Managing Your Money : A WHIRLWIND OF REASONS : Why Americans Aren’t Socking Money Away
The problem is plain. The personal savings rate in the United States has taken a precipitous tumble. From World War II to 1980, net savings of individuals and businesses combined averaged 8% of national income.
Today, the rate is just 2%.
The identity of the culprit seems clear: those spend-happy yuppies of the me-generation, right?
A Brookings Institution report challenges that assumption, as well as other demographic theories on savings. The report, based on analysis of government statistics, was prepared by Barry Bosworth and Gary Burtless of Brookings and John Sabelhaus of Towson State University in Baltimore.
That demographics aren’t to blame for our lack of thrift isn’t encouraging, because it suggests that merely getting older won’t make us save more.
As it turns out, there’s no simple answer. The savings rate slide seems to be a result of relatively flat income growth, psychological factors and greater use of enticing debt-creators such as credit cards--not demographic dispositions, Bosworth says.
Examine the numbers. The average annual rate of income growth between 1970 and 1990 was 1.8%. The personal savings rate dropped from 8% in the 1970s to 5.3% in the 1980s and is now only 4%. (The rate is just 2% counting business savings, indicating that business isn’t doing much saving for the future either.)
While personal saving dropped in the 1980s, credit card debt rose dramatically--from $79 billion in 1981 to a whopping $253 billion in 1991, according to Spencer Nilson of the Nilson Report, a Santa Monica-based publication that focuses on the credit card industry.
So is the conventional wisdom just plain wrong? Consider some theories in light of the facts:
The Generation-Savings-Gap Theory . People in the 45-to-54 age group are least responsible for the savings dive because they are consistent, reliable savers. The older middle-age group buoyed the savings rate in the 1980s, while baby-boomers supplied the sandbags.
Well, that’s not the case, according to U.S. Labor Department reports based on household surveys. The Brookings report uses those statistics to compare the savings rate of various age groups in the first half of the 1970s and the first half of the 1980s, the most recent savings data available on a demographic basis. The savings rate of those in the 25-to-35 age range, which included some baby-boomers by 1985, did not change over that period. The savings rate of those in the 35-to-44 age range in the early 1980s, which included some other baby-boomers, declined 3%.
But those in the highly touted 45-to-54 range--their savings declined 6%, partly because many were making payments on homes while larger segments of younger groups were saving money to purchase homes, Bosworth says.
“When you look at the savings rates based on age,” Bosworth says, “there’s not as much difference as has been assumed. And there’s not enough disparity to say that a certain age group accounts for the drop in savings.”
The Not-So-Golden-Years Theory. Those in their retirement years are supposed to be struggling to get by on their pensions and unable to save much. However, the savings rate for older people in 1985 was 12%. That’s higher than any age group except those in the 55-to-64 range, the Brookings study said. Many elderly Americans were able to save more partly because they used capital gains--funds from the sale of stock or homes--as spending money, Bosworth says.
The Single-Head-of-Household-Sandtrap Theory. Single parents generally have more difficulty saving money. The number of such households rose from 7% in the early 1970s to 10% in the early 1980s--but their savings rate actually increased 3% over that period. In sum, single-parent households have had little impact on the drop in the savings rate, according to the Brookings report.
The Foreigners-Do-It-Why-Can’t-We Theory. Americans are often criticized for saving at a much lower rate than people in Japan and other industrial nations. True, savings rates in those countries are generally higher. But they’re also in decline. For example, Japan’s savings rate in the first half of the 1970s was about 19%. But it was about 15% between 1985 and 1989, the report said.
So much for theories that don’t hold up. Some, of course, do.
For example, homeowners have a higher savings rate than renters. However, homeowners’ savings rates have been falling more steeply than those with leases, Bosworth says.
He subscribes to another prevalent theory--one that attributes lower savings to a relatively greater sense of societal security.
“Psychologically, the further we get away from the Great Depression, the less we seem to be concerned about saving,” he says. “We have more safety nets now.”
Bosworth says Americans appear to be saving less because personal income growth has slowed and because they have taken on more debt--particularly credit card debt. The pace of saving could pick up if national income rates grow, but Bosworth says there is even some debate as to how people would react given different income expectations. In other words, would they save more if they believed that they were going to earn more or if they believed that they were going to earn less?
There’s so much uncertainty about the direction of savings in the United States that Bosworth questions predictions that the savings rate will rise in the near future.
“We can’t really explain why the savings rate went down, so we can’t predict a rise,” he says.
