Explanation of Personal Savings Rate

The Personal Savings Rate in the United States is a very important figure to understand. Between the economic crisis and 2007 and the expansionary period of 2009-2012, one can notice clear fluctuations in the figure from year to year (1). Regarding the time period of 2007-2012, there are several noticeable highs and lows, including in 2008 with over 8% whereas middle of 2007 is seeing around 2% (2). What has caused these changes in savings and why such drastic changes? Economists have struggled to produce concrete answers to describe these changes, but one major reason is a shift in the mindset of our country’s lifestyle. In order to really understand this shift, we must look at the trends in savings overtime.
In the 1970s, the savings rate was 9.6%, but in contrast the savings rate of the last quarter of 2012 was 3.6% (2). We have evolved to become an economy that spends almost all of our disposable income, rather than working and saving for the future. One possible explanation for this increase in consumer behavior is with the extremely aggressive marketing and advertising campaigns led by credit card companies. Today almost anyone can open a line of credit, and this has led to some serious issues. Although we see in the graph the savings rate improved during the 2008-2009 period, the overall savings trend has decreased dramatically and will most likely remain low until citizens are forced to save via higher interest rates (3).
After reaching an all-time high in 2007, housing prices decreased significantly (4). In fact, the period of April 2007 and February 2008 saw a 10% drop in the OFHEO house price index. Stock prices also reached a peak in the middle of 2007, but between May 2007 and May 2009 the S&P 500 stock price index fell by over 40%. This combination of asset price drops led to a major decrease in total household net worth of over 20%, or $12.9 trillion (3). The 2009 rise in personal saving rate conveniently occurred with the tax rebates associated with the 2008 economic stimulus package, and economists suggest that these rebates directly affected this increase.
The Personal Savings Rate, the percentage of after-tax income that is saved after household bills are paid, is important for several reasons. First, households must save money in order to avoid a fall in their standard of living later on in life (1). If citizens are not saving, they may see in decline in lifestyle after retirement, especially if Social Security benefits fall through as many predict. Second, household saving is an important source of money to finance capital investment, increasing the capital stock and adding to worker productivity. Finally, personal saving is critical to account for emergencies in everyday life. If households are not saving enough money to handle a crisis, our economy will continue to be burdened.
There are several major economic risks associated with having such a low and unstable person savings rate in the United States. One concern is that consumers could dramatically alter their consumption habits and aggressively begin to save (4). This idea represents the “reversion to the mean” theory, but is somewhat unrealistic without an increase in interest rates. Another issue faced with the savings rate in how different demographics are saving. As shown in the Bureau of Labor Statistics graph, individuals in the highest tax brackets are accounting for most of the personal savings in the United States. Furthermore, senior citizens traditionally save less than young people (1). The population of citizens ages 45-65, people who save more, has decreased while the population of 65+, those who do not save as much, has increased. Hence, as the population ages, household savings rates will continue to decline and will create barriers to increasing it once again.
Understanding the personal savings rate is critical to analyzing our country’s economy. There are several factors that influence the figure and cause it to fluctuate. Looking to the future, we must hope the long run personal savings rate increases in order to pay off national debt and maintain a high standard of living in our country.

Works Cited
1. http://www.ebri.org/pdf/publications/books/databook/DB.Chapter%2009.pdf
2. http://assets.opencrs.com/rpts/R40647_20090901.pdf
3. http://www.federalreserve.gov/boarddocs/speeches/2008/20081006/default.htm
4. http://money.cnn.com/2010/06/30/news/economy/personal_savings_decline.fortune/index.htm
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