An Analysis of American Saving Patterns and Their Consequences
In recent years, the American savings rate has gone negative following many years of declining rates. This drop in savings rate may, however, be partially the result of how the rate is calculated. Calculation error or not, the decreased rate of savings in the United States is an important concern in the long run. The American saving rate, after calculation adjustments, does continue to decline; a problem which needs to be assessed further and addressed.
The savings rate officially went negative in 2005 and continued down to -1.1 percent in 2006.1 This compared to the broad 1950-1992 average of 8.6 percent, or even the 1999-2004 average of 2.2 percent2, has become a troubling figure for millions of Americans. What makes this even more concerning is that the monthly debt service payments of households has reached an all time high percentage of personal income3. The implications of the proposed calculation adjustments will be addressed first, followed by an economic analysis of what is causing the very real decline in the rate of personal savings.
The first proposed issue in the calculation of the savings rate is not, in fact, based on a calculation adjustment, but the measure itself. The most recent data used by the Bureau of Economic Analysis on the savings rate is preliminary data. Charles Steindel, in his article How Worrisome Is a Negative Savings Rate?, notes that data on the savings rate in the 1970s was up to two percent higher in the 1986 report than in the 1981 report.4 While this is not an entirely normal happening, the potential for this much variation could mean that we will find in five years that the savings rate was never negative in the first place.
The most visible calculation method to the public is the NIPA method. This is the most popularly reported number as a result of this calculation going negative in 20055. The primary issue with this method is how it accounts for realized capital gains. While dividends are added without issue, stock repurchase gains are not included in income although the taxes paid on these gains are deducted from disposable income. Stock repurchase has grown inconceivably since from 2003 to 2006 going from a mere $42 billion to a much more substantial $602 billion.6 This represents an increase of $560 billion in unreported disposable income and an $84 billion reported decrease in disposable income at the 15 percent capital gains tax rate.7 According to Steindel, this anomaly can account for approximately one-third of the savings rate decrease between 2003 and 2006.8 Also, by the NIPA method, pension benefits received are not counted as personal income, but contributions to pension plans are deducted from personal disposable income. Net benefits have risen quite consistently over the past several decades and were at an all time high in 2005, the last year that was reported by the Bureau of Economic Analysis.9 Naturally, this also has a negative impact on the calculated savings rate.
One proposed method for a more realistic measure of saving is to combine individuals and corporations to find a gross private saving measure. By this measure, in 2006 when the NIPA personal savings rate was -1.1 percent, the gross private saving rate was approximately 13 percent of the GDP. Furthermore, while the personal savings rate has been consistently dropping for decades, the gross private saving rate has remained relatively stable over the past several years.10
Despite all of these proposed anomalies and adjustments, the personal savings rate in the United States has indeed declined over the past several years. As we have seen, the rate may not have declined as much as has been reported, but even in post-adjustment terms the rate has been slipping. This, of course, brings about the question of whether Americans are saving enough and also the potential economic implications if they are not.
It is fairly unanimous amongst economists that the current personal savings rate, while not necessarily a problem in the short-run, will become an appreciable problem in the long-run.11 A component of the reduced current savings rate is the levels of energy costs rising substantially in 2005 and continuing to rise. Such a substantial and unforeseen increase in necessary expenses has understandably put a strain on the consumer. Steindel sees this issue waning as consumers increasingly move to more energy-efficient appliances and vehicles.12 Even with this new consumerism, however, the savings rate will likely not rise by much. To answer the first question posed: No, Americans are not actively saving enough of their disposable funds.
There are serious economic implications for this lack of savings in the long-run.13 Consumers are one of the greatest lenders of funds in the economy. A decrease in savings by consumers relates a reduction in the supply of funds for the commercial and public sectors to borrow. It follows, then, that this reduction in supply will increase the price of borrowing funds in the form of higher interest. While the public sector is not interest-rate sensitive, businesses are the most interest-rate sensitive of all borrowers. This increased cost of borrowing to businesses will make it hard to grow business or even remain at the same level. Thereby, the economy will stagnate with sustained low levels of consumer saving.
