Save Some For The Rest Of Us!

March 10, 2006
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GRAND RAPIDS — When the federal government identifies an alarming trend in the nation's personal financial management, it does what bureaucrats do best: It comes up with an acronym.

Most recently, economists have been warning about America's low personal savings rate, which has actually dipped into negative territory this year. Congress responded by creating the Savings Are Vital to Everyone's Retirement (SAVER) Act. The act requires Labor Secretary Elaine Chao to prepare a report with recommendations for four distinct groups of American workers: labor market entrants, low-income wage earners, small business employers and their employees, and workers nearing retirement. All of those groups have the same problem. They're not saving enough money.

The SAVER Act and President George W. Bush's pension reform plans focus on an immediate problem. The largest generation in American history is nearing retirement age, and many of its members have planned poorly for their retirement. Major losses from corporate malfeasance and the termination of pension plans have compounded the problem. On March 1, financial executives, retirement plan administrators and politicians came together in Washington to look at the pressing concerns of today's retirees, and to consider long-term solutions for America's savings shortfall.

"Because we're a nation that always focuses on the future, we want to make sure that as many citizens as possible enjoy independence and financial security in their retirement years — with personal savings and a nest egg to call their own, a retirement safety net that never breaks down, and reliable pension plans," said Vice President Dick Cheney. "And these goals set an agenda for our country."

The agenda Cheney outlined at the summit includes changes in tax code, Social Security, and reform in retirement account management. It also includes an effort to shift Americans' concept of saving money. In short, it shouldn't just be a goal for the middle-aged.

"The American Dream begins with saving money, and that should begin on the very first day of work," Cheney said. "The power of compound interest is even greater when people start saving early. Yet a lot of American families live paycheck to paycheck — often finding, as the saying goes, 'too much month at the end of the money.'"

In January, the most recent month for which data were available, the United States personal savings rate fell to a negative 0.7 percent. That number represents take-home income minus spending. In other words, an American family that took home $5,000 in January spent $5,035. That might not seem like much, but multiplied by the nation's roughly 100 million households, it added up to over $63 billion in January alone. That's nearly double December's $36 billion over-spend.

What exactly does that mean? On its face, it means that Americans are living beyond their means. However, the numbers can be somewhat deceptive. Among other shortcomings, the savings rate as calculated by the Bureau of Economic Analysis does not count capital gains toward savings. For example, someone who put his entire retirement savings into Google Inc.'s initial public stock offering in 2004 would have since quadrupled his money. Despite that major change in assets (or perhaps because of it), that person might spend more freely, resulting in a "negative" savings rate. Economists often warn that the unaccounted-for factors in America's wealth actually reflect a healthier picture than the one portrayed by the savings figures.

"It's completely bogus, the way the savings rate is calculated," said Greg Dimkoff, chair of the finance department at Grand Valley State University's Seidman College of Business. "How do I know? Because people have been talking about it for 40 years, and yet we still have the best economy in the world."

But regardless of the imprecision of the Bureau of Economic Analysis' savings rate, it reflects a changing trend. Throughout most of the 20th century, the personal savings rate hovered near 10 percent. Since the early 1980s, it has dropped steadily, reaching negative territory for the first time since the Great Depression.

In 2005, over one third of Americans saved nothing for retirement, according to a survey by the Financial Services Forum, a consortium of banking industry executives. Over one quarter of baby boomers saved nothing for their retirement in 2005. The next highest percentage group saved between $1,000 and $5,000. According to the forum's CEO, Don Evans, that's not nearly enough, especially in light of the troubled Social Security system. The survey revealed a paradox about the way that today's workers are saving for retirement. They are much less likely to expect a governmental program such as Social Security to provide for them, yet they are saving dramatically less than previous generations.

One of the primary causes for the low savings rate is the ready availability of credit. A snapshot of the average American's personal finances in 1956 would show little or no debt beyond a home mortgage, and substantial short-term and long-term savings. In 2006, people are less likely to save money for short-term needs such as major purchases, since most Americans now have several credit cards. And while personal savings have decreased, credit card debt has grown. According to, an organization that tracks the credit card industry, the average level of credit card debt among consumers who carry a balance on their accounts has risen to nearly $10,000. In 1990, it was just over $2,000.

And whether an individual carries mountains of credit card debt or saves 50 percent of his income, the current spending and savings trends in the country may affect him equally. No one is sure what these trends might mean for the economy 10 or 50 years down the road, but there are some common assumptions.

According to Paul Isley, an associate professor of economics at Grand Valley State University, low national savings will likely result in one of two things: a decrease in capital investment, or a heavier reliance on foreign investment. Both of those outcomes could result in higher interest rates and, consequently, a worse economic picture for the country.

Isley does see one ray of hope. It's known as the "permanent income hypothesis."

"This theory says that younger people save less because they have a larger amount of their lifetime income coming in the future," Isley explained. "They can therefore shift some of that future income for use today by borrowing money, so we tend to see lower savings rates among younger workers. As these workers get older, they shift to more savings because they do not have much future income to borrow against. Therefore, if younger workers do indeed value savings more than the baby boom generation, we should see increases in the savings rate start to occur sometime in the next 10 years."

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