National Savings Rate Continues to Plummet
- 2006 5 Oct
When we last wrote about the national savings rate in 2001, we bemoaned the fact that it had fallen all the way to 2.2% for the year. In other words, Americans collectively had 2.2 cents left from every dollar of income after subtracting taxes and "personal outlays" (the amount spent on either necessities or nonessentials). This remaining amount is assumed to go into savings when calculating the national savings rate.
Unfortunately, the trend over the past five years has not been good. The savings rate—already down from the 9%-10% average of the early 1980s and the 5%-6% average in the mid 1990s — declined to -0.5% in 2005. That's right, as a country we officially spent more than we earned last year.
What's particularly alarming is it happened in a time of relative prosperity. The last time the savings rate was negative for an entire year was the Great Depression (1932 and 1933) when Americans had to dip into savings due to frightful economic conditions.
But before we begin collectively wringing our hands, think about this rather amazing statistic: In 2005 alone, the net worth of households rose an astounding $3.9 trillion. Total household net worth has doubled, to roughly $48 trillion last year, from $24 trillion just a decade ago. How did our net worth rise while our savings rate was dwindling away to less than zero?
The answer lies in the way the government calculates the savings rate. Much of the increase in our net worth has come from stock market profits and the appreciation in housing. But while contributions to retirement savings plans are included in the savings rate calculation, appreciation of those accounts and our homes is not. If it were, the savings rate would look quite different. That's why most baby boomers are considerably better off financially today, following the long bull market of recent decades and the recent strong real estate market, despite doing less "traditional saving" than past generations.
However, that's not to say the national savings rate isn't sending us an important message. Just how important is up for debate, with some economists believing that it signals financial Armageddon while others consider it utterly useless. The truth is likely somewhere in-between. If we could count on similar healthy gains from our stocks and homes in the future, they would continue to gloss over many of our financial mistakes. However, very few experts forecast those types of gains in the years to come. What should we conclude? Well, there are a few facts we can count on:
• Time is getting short for boomer savings. 401(k) loans, credit card debt, and personal bankruptcies all continue to rise. If these trends don't turn around, there's going to be trouble ahead. Even worse, if a correction were to deflate the paper valuations of either stock portfolios, home prices, or both, our lack of "real savings" in recent years could come back to haunt us.
• Many people are vastly underestimating the amount of money they will need for retirement. A recent survey by The Center for Retirement Research released by Fidelity Investments determined that American workers are saving at a rate that would allow them to replace only 57% of their preretirement income after they stop working.
• Averages are deceptive. While it's easy to trot out statistics showing our collective net worth has soared in recent years, studies like the one mentioned above indicate that 43% of working-age households aren't likely to have enough income to replicate their current standard of living when they retire. That's serious.
Thankfully there's also an upside to this point about averages. That is, just because most people aren't saving enough and are counting on unrealistic market gains to bail them out, you don't have to be among this "average" crowd. Ultimately, your personal savings rate will matter infinitely more than the national savings rate.
• A negative national savings rate can't continue indefinitely, even if stock market returns and home values do continue to rise. Excellent returns on our prior investments appear to have weakened our resolve to put new money into savings. All is not lost, but it's clearly time that we pick up the pace. Based on our current negative savings rate, the first place to start is aligning our spending with our income. There aren't any shortcuts to saving money, even when the stock and housing markets try their best to provide one.
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