U.S. Savings Rate

U.S Savings Rate 1

U.S. Savings Rate: meaning, measurement, significance

Chris Walker

Texas A & M University

U.S Savings Rate 2

Abstract

The savings rate in the United States is a closely watched statistic. During the

years when the savings rate was low, it was a common theme that our society was "living

on credit" and that it was only a matter of time before we were plunged into a recession.

As we all know, that is exactly what eventually did happen. Most people believe that the

higher the savings rate, the better the state of the economy. However, that is not always

the case. This paper will take a closer look at how the savings rate is determined and

examine what this rate really does tell us about the state of the economy.

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Introduction

The savings rate is among the most studied macroeconomic aggregates, indicating

its importance for understanding a wide range of economic phenomena. How much we

as a society choose to save today for consumption at a later date has important

implications for the welfare of the elderly as well as economic growth and consumption

levels.

According to the "life-cycle model of savings", people save when young in order

to finance consumption during retirement (Bloom, 2003). This model of savings suggests

that in an ideal environment, people strive to achieve a target ratio of net worth to income

that will allow them to maintain their desired consumption patterns throughout their

retirement years. (Skinner, 2007). This model also maintains that if unexpected events,

such as drops in the prices of houses or stocks, causes net worth to decline, then the life-

cycle model predicts an increase in savings behavior to help return the net worth-income

ratio to target. Additional saving could then be used to purchase assets or pay down debt

resulting in increased net worth. The recent activity of the savings rate has conformed

with this model.

Since the 1980's until the middle of the last decade, the personal savings rate for

the United States had generally been trending down. In the early 80's, Americans were

generally saving about 10% of their income. However, by 2005, that figure had dropped

to just 1.1%. This decline continued even further until the end of 2007 when the personal

savings rate actually dipped into negative territory. As our country officially entered the

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most recent recession at the end of 2007, many economists believed that Americans were

spending too much and saving too little as few were prepared to handle the layoffs that

occurred. However, since that time, the savings rate has increased dramatically. The

most significant increase in the history of our country occurred from April of 2008 to

January of 2009 when the savings rate increased from 0.0% to 5.0% (Coleman, 2009).

Although this increase in and of itself is important, of equal importance is that the

majority of the adjustment resulted from spending falling relative to income. In some

respects this is good news because it signals that households have made a necessary

adjustment to bring spending in line with income. However, there are also negative

aspects to this adjustment in behavior which will be discussed in greater detail later on in

this paper. It is significant to note, and somewhat ironic to many, that as our nation

continues to emerge from one of the worst economic downturns in our history, the

savings rate has maintained this upward movement and is currently in the area of 4%

(Comstock, 2010). The question then becomes just what these numbers are telling us

about the state of the American economy.

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