The savings rate bottomed out at 1.5 percent in 2005 before it took an uptick during the financial crash and Great Recession, up to an encouraging high of 5.5 percent by 2008. But instead of being cause for praise of our financial discipline, it proved to be a sign of the times not a change in our spending and saving patterns.
The global financial crisis brought a screeching halt to our addiction to debt; not because we started being financially diligent but because the bank’s doors were suddenly closed to us. Once we couldn’t get mortgages, credit cards, etc. so easily, we went back to saving money for a very short time.
But since the economic recovery began in earnest in 2010, those savings rates have declined again steadily, to 4.2 percent in 2011, 3.9 percent in 2012, and 2.6 percent in 2013 before sinking even more last year.
Who exactly is failing to save?
To put it simply: almost everyone, as the decline and lack of personal savings extends across almost all demographics. The “vast majority” of Americans are not saving. For instance, Californians have an estimated negative savings rate bordering on zero percent throughout the last decade.
One of the most pronounced differences of savings rates is based on age. The millennial generation – adults under 25 – now have a savings rate of negative 2 percent, according to Moody’s Analytics. For those ages 35 to 44, that savings rate jumps to a positive 3 percent. It’s 6 percent for people who are 45 to 54 years old, and 13 percent for those 55 and older.
Savings rates also vary greatly based on economic level. Between 1979 and 2008, the vast majority of Americans saw a decline in savings but that was pronounced in the bottom 90 percent of income families. That same 90 percent was saving 7 percent in 1979 but down to an alarming negative 7 percent by 2008.
The top 10 percent of earners also had a drop of savings in that time period, but only the top 1 percent of wealthiest Americans saw increases or consistency with a 36 percent average savings rate.
By 1963, the personal savings rate was a healthy 10.5 percent, which jumped to an all-time high of 17 percent by 1975.
But deregulation, trickle-down economics, privatizations, and accepted risk on Wall Street and in savings and loans started a long, harrowing decline of savings rates since the 1980s, sliding all the way down to our current 2 percent.
Why is savings so important?
Numerous long-term economic studies show that the ability to save is one of the best indicators of upward economic mobility. In fact, the Pew Foundation’s Economic Mobility Project found that “71 percent of children born to high-saving but low-income parents emerge from the bottom income quintile in one generation, compared to only 50 percent of children from non-saving low-income households.”
Much of that has to do with the self-created safety net of a savings account. If that’s not present, than any unexpected life event – like a job loss, medical disability, divorce, major home repair, etc.- can derail the financial picture. Without a recommended three months worth of savings in the bank, people can be destitute or make some terrible financial choices out of panic or lack of other options. But studies show that 44 percent of American households lack that three-month savings buffer.
And without savings, the ability to buy a home, a car, pay for medical care, go to college, etc. all relies on taking out more debt – which jeopardizes, not strengthens, the overall financial picture.
What’s at stake: retirement and social security.
Why is it so important we save? One day all-too soon we won’t be able to work anymore, and the money to fund our retirements and advanced medical care needs to come from somewhere. Economists point to the fact that unless Americans start saving for their retirements, we’re facing a catastrophic economic crisis.
The statistics are grim: according to data from Bankrate.com, about one-third of Americans haven’t saved a single penny for their retirements. And in 2013, a study by the National Institute of Retirement Security found that 84 percent of Americans fall short of “reasonable” retirement savings targets. People who are looking forward to retirement have only accumulated about 15 percent of the necessary income to stop working and live. No wonder that a recent PBS poll fund that 92 percent of Americans thing we’re facing a retirement crisis.
But isn’t social security in place to take care of our retirements? Hardly, as the system is bursting at the seams and has no answer to the 75 million baby boomers ready to hit retirement age. Already there will be a 25 percent cut to social security benefits as of 2033 when trust funds evaporate, and it will take a miracle to keep the whole system from being torn apart and reinvented.
When comparing to other developed countries with wealthy economies, like European nations, Canada, Australia, Japan, etc., we see that it is mostly – but not exclusively – an American savings drought.
Europeans save a consistent seven to eight percent, and the bigger economies do much better, usually over 10 percent. The people of France saved 12.3 percent as of 2011, Germans 10.5 percent, and Swedes, 10 percent.
Interestingly, the United Kingdom and Australia are similar to the United States in their lack of savings and high levels of debt. That’s a testament to the other European nation’s practices of regulating the banking and credit industries, making it far more difficult to take out credit cards, use debt irresponsibly, and take out home loans. For instance, the German home ownership rate is around 40 percent, compared to 66 percent in the U.S., and cash-out refinances and home equity lines of credit don’t even exist.
Who or what do we blame for our lack of savings?
BlackRock, the world’s largest asset manager, had some interesting findings in their 2014 U.S. Investor Pulse last year.
Instead of just turning the savings problem over to economists and industry experts, they asked a sample of 4,000 respondents why exactly they weren’t saving. Of their answers:
-47 percent said they don’t earn enough money to save. Even 21 percent of affluent earners said they didn’t make enough to put money away.
The truth behind that is debatable based on our higher standard of living and commonality of luxury items these days, but it is true that the average household income these days, adjusted for inflation, is about what it was in the 1990s.
-46 percent of those surveyed said that the cost of living was too high for them to be able to save.
It’s hard to argue with that, as healthcare, the cost of education, the price of rent or mortgages, and many other costs have skyrocketed in the last decade or two.
-And finally, 33% of respondents said that unplanned expenses keep them from saving.
This answer is a bit of the chicken and the egg, because dealing with unplanned expenses is exactly why you want to save.
