Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Should the Decline in the Personal Saving Rate Be a Cause for Concern?

Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Should the Decline in the Personal Saving Rate Be a Cause for Concern?

Article excerpt

The personal saving rate has been drifting downward for the last two decades. According to the latest statistics, personal saving declined from about 10 percent of disposable income in the early 1980s to 1.8 percent in 2004. The decline has received particular attention recently because saving was negative in 2005 for the first time since the Great Depression. Although saving declined in other developed countries during this period, the U.S. decline was more pronounced than in most of these countries.

Many analysts and policymakers have expressed concern about the decline in the personal saving rate. A major concern is whether U.S. households are providing adequately for long-term needs, such as future retirement and medical expenses. With average life expectancies lengthening and the large baby-boom generation approaching retirement, many households will need to tap their personal savings to supplement increasingly pressured public and corporate retirement programs. In addition, low personal saving has created short-run concerns that a sudden increase in the saving rate could reduce growth of consumer spending, real output, and employment.

But there is another, often overlooked side to this story. Two major factors suggest the decline in the personal saving rate may not be as alarming as it is sometimes made out to be. First, various measurement problems with the personal saving rate from the national income and product accounts suggest household saving may not have declined as much as the statistics suggest. Second, economic theory assumes that households rationally anticipate future labor income and asset returns and plan their spending accordingly. If this assumption is correct, the low personal saving rate may not foreshadow wrenching future adjustments in consumer spending.

This article provides some perspective on the decline in the personal saving rate over the last two decades. The first section describes the decline in the most common measure of the personal saving rate and the economic explanations offered for this decline. The second section surveys some of the measurement issues related to the decline and presents some alternative saving measures. After weighing the issues, the third section concludes that, although there are some legitimate reasons for concern, the decline in the personal saving rate may not be as alarming as it first appears.

I. THE DECLINE IN THE PERSONAL SAVING RATE

The downward trend in the personal saving rate has prompted expressions of concern by economists and other observers. Roach wrote that "the U.S. needs to end its buying binge and rediscover the art of saving," while Eisinger worried that the United States will end up with "zombie consumers" similar to the "zombie companies" that littered the Japanese economic landscape in the 1990s. Lansing warned that "the decline in the U.S. personal saving rate and the dearth of internal saving raise concerns for the future." Underlying these and virtually every other discussion of saving trends is a point of agreement-saving for the future is important. This section begins by reviewing why saving is important and then provides some background on the downward trend in the U.S. personal saving rate.

Why saving matters

The purpose of saving is to increase the resources available for future consumption. This point is true both for individual consumers and the nation as a whole. Households put aside some of their current income to provide for future consumption, such as a major vacation or basic living expenses during retirement. Saving also helps protect against an unexpected loss of household income caused, for example, by illness or an unanticipated layoff. Typically, households invest their savings in financial assets, such as a bank account or mutual fund, or build equity in a real asset, such as a home. These assets can be redeemed or sold to others in the future to provide the funds needed to buy consumer goods and services. …

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