Americans saving less money. Discuss?

Great Debates
1

We’ve all heard the news, and some have taken it to be an indictment on Bush and economic policy. This isn’t a defense of Bush, nor an attack on Democrats.

This is intended more as a debate on the responsibility of individuals/government on savings.

(No cite available as yet) I heard on CBS radio that Americans are actually in the hole as far as savings. Years ago (the '70’s?) the savings rate was 11%. The story is being reported as how bad the American economy really is. That we’re falling behind in real income and the economy is in the crapper.

Here’s my beef. It’s two-fold.

First, the savings rate is based on percentage of disposable income. 401(k)s, Roth IRAs, etc are all pre-tax. That is not disposable income. They don’t count in the equation, even though the money is, in fact, being saved.

Here’s the biggie.

Nobody seems to understand why Americans are spending more than they make. When comparing real dollars to 20 or 40 years ago, there is no adjustment for what we spend money on.

Think of what a family in 1975 didn’t spend money on. (I’ll use numbers based on what I and other’s I know pay, adjust as you see fit.) I know not everyone uses these services, but enough do to make a big impact on the statistic.

  • $35 broadband internet access.

  • $30 - $70 for cell service.

  • $50 cable service

  • $5 (averaged) for whatever websites you subscribe to.

There’s about $1200 a year we could save for what wasn’t even known 30 years ago. With 30 years’ of interest, seems a good investment.

In addition, think of the comforts of home.

Central air was for the rich.
Nobody had auto-starters installed in their cars.
Many families had 2 televisions, tops.
Nobody had a flat-screen, nor anything bigger than a 19" screen.
Surround-sound? Go to the theater.
Routers, modems and a computer? You’d likely offer little more than a blank stare.
X-Box? PS2? PSP? Nintendo DS? Nope. You got Super Breakaway from Sears.
Games? Nope. No $50 spent to play something. It was in the console you bought.
CD shuffle sytem in the car? 8 Track, bitch. Deal with it.
A printer to get a copy of the cheats for the games you’re playing? Heh.
Microwave oven? With a sensor that tells you when the food is done? Unheard of.
GPS in the car? It was your dad saying “We’re not lost, dammit!”
MP3 players, iPods, personal DVD players, CD/DVD burners.
Anti-virus software, OS upgrades, spyware protection, credit monitoring.

Imagine you’re living in 1975.

You have the mortgage, phone, car payment, insurance, grocery and utilities to pay. You have a severly limited choice of goods compared to today. you didn’t have to choose between plasma, LCD, HDTV, EDTV, widescreen or standard. You got CRT and liked it. And if you wanted to splurge, you got a remote control tv that didn’t have sound bars in the “Clicker”. (Those of you old enough will remember why a remote was called a clicker. We had a console Zenith.)

That’s another thing. Bring back the damn console TV sets with the radio and record player built in. That was neat. But I digress.

So what we have today is technology so quickly advanced that when you buy the latest, it’s old in a month. I see this as the biggest problem with savings. I know people I work with that can’t afford to buy a home and choose to live as renters so they can get a bigger HDD or the latest in wireless routers. Or the newest call phone, or the front-loading washer just because it’s different than what everyone else has. It’s about the “now”, savings don’t even register.

It has nothing to do with anyone’s economic policy nor foreign policy. It has to do with “personal economics”. What is happening is people are buying themselves into debt. If you make $40k a year and owe $41k, you have a negative savings of $1k.

I don’t see how this is the government’s fault, but it seems some do.

Please enlighten me, and thanks for reading.

2

I think one of the unspoken drivers of the low savings rate is the rise of employment pensions and Social Security. No need to save for your retirement if you’ve got your house paid off and a 70% retirement with full benefits. Plus Social Security.

Most people also see their home as being part of their retirement strategy, and Americans are currently more highly invested in personal real estate than at any time in history.

I generally believe that macro economic trends are ‘rational’, in that people are making logical choices given the economic environment they find themselves in. There are exceptions, but it’s usually close to the truth. Lower the demand for retirement savings by providing other retirement benefits, and you’ll get less retirement saving.

3

As you said, what counts as savings? I don’t spend a lot of money on cable or much else, because I’m just trying to scrape by on $1500 a month with rent, tuition, gas (both kinds), electricity, internet, health insurance (bare-bones and very cheap) and the basics needed to live like groceries and money to do the laundry. And I’m trying to get out of debt (a fairly small amount of credit card debt, luckily, and not thousands in student loans) before I do any heavy-duty saving or investing. But I still try to put aside about $50 a month into my savings account and $50 a month into my IRA. To me, that means I’m saving right now about 7% a year, a number I plan on increasing (mostly into the IRA) once I’m debt-free. It doesn’t make any sense to reverse what I’m saving and what I’m using to pay off debt.

