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