young have a great influence on the kind of housing they are able to have as they age. If an individual does not save as much when he or she is working, they are bound to have poor housing conditions when they are older. Such individuals find themselves living in the same housing conditions after they have retired. Some move to other houses that are smaller and may pose a risk in their living. This is because old people are less amused by their prior choices of housing (David, 2001). The saving rates then are part of the government policies. Thus there is a need to regulate the consumption levels to ensure that people are able to save adequately for use in their old age. It is quite noticeable that poverty levels affect the old due to high taxation rates as they work hard. The fact that the more one earns later leads to high taxation, leads to reduction in saving by individuals. They are greatly discouraged to keep wealth to use when they are old. The government proposes that as people become too old and dependent, they need to join the community care centers for the elderly. Here they are well taken care off until they die. The care centers are supposed to follow the policies set by the government. They need to be very clean and have all the facilities to cater for the aged. Though the aged feel like they are confined and neglected in these homes, it provides better living conditions for the elderly (David, 2001). The government is responsible for setting conditions for healthy housing. This entails using the best building materials, non hazardous paints and the mode that a house is built is also essential. It needs to ensure that houses have adequate water; lighting and the surroundings should be very clean. This is a way of ensuring that fewer accidents due to collapse of houses and spread of diseases due to poor sanitation. A healthy maintained house will help an aged person to live comfortably by avoiding things like leakages that might cause falling. The main point is that the government policy of housing is related to reduction of accidents in houses (David, 2001). Executive Summary The main policy maker in savings and wealth in regard to the old age is the government. The government is supposed to come up with policies that will increase saving rates when one has the ability to work for usage in the old age. It has the responsibility of educating its citizens on the importance of saving for the sake of having a secure life in old age. Moreover, the government needs to come up with a policy that will reduce the levels of consumption and thus increase the levels of savings. This is the most important policy implication because it will ensure that taxation of income and goods reduce so that individuals purchase less leading to more savings. Another policy implication should be on the effect of wealth. The government needs to ensure that the tax system does not fully burden those who own a large amount of wealth. The main idea is to reduce the frustrations of people surviving in the old age. References Burkhauser R., 2000. Supplemental Security income program: National Bureau of Economics Research Paper. Pp. 1-54. David N., 2001. Caring for Our elderly: Housing and Aging. Pp.144-154. Graham et al., 2003. Longevity and life-cycle of Savings: Journal of Economics, Boston School of Public Health. Vol. 5, pp. 134-144. John D., 2006. USA Housing Slowdown. Insights from Federal Reserve Bank-Economics. Pp. 104-118. Joint Committee on Taxation, 2008. Senate committee on Finance: description of Alternative wealth Transfer Tax Systems. Pp. 1-26. Paul M. et al., 1996. Rate of return of older households- saving behavior of older household. Vol. 50, pp. 111-120. Read More