Now, as for the stuff you mentioned. I’ve heard it argued that consumer spending is what kept the economy really afloat from about 1999 on. That and real estate. As for people buying the latest toys, I don’t get it. I like new toys as much as anyone else, but I’m happy for now to stick with the roof antenna and the little 19" mono TV. I need more computer gear, but not desperately. (I’d like a matched set of SATA HDDs so that I can set up a RAID, for instance, but that can wait.) I keep meaning to replace my printer (stupid POS Epson) but for most printing I need to do I can always do it at the group’s printer at school. Anti-virus? I use Sophos for free. Firewall? Hardware built in the router and ZoneAlarm free version, as well as the one in XP. Anti-spyware? Spybot, SpywareBlaster, and Ad-Aware, all free. The XP upgrade was paid for years ago, along with most of the rest of what’s currently in my computer.

As you might see, I don’t see why people are buying themselves into debt. Even so, I agree that it’s not a governmental problem.

4

I agree with you. It troubles me that we’ve lost the idea of the “prosperous working class”- people like my grandparents who worked hard in working-class jobs and retired with a house and significant savings. We’ve even lost the “prosperous middle class.” I’ve heard people on this board honestly claim it was “hard” to raise a couple kids on $100,000-$200,000 a year.

A good part of this is insanely sky rocketing health care and tuition charges. Another is that yes, our standards have changed. A three bedroom, one bathroom house is no longer a “starter home”, is practically an invitation to call CPS to investigate. Things like taking public transportation, cooking from scratch, going to a nearby campground on vacation- these things have become unacceptable. The list of things you “must have” to raise a kid are absurd. The average wedding costs around $15k. It’s crazy out there.

And I think people my age are growing up with the idea that it’s okay to spend every penny that comes in- that saving isn’t a value of it’s own. It keep the economy hopping in the short run, but what are we doing in the long run?

5

Your ‘prosperous’ grandparents’ house was probably about 1000 square feet. If they had a garage at all, it was probably a one-car garage, and they probably only had one car. They washed their clothes with a ringer washer and hung their clothes out to dry on a line.

You too can make it one one career if you’re willing to only have one car, a 1000 sq ft house, one TV, and a manual-clean oven and a washer with no dryer.

The notion that people had the same standard of living on one income is a myth. People generally lived on one income, but they lived a much lower standard of living. Today, the average middle class home is almost 2000 square feet, has an en-suite bath, maybe a hot tub, a TV in the bedroom, one in the kitchen, one in the family room, and maybe one in the office. Everyone has cell phones to stay connected. We have two or even three car families, depending on how old the kids are. We eat better food than our grandparents did, and we don’t work nearly as hard on the basics of life - cooking, cleaning, shopping, etc.

6

The rise in employment pensions? Perhaps I’m completely off the mark here, but my impression is that the type of pensions you’re talking about (defined benefit) are going the way of the dodo. In fact, the existence of a 70% pension was probably much more of an issue in the 70s than it is today.

Most companies these days offer defined contribution pensions (401Ks) instead which, while they perhaps should count towards the savings rate, also have accompanying risk, which you would think would make Americans save more.

7

BS, cut up the credit cards, pay off the mortgage (instead of refinancing). high savings is important to industrialization. The only reason our interest rates aren’t at 10% is because the rest of the world is financing our debt. Pretty soon they are going to own us too, so don’t cry when it happens.

8

I saved about $6000 last year. Let’s see… I saved $500 when I bought my car, I save at least $10 a week when I bought my groceries, and there’s another $500, I saved $35 when I bought my DVD player, I save $150 on car insurance…

9

People are unwilling to save for their personal luxuries. They end up over-extending themselves on stuff they could have owned outright if they would have saved up for a few months for it.

10

I’m shocked at the OP’s claim that 401k’s don’t count as “savings”. That’s probably the best example of savings that I can think of!

So, let’s say Mr. Hypothetical is maxing out his 401k every year at $14,000 and also maxing out his IRA at $4,000. On top of that he is paying an extra $500 a month towards the principal on his house so that it will be paid off in ten years instead of thirty. The rest of his paycheck goes to pay the bills and mortgage and toys with nothing left over.

Is Mr Hypothetical not “saving” enough? Is his contribution to the national savings rate lowering it?

I never understood the old fashioned concept of “savings”. I’ve heard people advise you to have six months pay saved in case of emergency. That’s insane. If I had that much cash lying around in a bank account I’d be wasting money. That kind of money should be in the market making compound interest!

11

And if they had just saved up for a few months, they might find that they don’t “need” that fancy new toy anymore, and lose interest in it all together.

12

You know, some things were also more expensive in the 70’s. You forget that. Air travel cost a fortune. Shrimp were for the rich. Just because we have new things doesn’t mean that our lives are “more expensive”. Not to mention, you know, you don’t have to have all that crap. I’m sending my tax refund off to my mortgage company for an extra payment. What are you spending yours on?

Just because Americans have gotten more foolish doesn’t mean they have to be.

