Dr. Econ

What steps can be taken to increase savings in the United States economy?

February 2002

You have asked a timely and complex question. Why are Americans in the aggregate saving far less (or consuming much more) as a percentage of disposable personal income than they did over most of the past 40 years?

Aggregate Saving Rate Has Fallen Dramatically

In the aggregate for the years 2000 and 2001, Americans only saved 1.0 and 1.6 percent, respectively, of their disposable personal income. These saving rates are but a fraction of the average 7.9 percent aggregate personal saving rate recorded over the 1959-2001 period. The chart shows that, at least since 1995, the aggregate personal saving rate has been far below average.1

There are a number of recent studies examining the saving rate issue. I’d like to start by citing the March 29, 2002, Federal Reserve Bank of San Francisco Economic Letter by Milt Marquis titled, "What’s Behind the Low U.S. Personal Saving Rate?"2

Economic Letter examines the causes and the consequences of the sharp decline in the U.S. personal saving rate, and whether there is reason to expect that it will remain low.

Marquis concludes with the following observation:

…substantial empirical evidence to date suggests that to a large extent the low personal saving rate in the U.S. economy is a systematic response of households to changes in its fundamental determinants, most notably the increase in financial wealth. Had the stock market appreciation of the 1990s been the sole reason for the low personal saving rate, its decline would also portend weaker consumption. However, this effect would likely be spread out over several quarters, as some estimates of the wealth effect on consumption suggest (see, for example, Dynan and Maki 2001). Moreover, it may also be the case that a lower personal saving rate will be a feature of the U.S. economy for the foreseeable future. This persistence could be attributed to an increase in trend productivity that induces higher permanent income for households or to a relaxation of financing constraints due to financial innovation. To the extent that these factors are important, the current low personal saving rate would not represent a problem that is overhanging the U.S. economy, but is instead a manifestation of a more efficient deployment of the economy’s resources.

Additional research by Maki and Palumbo (2001) suggests a further dimension to the saving rate question. Their findings look beyond the aggregate or economy-wide numbers to groups defined by income or education. Their results suggest that most of the decline in the saving rate at the aggregate level may have been caused by a sharp decline in saving by the nation’s high-income households. They found that, as a group, high-income households own a relatively large share of corporate equities. Those equities recorded rapid appreciation in the latter half of the 1990s as stock values soared to record levels. As their net worth increased, high-income households as a group significantly reduced the percentage they saved out of current income. Other income groups did not report such dramatic changes in their saving behavior.3

Identifying Household Cohorts That Experienced Low Saving Rates

Maki and Palumbo (2001) used cohorts (or families grouped by income or education) to examine the saving rate behavior across income groups. Their findings suggest the decline in the aggregate saving rate observed in the chart was not a phenomenon that extended across all categories of households. Rather, the decline in the saving rate at the aggregate level was primarily the result of a behavioral response by wealthy households to a surge in stock market wealth; as this group’s stock market wealth and net worth soared, it significantly reduced its saving out of current income. Their research is reported in Finance and Economics Discussion Paper, 2001-21, published by Federal Reserve Board of Governors. Two excerpts from their conclusion illustrate key findings of their research that relate to trends in the saving rate:4

…most of the aggregate trends in net worth and saving over the 1990s can be attributed to the experiences of households near the top of the income and education distributions.

What is novel about our study is that it reveals, essentially for the first time, that these same cohorts (income groups) of households whose portfolios surged in value decreased their saving rates sharply over this period. In fact, we show that the well-documented decline in the economy-wide rate of personal saving over the 1990s can be attributed almost entirely to a sharp reduction in the saving rate of cohorts of families who experienced the largest capital gains.

Clearly, recent studies of the saving rate are likely to stimulate additional research on the relationships between income and wealth, and saving and consumption behavior, both at the aggregate level and for smaller demographic groups. In the meanwhile, these studies indicate that forces affecting the overall economy, including productivity, financial innovation, income, and wealth distribution, may affect the rate of saving.


Endnotes

1. The personal saving rate is available from the Bureau of Economic Analysis website. (3-14-2002). http://www.bea.doc.gov/bea/dn1.htm

2. "What’s Behind the Low U.S. Personal Saving Rate?" Milt Marquis. Federal Reserve Bank of San Francisco, Economic Letter, 2002-09; March 29, 2002.

3. Stock ownership is not evenly distributed across all groups identified by income or wealth, so the wealth effect from rising or falling stock values may vary widely across groups sorted by income.

4. "Disentangling the Wealth Effect: a Cohort Analysis of Household Saving in the 1990s," Dean M. Maki and Michael G. Palumbo, Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System, Washington, DC, 2001-21, page 21.

References

Bureau of Economic Analysis, data on personal saving as a percentage of disposable personal income. http://www.bea.doc.gov/bea/dn1.htm

Dynan, Karen E., and Dean M. Maki. 2001. "Does Stock Market Wealth Matter for Consumption?" Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System, 2001-23. http://www.federalreserve.gov/pubs/feds/2001/200123/200123abs.html

Maki, Dean M., and Michael G. Palumbo. 2001. "Disentangling the Wealth Effect: a Cohort Analysis of Household Saving in the 1990s." Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System, 2001-21. April 2001. http://www.federalreserve.gov/pubs/feds/2001/200121/200121abs.html

Marquis, Milt. 2002. "What’s Behind the Low U.S. Personal Saving Rate?" Federal Reserve Bank of San Francisco, Economic Letter, 2002-09; March 29, 2002.
/publications/economics/letter/2002/el2002-09.html

Poterba, James M. 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives 14, no. 2 (Spring), pp. 99-118.

Personal Financial Education, FederalReserveEducation.org, 2003