Background
In 1867 Horace Greeley, the famed journalist, observed of Americans: “We are energetic, we are audacious, we are confident in our own capacities and in our national destiny, but we are not a systematic, a frugal, economical people.”
How well he predicted where we are today: a culture that has embraced spending, and abandoned thrift. Perhaps the best long-term indicator of this malaise is the Bureau of Economic Analysis’ calculation of the personal savings rate trend. This is a statistic that is based on disposable personal income vs. expenditures. Data is available back to the early 20thcentury. This gives us over a 100-year window into the trend in how much we save. Will that statistic bear out what Greeley perceived over 150 years ago?
Findings
The answer, perhaps unsurprisingly, is yes.
- The personal savings rate has fluctuated dramatically over the past century: Its lowest point was during the great depression when it was negative in 1932 and 1933. People had to dig into savings just to survive. It was dramatically positive – over 25% — during World War II, when the war economy meant everyone was working. On the other hand, you couldn’t buy anything due to rationing!
- When boomers grew up, the savings rate dived: During the post-WWII prosperity, the savings rate gradually grew to 13%. But in 1975, after the majority of the Boomers turned 21, the savings rate began a consistent decline. Just before the recession of 2008, the rate was at only 3%.
- Some hope based on recent behavior: The savings rate did bump up after the recession, but not to historical levels. It’s still about half of what it was before Boomers entered the workforce.
- The BEA summary statistic hides an ugly truth: Here the devil is in the details of the statistic. Disposable personal income includes employer contributions to 401k plans and pensions, because the BEA sees this as a way Americans generate savings – fair enough. But the total amount of “personal savings” in 2019, $1.3 trillion, is less than the employer contributions to retirement accounts of $1.5 trillion. That means that if we look at what Americans actually bring home in their paycheck, they spend it all – and more.
- Many Americans admit to not saving anything: Many studies have highlighted that many families can’t or don’t save. A Charles Schwab study found that 59% of Americans live paycheck to paycheck.
Implications
The obvious overarching implication for our country is the one that we’ve been hearing. A lot of families will be in trouble not just in retirement, but also if they have a significant event – e.g. a job loss or an extraordinary expense.
But the big challenge is that this is old news about a stagnant problem! The news media, and financial websites, are rife with a simplistic answer: save more money. This message has been out there for 20 years, but hasn’t worked. We need to drill down deeper in subsequent posts to better understand how to address this trend:
- What has changed that drove down savings?
- How does this differ by generation?
- Why are Americans behaviorally averse to savings?
- And most importantly, how can we help people change their behavior to achieve better outcomes?
The small print
The BEA data, including the long-term trend, is central to this analysis. Because the currently available data tables go back only to 1959, the data for earlier in the century is from a previous analysis I did on this topic but I can no longer link back to BEA data as it is no longer available.
The BEA revises their calculation at times, and the most recent revisions’ biggest change was making employer pension contributions accrual vs. cash based. What this really means is that the “income” employers contribute is based on what they should have put in given likely pension benefits, not what they actually put in. So if employers (including the government) aren’t contributing enough, the BEA still includes what they should have contributed in the personal income amount.