After a period of belt-tightening in 2008, when Americans boosted their personal saving rate to a 15-year high, the annual rate has fallen again, from 5.4 per cent to just 3.9 per cent. Are consumers letting their guard down? Declining savings is one of five signs that American households are forgetting the lessons of the Great Recession:
1. Saving rate remains near historic lows
When it comes to saving, Americans appear to be forgetting the lessons of the Great Recession.
Throughout the 1970s and early 1980s, personal saving (income less taxes and spending) as a percentage of disposable income was consistently above 10 per cent. Then, sometime around 1985, it began a steady decline towards an all-time low of 1.5 per cent in 2005.
The jump in savings around 2008 made it appear as if things were heading in a new direction, but consumers failed to maintain that same level of fiscal constraint. The personal saving rate has since declined 1.5 percentage points in a span of four years.
2. Fewer families are saving
The Federal Reserve‘s Survey of Consumer Finances reports that in 2010, just 52 per cent of families surveyed indicated that they had saved money in the previous year. This is down from 56 per cent in 2007 (the previous release). That also means that nearly half of all households are either just breaking even, or spending more money than they make in a year. By any interpretation, this is not a good trend.
At the same time, the Fed reports that median household net worth has declined by over $49,000 in real terms from 2007 to 2010. Deflated investment values can probably be to blame for a large part of the decline, rather than a lack of regular saving. Nevertheless, decreasing net worth is one more sign that families are having trouble managing their financial assets.
3. Financial asset values have fallen in most categories
The median household value of transaction accounts (checking, savings, etc.), retirement accounts, and certificates of deposit have all declined since 2007. These types of assets are also some of the most common – held by 93 per cent, 50 per cent, and 12 per cent of American families, respectively.
Consumers may be further deterred from storing excess funds in such accounts due to notoriously low yields. Very few institutions, barring high yield savings accounts at online banks and some local community banks or credit unions, are managing to offer competitive rates.
Meanwhile, the median value of other asset categories, namely stocks, pooled investment funds, and bonds, has seen a boost. Unfortunately, it’s likely that high net worth households are driving the increase rather than those in financial trouble.
4. Retirement savings options are harder to come by
The Survey of Consumer Finances reports that in 2010, just 35 per cent of families held some sort of retirement account offered through a current or past job, down 2.9 percentage points from 2007. With fewer employer-sponsored plans, consumers are left to navigate the process of researching and managing a retirement plan on their own – something they may not be fully equipped to handle.
To further strain retirement savings, a study by HelloWallet indicates that 1 in 4 US households with a retirement plan have used at least some of these savings for nonretirement needs. The fees and penalties associated with such withdrawals usually make this habit costly.
5. Debt remains at distressing levels
Average household credit card debt currently stands at over $7,000. Among indebted households, the average rises to more than $15,000. The good news is that credit card debt is down from 2010, but evidence suggests that this is due to defaults rather than repayment.
One might hope that declining debt would lead to an increase in saving, but that trend has yet to emerge. The debt-service ratio, a comparison of payments on mortgage and consumer debt to personal income, has leveled off and even begun to decline in recent years. Despite this, personal saving continues to drop off.
This should be the year Americans make an effort to turn their finances around.
– John Gower is a Senior Analyst for NerdWallet, a website dedicated to helping consumers learn more about their personal finances.