Collapsing saving rates leave consumers at risk, experts say

What the dive in personal savings means for America and how to turn it around

Published: Saturday, Aug. 18 2012 1:00 p.m. MDT

Kevin and Steffani Raff, with the help of their son, Joey, are laying their own wood floor to help them save money while building their new home.

Tom Smart, Deseret News

When Kevin and Steffani Raff were finally ready to remodel their 37-year-old kitchen in Pleasant Grove, Utah, they did it with years of hard-fought savings.

"Steffani was putting something aside every month over several years," Kevin said, who admits he doesn't know the details, as she handles the books. A 40-year old father of five, Kevin supports his family on his modest income as a social worker with the Veteran's Administration.

In waiting years to remodel their kitchen with cash in 2010, the Raffs ignored waves of advertisements from banks and credit unions urging them to refinance and "cash out" their equity.

By saving rather than borrowing for the remodeling, they also bucked a nationwide trend that began in the 1980s: a sharp nosedive in the "personal savings rate."

Measured by the U.S. Bureau of Economic Analysis, the personal savings rate is the nationwide difference between after-tax income and consumption. Any money not spent is considered "saved," including money spent paying down debt. That rate dropped precipitously from more than 12 percent in 1981 to just 1 percent in 2005.

The free fall of savings has many economists and personal finance experts concerned at both micro and macro levels. At the family level, they argue, insolvent individuals are exposed to economic shocks. At the national level, depleted savings are unavailable to fuel business investment and government infrastructure, leading to unsustainable reliance on foreign cash, especially from China.

As of March 2011, foreign investors owned more than 53 percent of privately held U.S. debt, up from 35 percent in March 2001. Concerned with spiraling U.S. deficit spending, China reduced its U.S. securities in 2011 — the first time since the Treasury department began tracking the data in 2001.

Many economists view the long-term implications at both the micro and macro levels as troubling.

"Take a look at the share of U.S. GDP devoted to consumption over the past 40 years," said Barry Bosworth, a senior fellow at the Brookings Institution. "It just steadily goes up during this period. We just became a consumption society. We consumed all of our income, and if we ran short, we got the rest from overseas."

Consumed with consumption

"A lot of the problems we face as individuals and as a society can be traced to this overemphasis on consumption," Bosworth said. "Look at the number of Americans who are fundamentally living way beyond their means."

The data, collected consistently since 1930, show a remarkable shift beginning in the mid-1980s. Prior to 1984, the savings rate held steady for decades, though it dipped during the Great Depression and rose sharply during WWII, when there was little to buy besides war bonds.

The rate dipped briefly again after WWII, reflecting pent-up demand. Then it rose steadily until 1984, at which point Americans were saving 10.2 percent of their income.

From that point, personal savings dropped sharply — both during recessions and during booms — ultimately settling between 2 percent and 3 percent, with brief drops to 1 percent or below. The rate recovered slightly after the 2008 crash but was still well short of historic norms and recently dipped again.

Some of the shift away from savings may be a consequence of dual income households, Bosworth believes. Whereas in 1969 both spouses worked full-time in about 24 percent of married couples between the ages of 24 and 54, by 1998 both were working in 43 percent of households, according the Bureau of Labor Statistics.

"People think, instead of having a savings account, I'll have a spouse. But they don't anticipate that their spouse may lose her job, too," Bosworth said.

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