Multi-sided puzzle of supply-side economics

At the heart of President Reagan's economics lies the hope that America can save itself only if Americans save for themselves. New tax enticements, such as individual retirement accounts (IRAs) available in 1982, allow US workers to stash away cash for future needs rather than spend it today, thus supplying capital for business ventures.

This ''gone today, here tomorrow'' theory of a saving society will likely have its greatest effect in the building of financial nest eggs for Americans' later years, whether it is in retirement or in ''rehirement'' for a second career.

To many younger workers, however, saving money for the golden years is about as important as a raincoat in the Mojave Desert. Besides having low savings rates normally, the under-35 workers may be lulled into thinking that social security and employer pensions will meet their later-life financial needs.

That assumption is in doubt for various reasons: inflation, looming funding crises for social security, early retirement, and periods of unemployment for many workers.

Like a Rubik's Cube puzzle, a wage-earner today must twist and turn an increasingly-complex pattern of options to ensure a stable retirement income from three sources - social security, private pensions (if available), and - more and more - personal savings.

The time has come for a system in which people provide more of their own retirement savings, believes Norman Ture, undersecretary of the Treasury for tax affairs.

The Reagan tax act with its incentives for direct savings is a nice way for Uncle Sam to say, ''Don't count on social security.'' The political groundwork is being laid for easing back government's retirement benefits in decades ahead.

Those workers in their 20s, 30s, and 40s will soon see an example of social security's problems forecast for the 21st century. The nation's retirement Trust Fund is projected to fall below the level needed to cover payments by 1985. A Harris poll released in November showed that 68 percent of Americans aged 18 to 54 had ''hardly any'' confidence they would collect benefits upon retirement.

Still, today's social-security benefits replace as much as 70 percent of preretirement earnings. In 1984, for instance, the estimated maximum benefit for 65-year-olds will be a tax-free $8,331. Prof. Dennis Logue of Dartmouth notes that the rising benefits ''undermine incentives to save.''

One illustration: Of male workers making a median salary of $27,000, about 80 percent expect to finance their retirement at least partly from personal savings , according to a survey of the Investment Company Institute last year. Yet about half have reduced their savings, and over one-third have not yet begun to save specifically for retirement.

By the year 2010 social security might be forced to return to its original role as a ''safety net'' for the elderly, rather than the financial trapeze to a higher standard of living. In that year the earliest of babies born in the years just after World War II will be nearing retirement age. Then the Trust Fund will be swamped with demand.

''If the growth of social security is to be restricted, accumulated personal savings will have to become an increasingly important component of retirement income,'' concludes the respected Committee for Economic Development in a 1981 report on retirement.

''It is through their personal saving decisions that individuals achieve the greatest flexibility in adjusting the shape and timing of their lifelong consumption patterns,'' the study adds.

Because many private pensions are integrated with social security benefits, the uncertainty of the government's Trust Fund may put the adequacy of company benefits in doubt as well. Even so, private pension assets are expected to reach

The private pension system, which covers about 75 percent of workers between 25 and 64 years old, has not kept its current pensioners' benefits up with the inflated costs that retirees experience.

Last January a presidential commission on pension policy forecast only a small increase in the number of workers under company pension programs. The panel - not confident that people would save much more for retirement themselves - recommended a mandatory pension policy for private firms that would cost at least 3 percent of payroll a year.

Adding a second mandatory pension system to social security has brought grumbles among US firms. The boosts in the social-security tax rate from 1980 to 1987, which top executives find ''most disturbing'' in surveys, crowd out expanded use of employer pension programs, states the Employee Benefits Research Institute.

The higher tax on social security, which will reach a possible maximum rate of 7.15 percent in 1987, severely cuts into personal savings, most studies conclude.In addition, inflation and the 1974 Employee Retirement Income Security Act (ERISA) have forced a substantial shift away from company practices of defining pension benefits to defining both employer and employee contributions to retirement coffers. A few companies have begun to ask workers to chip into a special fund to protect their pensions from inflation. The reason is simple: At a 9 percent rate of inflation, a retiree receiving stable benefits from a private plan loses half of his or her purchasing power after a mere eight years of retirement.''It is desirable and necessary that individuals participate actively in providing for their retirement security,'' says Sylvester J. Schieber, research director of Employee Benefit Research Institute in Washington.The institute forecasts a slight rise in real pension benefits for the future. The average pension benefit for married couples is expected to rise from $4,800 in 1979 to $5,000 in 2004 (in 1979 dollars). For unmarried individuals, the increase over the 25 years goes from $3,500 to $4,000.More significantly, the percentage of families eligible for private pension benefits increases from 39 percent to 81 percent.These figures, the institute admits, ''may appear to be somewhat optimistic about the future role of pensions in the retirement income security system.''Will America's savings climate change? The Reagan administration hopes that the US level of savings, currently about 5 percent of income, will rise to European levels of over 10 percent. Many economists predict an 8 percent savings rate by 1983. When Canada provided inducements for personal savings in the early 1970s, its savings rate doubled from about 5 to more than 10 percent. Data Resources Inc. estimates that an increased US savings rate will bring relatively more wealth to younger workers, making their incomes rise faster than elderly Americans (see chart).At Wall Street's U.S. Trust Company, money managers ''detect a growing desire by their clients to save and invest in contrast to a previous philosophy of 'spend now because future prices will be higher,' '' says John R. Groome, director of research.The administration is counting on the tax-deferred IRAs to become very popular, especially with the middle class. Many companies are still deciding whether to help employees set up IRAs, deducting payments from payrolls and investing them for workers.The IRA potential may be enormous based on the experience of ''thrift plans,'' which offer no tax advanatage to employees. For several years, employers have swiftly taken advantage of tax incentives for these plans, which allow workers the option to place up to 6 percent of their salary in a self-help pension plan. The employer matches contributions up to 50 percent - $1 for every $2 saved by a worker. While employees receive no tax break, employers do.Such plans can pull the spendthrift out of almost anybody. In companies offering thrift plans, an average 72 percent of workers participate , according to a 1977 survey of 236 corporations by Bankers Trust Company. But if employers matched 100 percent of a worker's contribution, participation went up to 86 percent. If matching was 25 percent or less, fewer than 52 percent of workers signed up for the thrift plans. ''The janitors are as willing to save as much as the guy at the top,'' says Mr. Schieber. Other incentives draw workers into self-help pensions. If workers have a choice in where their 6 percent of salary is invested, then participation jumps up another 5 percent. And if the contribution goes into stocks other than the employee's company, almost 15 percent more workers sign up.The number of American workers opening IRAs in the next year or two is estimated to at least double, according to the Employee Benefits Research Institute. An estimated 5 to 15 percent of Americans making $ 15,000 to $20,000 wil use IRAs. But for those earning $20,000 to $50,000, anywhere from 21 to 65 percent are expected to start IRAs. The over $50,000 money-earners will range from 54 to 100 percent participation, the institute forecasts.Still, the president's commission on pension policy does not believe that tax incentives will significantly increase the pension plan participation of low- and moderate-income workers. And such groups as the Pension Rights Center, which lobbies on behalf of retirees, says it is unrealistic to expect a new spirit of volunteerism in pension contributions by workers. The Harris poll found 57 percent of Americans who save have had to dip into savings in the past year to meet expenses.But comes tax time in 1982, when Americans fully realize the cost of not building a tax-deferred nestegg during their working years, the IRAs might catch on with a bang. ''People will do about anything to avoid a dollar's worth of taxes,'' says Mr. Schieber.