The rapid rise in saving has reduced consumer spending, slowing the pace of GDP growth in 2009 and in early 2010. If the saving rate continues to rise rapidly, it could push America’s fragile economy into another downturn. That would mean lower imports, creating a potential problem for countries that depend for their employment on exporting to the US.
Higher household saving depresses consumption because it is the difference between households’ after-tax income and what they spend. The saving may be deposited in bank accounts or used to buy mutual funds or corporate stock. Saving may also take the form of individual contributions to retirement accounts or employer contributions to corporate saving plans. Paying down debt on credit cards or mortgages also counts as saving – but increases in the value of existing assets like stocks or real estate do not, even though they increase the value of household wealth.
In any year, some households are savers and others, especially retirees, are dissavers that use past saving to finance current consumption. The nation’s net household saving rate is the difference between the saving of the savers and the dissaving of the dissavers.
The recent rise in the US household saving rate reversed a long-term decline that began 25 years ago. Before that, between 1960 and 1985, American households saved an average of 9% of their after-tax incomes. The saving rate in each of those 25 years was between 7% and 11%.
But, after 1985, a variety of changes caused saving to decline until it reached less than 2% in 2007. One reason was that rising stock markets and higher house prices made individuals wealthier, reducing their need to save for retirement and allowing retirees to dissave more. The general shift from defined-benefit pension plans to defined-contribution plans meant that employees felt the effect of rising share prices directly in their own personal accounts.
Moreover, the increased availability of credit cards gave Americans a greater ability to dissave, buying goods and services now and paying for them later. Mortgages became more widely available. Rising house prices also allowed homeowners to refinance their mortgages, obtaining additional cash to spend on other things. Credit lines secured by home equity provided another new way to finance spending.