13

http://www.cia.gov/cia/publications/factbook/rankorder/2001rank.html

If this site is credible, we’re still in the game for 20% of the worlds GNP. Someday they may own us, but soon? China and India will grow, but I don’t see them owning us anytime soon.

14

You sure about that? Cause the article I saw implied 401ks in the savings rate and Americans were still negative - mostly from their ability to cash out equity in their homes. i.e. disposable income is figured after taxes are taken out - but not after 401ks are taken out. You make 1000, put 100 into your 401k pre tax, pay 300 in taxes, your disposible income is still 700 - you add back the 401k.

Regardless, however, actual participation in 401ks in not impressive, then the loans out of 401ks that exist are substantial - and I’d expect the people who are spending every penny they take home and more are not the ones putting 10% of their income into a 401k.

The other scary thing about this is that its aggregate. I save a substantial portion of our income in a variety of places. In order for U.S. consumers to spend more than we make, someone has got to be overspending what I save. I just hope I don’t get stuck with the bill when everyone discovers their wallet is empty at the end of the dinner party.

15

The savings rate being discussed does not include pretax retirement savings like 401Ks.

Tha’s from a Yahoo story. This information doesn’t change the fact that the rate has declined tremendously, but this decline is probably somewhat offset by the tremendous growth in retirement savings.

16

What surprises me is the number of couples I know who aren’t saving a penny, and don’t *have *a pension.

My husband works for the state in corrections. The minimum salary one earns at his institution is about $35 K, and can be considerably more. Last month, the place exploded in outrage, because the inisitution is switching over to direct deposit, and a surprisingly large number of the employees don’t have bank accounts.

He recently spoke to an employee who returned from a pre-retirement conference very dejected. He found out he’s only going to be making about 70% of his salary, and he told Hubby he can’t retire. The amazing part is that he lives in one of the houses that are provided by the instiution and only pays $200 a month in rent. His kids are grown, and they didn’t go to college. But, he’d have to leave the institution’s house if he retired, and he told Hubby that he has no assets to buy another. He and his wife spent every dime of his salary and have mountains of bills on top of it.

Another couple I know has no savings or retirement benefits. They do own a house, but they keep refinancing to pay off bills. Both of them make pretty good money, but they spend it all. God only knows what they’ll do when they retire. I’ve gingerly broached the subject, and from their answers, they don’t know themselves. They just don’t think about it.

I once read an article which claimed that when my generation reaches retirement age, we’ll see the world’s largest yard sale. All of the luxuries that people spent their salaries on will have to be sold because they can’t afford them any more.

17

You indicate that you’re upset that 401Ks are not counted as savings.
There are two sides to that coin.

  1. 401Ks are great when you retire. Super vehicle for getting money from your paycheck when you’re 25 to your house in Florida when you’re 75.
  2. But, if you spend two years out of work in your late thirties, having a bunch of money in a 401K won’t help you. If you DO tap into the 401K in those circumstances, you’ll pay through the nose to the IRS for whatever you do withdraw.
    So, yeah, count it as retirement savings. But the fact is, if my Ford Taurus blows its $3000 transmission tomorrow, my having $13K in my 401K and $500 in my regular bank accounts is less advantageous than if I had $9K in my 401K and $3500 in my bank accounts.
18

I have a friend who is a few years from retirement age. She’s depending on her inheritence to survive. There’s not that much there, and she has a brother who is going to fight tooth and nail for at least a portion of that inheritence that he feels is rightfully his (he’s a professional sue-er). I shudder to think what that situation will do to her. And I expect she will work at least an additional ten years beyond retirement age. It’s very sad. I have the same situation with my brother. He’s so utterly clueless about retirement. I have no idea how he will survive if our dad lives long and spends his money.

19

Forgot to add my two cents on the quoted section.
Six months of expenses is the usual reccomendation. That is six months pay for a lot of people.
If you’re much above the poverty line, six months of your pay is enough money to open up a brokerage or money market account. You can put two month’s pay in an interest-paying checking account and the other four months in a mutual fund that invests solely in high-quality government, bank and large company bonds. If you pick carefully you can get around 4% yield and no material risk of losing money. In fact, Capital One has a 4% APR savings account product right now.
You can beat 4% long-term in the equities market, but if you had lost your job when the dot-com bubble burst, your six months of expenses carriage might have turned into a three and a half months of expenses pumpkin in the same week you lost your job.
Now if you have enough invested that there’s NO WAY any stock collapse in history could wipe you out down to below six month’s savings, sure, go ahead, keep all of it in equities. Except for maybe $3000 or so, in order to avoid transaction fees for 99% of those little emergencies that get thrown your way.

20

It’s not that easy to just scrape together six months pay. Even if you manage to put 10% of your paycheck aside, that’s going to take 5 years. That’s presuming the water heater doesn’t blow, or anything else that eats into those savings before you get there. And something almost always does come up.