Why is the savings rate so low?

Andrew Samwick of Vox Baby wonders why the U. S. personal savings rate is so low and does some speculation about the behavior of the baby-boomer age cohort:

I wonder how it can be that with the Baby Boom generation in the high-income and presumably high-saving part of its economic life cycle, we can possibly have negative saving rates for the population as a whole, if we are making decisions with any attention to the amount of consumption we will be able to do in the future.

I think that Andrew needs to forget about age cohorts and think more about income quintiles.  For the last 20 years or more practically all of the real income growth has been in the top income quintile.  The lower quintiles have barely kept up or even fallen a little.

The practical consequence of this is that you can’t expect a lot of saving from the lower income quintiles.  The question then becomes why is the topmost quintile saving so little?

Saving is a statement about the future.  If you have what John McLaughlin would call metaphysical confidence or metaphysical doubt about the future, you won’t save.  That is if you believe that saving will do no good (metaphysical doubt) you won’t save and if you believe that your income prospects for the future are so good (metaphysical confidence) why save?  It would be redundant.

My conclusion is that the top income quintile is so confident in their future income that it would be foolish for them to save.

So if you want more saving you’ve pretty much got two alternatives:  increase the income of the lower quintiles or disrupt the confidence of the uppermost quintile a little.  Stirred, not shaken.

4 comments… add one
  • There have been periods of great optimism about the future of America — the Roaring Twenties, for example — when the savings rate was much higher than it is today, so I’m not sure that relative confidence tells the whole story. A little moral suasion wouldn’t hurt. For most of sixty years, politicians and capitalists have been teaching Americans to forget thrift. They have done their job too well.

    In any case, there are clearly cultural influences at work. I was in a position a few years ago to see the schedule of 401(k) contributions at the company I worked. Among the line workers, east Asian surnames and maximum savings were very highly correlated.

  • I don’t think that in the Twenties the trend of wealth concentration was nearly what it has been in the last 25 years here.

  • The U. S. personal saving rate is low.because the people’s think different so negative saving rates for the population as a whole.saving is a statement about the future. so the save money.



    Savings Rates

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