Why Saving Less Is Costly

April 9, 2013

As elderly Americans live longer lives and health care costs continue to rise, seniors and retirees need more savings for their later years. For other Americans, savings are useful when buying a home, paying for a child's education, retiring or in cases of emergency. While retirement and education costs have risen with an aging population, America's saving rate has been falling, says The Economist.

  • The saving rate was above 8 percent around 1960 and rose above 10 percent in the 1970s before falling back to around 8 percent in the early 1980s.
  • The savings rate fell to roughly 6 percent in the late 1980s, to 4 percent in the 1990s and to almost 2 percent in 2007 before the housing collapse.
  • The savings rate shot up following the housing collapse and Great Recession, which was a period of tight credit conditions and uncertainty.

In January of this year, the savings rate fell again to near 2 percent, possibly due to greater economic optimism or the return of the full payroll tax.

  • It is possible that the reduced take-home pay from the payroll tax increase led consumers to shift money from their savings to maintain their personal spending.
  • The low amount of savings is worrisome because it increases vulnerability to the volatility of an economic shock.
  • The low level of savings may serve to increase overall economic demand and fuel the recovery but is a bad practice over the long run.

The reduction in savings is converse to the popularity of private pension accounts, which have become more popular as the baby boomer generation moves closer to retirement.

  • The amount of money in pension accounts has risen substantially over the last two decades and now approaches an average of $35,000 for the median wage earner.
  • During this time period, the amount of liquid assets (savings accounts, CDs and savings bonds) has decreased from about $25,000 to under $20,000.
  • Slow growth in income and low interest rates may be one reason why Americans are saving less or putting more into retirement accounts that have higher yields on riskier securities.

Along with the decrease in liquid assets, more individuals have been taking out loans on their 401(k) plans. Americans could avoid personal financial uncertainty by saving more, regardless of the vehicle.

Source: "Too Thin a Cushion," The Economist, April 2, 2013.

 

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