Saving America: Reading the Fluctuations in the U.S. Personal Savings Rate
Faced with a financial crisis, a recession and sluggish recovery, and sustained high unemployment, American households generally responded with impressive personal responsibility in 2008. Evidence of this can be seen in the U.S. personal savings rate.
In decline for decades, the personal savings rate rose sharply as the economy sank into recession during the financial crisis. As the accompanying chart illustrates, the personal savings rate more than tripled from an average of 1.6% in 2005 to an average of 5.6% in the first half of 2009, as the recession wound down. While the drop in consumption exacerbated the recession, American households’ willingness to tighten belts, defer nonessential purchases, and work toward mitigating the risk of job loss showed awareness of and responsiveness to changing fiscal pressures.
However, as the chart shows, the savings rate has been intermittently declining since the end of the recession. This does not bode well for long-term economic growth for the simple reason that domestic savings is critically important for capital investment. Because a growing capital stock is necessary for long-run growth, households would be wise not to return to the pre-recession levels of personal savings. Furthermore, while the near-term economy has stabilized, many households are not adequately prepared for their own retirement or for the projected shortfall in Social Security. Absent reforms, the Social Security Trust Fund is projected to be depleted in 2033 and the program only capable of paying $0.77 of each expected $1 in benefits thereafter.
While a comprehensive analysis of household savings needs to also consider the household balance sheet and not just the savings rate, it remains true that too much focus on near-term consumption puts at risk the financing critical for fostering long-run growth.