It has recently been reported that a majority of American workers (60%) have less than $25,000 in personal savings – including retirement funds. Last summer, a survey by the National Foundation for Credit Counseling found that 64% of Americans don’t even have enough cash on hand to handle a $1,000 emergency expense. Too many are living paycheck to paycheck unable to set aside enough money for savings.
But this isn’t anything new, really. Saving rates in the U.S. have been steadily declining since the early 1980’s hitting a low point in 2008 (just before the recession hit). And while economists debate the severity of such a clear downward trend, the worry is that it is the result of a growing culture of over-spending that will cause economic insecurity as future generations enter retirement age.
Personal savings rates in decline
Since the early 1980’s, personal savings rates have been in steady decline. This graph shows the clear trend of reduced saving rates in the past 30 years.
In the first quarter of 2008, just as the current recession was beginning, U.S. personal savings rates hit the lowest since the BEA started recording it in 1947 at 1.5%. Rates quickly recovered back to pre-2000 levels as citizens focused on paying down debt and reducing spending during the recession.
In fact, personal savings (dollar amounts) skyrocketed to new highs during the recession. A spike that was largely fueled by stricter mortgage requirements and loss of confidence in the real estate and investment markets.
The current rate (as of March 1, 2012) is hovering at 4.7%. As it almost seems that savings rates have recovered, temporary spikes are relatively common during recessions as a result of personal retrenchment (Ireland’s rate went from 3.8% to 19.3% when the Irish banking crisis caused their recession in 2008). And even if rates do level off, the question remains: how much of the downward trend in savings rates, in the past 30 years, was due to a culture of over-spending? Do I need to start mentioning Credit/Debit statistics? This is a credit blog, after-all…
More importantly: How much savings is enough?
Savings rates around the world
Looking at some of the savings rates of other developed nations, it may be relatively refreshing to know the U.S. isn’t dead last. It is still, however, at the lower end of the spectrum:
- France – 16%
- Germany – 11.4%
- Australia – 10.3%
- Norway – 8.7%
- Ireland – 8.1%
- Japan – 6.7%
- United Kingdom – 6.3%
- United States – 4.7%
- Canada – 4.3%
- Netherlands – 2.6%
- Denmark – -0.9%
Savings by age
One of the criticisms of the national savings rates (as a statistic) is extraneous factors that effect the numbers, like an aging population, for example. Older workers need to save less as a percent of their income because they usually earn larger salaries later in their careers and have already acquired a sufficient sum of savings by that point as well. As the baby boomer generation enters retirement age, overall savings rates were bound to drop.
Taking a look at U.S. individuals’ median net-worth by age group can give a somewhat better perspective on the culture of savings we have today:
Looks like real savings generally doesn’t start until well into the median worker’s 30’s. And by the time they reach retirement age, the median net worth is just under $250k. That means half of America at age 65 will have a net worth of $250k or less…Is that really enough to retire on?
Why a trend reversal for personal savings is important.
While economists argue about the macroeconomic effects and potential consequences of reduced savings rates, as an individual, there are a number of future concerns that each of us (as a person who plans to retire at or before 65) should be taking into consideration.
- Social Security’s future is bleak
- Pensions are becoming a thing of the past
- Inflation and the instability of the U.S. dollar
- Lowered interest rates for savings/bonds
- Unstable investment opportunities
These are just a few challenges for current and future generations for when (or if) they plan to retire. Not only will we be asked to take more personal responsibility for the funding of our own retirement, but we’ll need to do it in an economy full of challenges for investors. As a result, each of us will need to start saving more of each paycheck or, perhaps, retirement simply may have to wait.