The Collapse of Personal Savings Rate in America
This year’s dramatic shift in the economy found many Americans without a ‘rainy day’ fund. Millions of Americans lost their jobs and saw their 401(k) wiped out. It is unsurprising then to see that the trend of personal savings rate has been on a fast-pace decline since the mid 1980’s, reaching decade-low levels in recent years. The following graphic shows the trend of personal savings rate per month from 1959 to 2009, along with an alarmingly opposing trend of rising consumer debt.
(click image to enlarge)
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Personal savings rate is a key measurement of the amount of resources American household have available to contribute to the national saving. A low personal saving rate limits how much the nation can invest and so ultimately limits future economic growth.
As you look at the graph above, consider this: personal savings rate also correlates with Americans’ ability to sustain their rate of spending. Because personal spending represents about two-thirds of the U.S. economy, a low personal savings rate raises questions about whether Americans have adequate resources to withstand a financial emergency such as unemployment in the event of an economic downturn.
Despite the downward trend of personal savings rate in America, a change in money mindset has emerged from this recession. Personal savings rate has climbed to its highest level in the past 15 years while U.S. consumer outstanding credit plunged in recent months. Having directly seen the impact of facing a recession without a cushion, many Americans are becoming thriftier and savvier in managing their money.
Why was there a decline in personal saving? A few things may explain the trend: 1) Increasing availability and the abundance of consumer credit. 2) General positive outlook and expectation on continued economic growth.
Why do you think Americans started saving less money in recent decades? Please feel free to share your thoughts below.
I would like to see what the Fed was setting interest rates at along this graph. Then you will really understand the cause of our current mess.
Comment by He Who Pawns — September 29, 2009 @ 10:26 am
Billshrink Guy,
Well written, timely article. Does the data from the US Department of Commerce Bureau of Economic Analysis include retirement plan contributions? I seem to recall that some of their statistics are still calculated using methods established prior to the creation of 401k’s and IRA’s.
Still, good news that the savings rate has improved, although, it’s a shame that it took an economic collapse to motivate saving.
Best regards,
Paul
Author - Investiphobia: You Can Invest Without Fear
Comment by Paul Puckett — September 29, 2009 @ 10:31 am
This has good points, but you can’t compare percents and totals in the same graph.
Also, the consumer deb, as a total number, is pretty much useless unless you index it to inflation. It’s like putting the min wage rate on a graph and showing how much it has increased over the years. Unless you index for inflation, then you don’t know the “real” value of the number from 1960 compared to today.
Lonnie
Comment by Lonnie — September 29, 2009 @ 11:14 am
Personal savings rate also reflects how much excess money people have above what they need to live–in other words, the prosperity of the average American.
When my parents bought their first house in 1963, they were 36 and 37 years old. Their house payment was $110 per month, and my father earned $600 per month. His take home pay was most of that, since at $7,200 per year he wasn’t paying much taxes. Of course they could afford to save money. They could live on maybe $300-$400 per month and save the rest.
In 2009, it is impossible to find an average, unskilled worker without a college degree who can buy a 2-bedroom house in a metropolitan area and have a house payment that is less than 20% of his take-home pay.
Face it: the gap between the wealthy and the poor has increased incredibly and the distribution of wealth is going the way that it did in pre-revolutionary France at the time of Louis XVI.
People aren’t saving as much because they need more and more of their income just to live. The average American isn’t as wealthy today as he was in 1950.
Comment by Just My Opinion — September 29, 2009 @ 11:33 am
Why do you think Americans started saving less money in recent decades?
Insanely low interest rates maybe?
Comment by skeksis — September 29, 2009 @ 11:51 am
While indexing the graph to inflation would be informative, it is not necessary since the debt increase significantly exceeds that of inflation. If the graph were fairly level, inflation might be more important, but the graph gets radically steeper as the years move on!
Comment by Tom — September 29, 2009 @ 2:29 pm
Thanks for the comments everyone.
Paul: The BEA’s National Income and Product Accounts (NIPA) personal savings rate is calculated as the ratio of personal saving to disposable personal income. NIPA personal income used in the calculation includes wages, asset income (dividends and interest), rental income and supplements to wages, including pension and 401(k) contributions. So yes, retirement plans are factored in. It’s certainly not an end-all capture of how Americans are saving today, as the NIPA calculation excludes captial gains from investments (including gains within retirement plans and real estate).
Lonnie: You make a good point and we added the consumer outstanding credit graph mainly as a supplement to the personal savings rate graphic. Interestinly enough, the plunge in consumer credit isn’t necessary a good thing too, as many parts of it are due to foreclosures and lenders writing off loans.
Just My Opinion: Good mention. Even if you factor in inflation from the consumer price index, the cost of living in many major metropolitan area has substantially increased.
skeksis: Woops we should have clarify: widely available credit was also because of historic low interest rates.
Comment by BillShrink_Guy — September 29, 2009 @ 3:03 pm
An increased savings rate is not an unmitigated blessing.
If the individuals are saving, then they are not buying,
and in the midst of a recession, with our economy based about
70% on consumer spending, that does not bode well for a dramatic pickup in business fortunes.
Comment by JustPlainBill — September 29, 2009 @ 4:01 pm
Savings is at an all time low because the Federal Reserve artificially sets interest rates low. Banks borrow from the Fed at 0%. How much incentive is there for you and I to save when a savings account earns less than the rate of inflation? It’s not even worth the time it takes to balance a bank statement to earn $1.80 a month. The system is rigged by the banks. Wake up America. It’s time to end the Federal Reserve.
Comment by Harold — September 29, 2009 @ 4:52 pm
I like the graphic.
Now can you correlate the data against interest rates paid on savings accounts?
Or against household expenses?
How about personal taxation rates or even investment items like retirement plans?
I feel that these are also contributing factors in personal savings declines.
Comment by RRWest — September 29, 2009 @ 6:37 pm
For 2008-2009, it’s not that “a renewed interest in savings has begun” but rather, that hundreds of billions in debt has been erased. Through deleveraging both corporate (bank failures) and personal (foreclosures and home short-sales) and the transfer of debt (bailouts by deficit spending) a large amount of consumer debt has become public debt.
That’s my interpretation of the recent spike in the graph. It’s not a rise in spending, but a reduction of debt.
Comment by Ruggy — September 29, 2009 @ 8:52 pm
The more the unskilled and uneducated continue to have babies (in California, 60% of mothers with infants use public money for food and formula - that’s from NPR) that are fed, housed, raised, schooled, and jailed at the expense of the taxpayer, the more unskilled and uneducated people there will be, making little money while being taxed heavily for it.
Comment by P — October 1, 2009 @ 1:31 am