The Spectacular Fall, and Very Modest Recovery, of Household Savings

The personal savings rate tries to estimate the proportion of people’s disposable (post-tax) income that is not spent. Presumably, it gives us a sense of how much money people are putting aside for the future. A lower savings rate suggests that more people are financially ill-prepared for the future.

The figure below illustrates changes in US households’ personal savings rates. The data comes from the Federal Reserve Board.1 Keep in mind that these rates are derived from aggregate data, and represent means rather than medians. It seems likely that wealthier households with much higher savings rates push these averages up, and that the median household would save below the average personal savings rate.

During the 1960s and early-1970s, households saved between 10% and 14% of their incomes. At those rates, a household earning a yearly salary would put aside between $6,000 and $8,400 a year. Over thirty years of compounding 5% real annual returns, such savings would result in a nest egg of between $400 and $558 thousand.

us personal savings rate

Since 1976, the personal savings rate has declined steadily, eventually reaching near-zero right before the 2008 crisis. Throughout the Great Recession, many observers have celebrated a resurgence in savings, but the magnitude and expected durability of this rebound can easily be overstated. When savings rebounded to about 5% in 2013,[^21] it was reverting to levels that prevailed in the mid-1990s, not the mid-1960s. This decline is enough to produce a substantial diminishment in long-term wealth accumulation. Were our $60,000 a year family to save between 2% and 5% of their income (as opposed to 10% – 14%), they would be left with a nest egg of $78 to $199 thousand. The effect of low savings seems more moderate on a year-by-year basis, but they can render substantial differences in wealth over a lifetime.

Why have savings been falling? There are many explanations. Part of the picture probably involves income stagnation. Many analysts argue that people are more spendthrift today, and more amenable to borrowing money. Consumer debt is also cheaper and easier to obtain than in the 1960s or 1970s. In my own research, I also focus on the rising cost of living, particularly the rising cost of essential goods and services like health care or education.

Whatever the cause, it seems likely that people save less money, which suggests that they will have less wealth from which to draw in the future.

Federal Reserve Board (2014) “Personal Saving Rate, Percent, Annual, Seasonally Adjusted Annual Rate” Series PSAVERT from Federal Reserve Economic Data set. Accessed in Spring 2015.↩

Also published on Medium.

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