Sep

8

The United States Personal Savings Rate Freaks Me Out.

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sascha's picture

When I look at the fall of the personal savings rate in the United States over the past 50 years, I cannot help but cringe. We're on a fairly linear trend towards completely obliterating our personal reserves.

Personal savings are one of the few things that keeps people above water when the inevitable vagaries of life knock us off our feet. Without savings we're all more prone to getting taken advantage of (e.g., we can't afford to leave a bad job), less capable of recovering from unexpected expenses, and often more risk-adverse (thus turning down opportunities we might otherwise want to take).

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One facet of the problem is that we are, as a whole, living well beyond our means. Eating out far too much, buying far too many gizmos and clothes, and expending money far beyond what's sustainable. As a consumer society, we're living in the here and now -- all but guaranteeing that even tougher times are going to lay ahead.

But the flip side of this problem is the institutionalized processes and mandates that strip individuals of an ability to save. Medical expenses and college costs have both gone through the roof -- systematically sapping our society of savings. Cities are built in ways that all but mandate car ownership -- and often dual-car ownership for multiple bread-winning families. Credit cards allow us to overextend ourselves and extract interest that otherwise might have been saved. Social safety nets to help the working poor move up in the world have been disassembled, tax breaks accrue to the rich, and better incentives to promote savings have not been developed by banks and other financial institutions.

We're a "spend it now society" -- but when you don't save for a generation, you all but guarantee multiple generations of hardship. I fear it's going to be a remarkably grim future for Americans. Most of us have no idea how overextended we actually are -- both individually and as a country. And yet, few politicians and decision-makers -- who should know better -- are raising concerns about our current trajectory.

My colleagues at the New America Foundation just released a new (free) resource and analysis, "The Assets Agenda: Policy Options to Promote Savings and Asset Ownership by Low- and Moderate-Income Americans" that is well worth the read:


While it focuses on institutional changes to help promote savings, the lessons for individual-level intervention are equally compelling.

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  1. The Savings Maven (not verified) on Tue, 2008-09-09 23:00

    Very alarming chart. But, even more alarming is that apparently people need the New America Foundation to tell them they should be saving! Excellent publication, just what we need right now. Indeed, the collapse in home valuations may just be the thing to make people save cash. For too long, houses have been the piggy bank and that is why, to keep "the people" happy and not complaining about America's lack of universal health care, the decrepit public infrastructure, lousy public schools, outrageous college costs, paltry unemployment insurance -- the past few administrations (Democrats included) have made sure that house prices and share prices kept rising. What better way to keep the illusion alive? Of course when the stock market took a nosedive a few years ago, then Fed Chairman Greenspan decided it was too dangerous to allow housing prices to follow so he created another bubble -- these bubbles are designed to keep "the people" happy and stuck in illusion. Unfortunately you can't keep bubbles running forever.

    So what are people going to do now -- now that their paper/credit card wealth has evaporated overnight? 

     

  2. Anonymous (not verified) on Tue, 2008-11-11 16:15

    The way the federal government calculates savings is error prone to say the least.  You might want to take a look at this article.  It presents an excellent argument on why the savings rate as caluculated by the federal goevernment is flawed.

    Personal Saving Rate is a Misleading Indicator

    http://realclearpolitics.blogs.time.com/2007/02/22/personal-saving-rate-is-a-misleading-indicator/

  3. sascha on Wed, 2008-11-12 14:38

    Interesting article, anon. However, the adjustments it calls for would simply shift the savings rate in a more positive direction, they wouldn't really change the delta. So even if I agreed with the article's analysis, the direction of change would remain negative over time -- the linear drop would be unaffected.

    I would also note that the indicators that the author of that article claims are better are themselves remarkably biased. Any measure of average wealth completely disregards the growing wealth divide in the United States. Commentators who claim that the average is going up ignore both the "floor" effect (i.e., it's hard to go too far in the negative direction whereas it is possible to be fabulously wealthy). Put another way, this claim means that if 500,000 people are worth $100,000 today, and 499,999 of those people are worth $1,000 next year (but the last guy is Bill Gates and worth $50 billion), net worth would have increased as a whole -- but on-the-ground reality would clearly demonstrate that people's quality of life was better off.

    However, I suspect that we would find that people's net worth is higher today than 50 years ago, however people are also saving less than before. This means that people's worth is both higher, but also more fragile. While I wrote the original post prior to the current financial fiasco, I think it's eerily prescient of the problems that this sort of over-leveraging creates.


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