These effects could trickle down even further back to the consumer themselves. If businesses are struggling resultant of the increased cost of borrowing, they may seek to cut costs by laying-off workers. These workers, because they have not been saving and likely have a considerable debt load, will struggle to cover even basic expenses and will likely find a substantial challenge in finding new employment. If a portion of these unemployed workers are forced to declare bankruptcy, the problems only escalate further. The credit companies, utilities, and other businesses servicing these bankrupt accounts will be forced to write off this bad debt. The bankrupted workers will find it difficult, or even impossible, to find credit in the future. The written-off debt in combination with the new lack of consumer credit will further stagnate or even depress the economy.
The above is, of course, a worst case scenario, but the result is a very real possibility. The rampant consumerism of the 1990s and early 2000s has led the public to expect a higher standard of living and many are choosing to save less and borrow more to maintain this new standard.14 Also, during these high points in our economy, individuals increased their estimates of permanent income as a result of extremely high labor productivity in the aforementioned time period. Also to blame, Massimo Guidolin and Elizabeth A. La Jeunesse argue, are financial innovations such as interest-only mortgages and subprime loans. All of these factors have synchronously combined to create our current conundrum.
Indeed, a potential savings crisis is a reality for the United States. Now that there is an understanding of how it came about and the potential implications, it is wise to find a path to reform these spending and saving habits. Increasing levels of saving isn’t hard, it merely requires a few well thought-out actions on the saver’s part. Pat Regnier, in The Call to Make America Thrifty Again, suggests that savings bonds would be a solid saving strategy.15 Although not marketed as well these days, EE and I bonds are still available for purchase. The bonds make it easier to save the money than a simple savings account, because you can see clearly the appreciable opportunity cost of turning them in early to make a luxury purchase. Further, Regnier suggests offering on tax forms the option to receive tax refunds in savings bond form.
In this authors opinion, there are even easier methods of “positive reinforcement” saving. For example, if an employer offers direct deposit, their employees may elect to have a portion of each paycheck deposited directly into a savings account while the remainder is directed to the checking account. In this fashion, the saver need not be aware of the funds going into the savings account and the balance that makes it to the checking account is spendable.
Of course, not everyone has a level of income that will allow them to uncaringly tuck away a percentage of each paycheck. This reform in savings will undoubtedly need to be accompanied in a reform in spending. It is important that the saver is tracking reductions in expenses and saving an equivalent amount. For example, cancelling an unlimited rental account at Blockbuster will save 30 dollars each month and upon this cancellation the saver should increase the portion of their paycheck being direct deposited into a savings account by the equivalent 30 dollars each month.
Americans need to relearn the art and science of thrift to avoid the economic consequences of not saving enough. It will require an adjustment in the standard of living expectations and saving habits of a generation, but in the long-run it may be the only thing that can save our fragile economy.
Works Cited
Regnier, Pat. "The Call to Make America Thrifty Again." Money Aug. 2008: 148+. Business Source Premier. EBSCO. [Library name], [City], [State abbreviation]. 14 Aug. 2008
Guidolin, Massimo, and Elizabeth A. La Jeunesse.. "The Decline in the U.S. Personal Saving Rate: Is It Real and Is It a Puzzle?." Review (00149187) 89.6 (Nov. 2007): 491-514. Business Source Premier. EBSCO. [Library name], [City], [State abbreviation]. 14 Aug. 2008
Steindel, Charles. "How Worrisome Is a Negative Saving Rate?." Current Issues in Economics & Finance 13.4 (May 2007): 1-7. Business Source Premier. EBSCO. [Library name], [City], [State abbreviation]. 14 Aug. 2008
1,2 See Steindel, page 1
3 See Guidolin, page 491
4 See Steindel, pages 2 and 3; chart 2 on page 3
5 See Guidolin, page 494
6 See Steindel, page 3
7 These numbers were produced by the author, based upon the subtraction of 2006 numbers from 2003 numbers and taking 15 percent of the resultant number.
8 See Steindel, page 4
9 See Guidolin, page 500, Figure 6
10 See Steindel, page 4 and 5 “Broader Saving Trends”
11 See Steindel, page 2
12 See Steindel, page 3
13 The following is an economic analysis based on widely-accepted “stylized facts” and economic theories as interpreted by the author.
14 See Guiodlin, page 508-510
15 See Regnier article
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