Arnold Kling  

Why Are Saving Rates Declining?

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Robert Shiller thinks that people ought to be saving more.

According to a recent study by the Organization for Economic Cooperation and Development (OECD), household saving rates declined between 1984 and 2001 in Australia, Austria, Belgium, Canada, Finland, Italy, Japan, Korea, New Zealand, Portugal, Spain, the United Kingdom, and the United States. In some countries, the decline has been dramatic: in the US during this period, the annual household saving rate - expressed as the share of disposable income - fell from 10.6% to 1.6%.

He cites a study which argues that people save more when inflation is higher. One reason for this in the United States is that level-payment mortgages force people to accumulate equity faster in an inflationary environment.

For Discussion. What other factors have economists used to try to account for the decline in the personal saving rate over the past twenty years?

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COMMENTS (12 to date)
Eric Krieg writes:

To what extent is our willingness to save based on the rate of return that we expect to get from our savings?

If I am making a 7% after inflation return on my savings, then I need to save less to meet my savings goals than if I am using a savings account, or savings bonds.

People may also save for rainy days. With the proliferation of credit cards and other types of loose credit, the need for a raing day fund is less pressing.

What does it say about the economic theories of savings and investment that productivity growth has surged at the same time that the savings rate has plunged? Is investment in any way related to saving in the real world?

Bernard Yomtov writes:

Could there be a sort of money illusion at work here? Are people more likely to save when nominal returns are 6% and inflation 5% than when nominal returns are 1% and there is no inflation?

Lawrance George Lux writes:

I think the biggest factor resides in the structured Payment conditions which Consumers face. Utilities, Communications, Fuel, and necessary Services all stay ahead of the Inflation curve. Any residual deposits made are eaten over short-term Price increases. lgl

Lok Wong writes:

I agree with Eric..In developed countries like U.S,mature financial systems help economy a lot.With this kind of system,people would have more ways of getting money when bad days come and so,less incentive to save for future.

In contrast,people save more in less developed countries than in developed countries since there are no such way of borrowing money even though the degree of uncerntainty of the future facing them is same.

Sandy P. writes:

Since I'm an economic illiterate, there are "savings" (rainy day?) but savings doesn't include retirement. Why not?

It's only really a 20-year phenomenon(?) in this country.

When I was working, I "saved" between 5-15% of my salary, but it went for retirement. I "saved" more for a rainy day, but only the recommended 3-6 months, and then also for a house - saved enough for my goals. Guess I'm waiting for that inheritance.

2% for "rainy day savings"
2% for religious contributions
5-15% for retirement if offered
7.62% for FICA
fed/state/local taxes, food, clothing Starbucks @ $15 a week (not me), it adds up. What's left?

And w/cell phones and land-based line, if normal people looked at the taxes/fees of those 2 alone, not including long distance, that's $200 a year or so.

Maybe we don't save a lot because we have more choices to buy stuff than poor countries.

Maybe that's part of the thinking, but not from an economist's view.

And I do have to agree, what's the point for a measly 1% that's taxed?

Joe Marshall writes:

How does one define savings? Many people consider their 401K's and the equity in their homes as their primary savings. Shiller refers to these as purely asset markets but many money market and mutual funds, although classified as stocks, are actually income investments. Until you define your terms, statements about declining savings are meaningless. Also, the concept of increased savings accompanying increased inflation is absurd. History has shown that during inflation people get rid of their currency in favor of holding assets, because the assets are increasing in value and the currency is decreasing in value, people tend to act very logically in this regard. Loayza is probably confusing savings with increases in short term liquidity. Stable currency value promotes long term savings and investments in the capital markets. The article seems to have reality upside down.

Eric's question about theories of savings and investments as it relates to productivity growth is the right question, the answer is that "real " savings over the past 20 years have been increasing under the environment of declining inflation, hence the boom in the capital markets and the boom in productivity.

Sung-bok Lee writes:

I think that saving rates are declining because of budget constraints are loose. Poeple can't definitely measure their budget line and may overestimate it because of changes of payment systems such as credit cards; that is, they can easily withdraw future income more than the past, which means negative savings(overdrafts).

mcwop writes:

One big factor effecting savings rates is Inertia (Behaviorial). Simply, people don’t get around to dealing with savings or a savings plan. Richard H. Thaler has done nice work on the behavioral aspects of savings. Here are a couple of articles showing that people can get the savings rates up rather painlessly.


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Eric Krieg writes:

Anyone find a link to the OECD report? It wasn't obvious where it was on their web site.

I am interested in how they defined savings. Did they include all non-consumed income as savings?

R. Richard Schweitzer writes:

Joe Marshall is quite right. Further, "Savings" defined by econometricians is not the function that motivates the body public. The function of "not consuming all that is produced" is to accumulate assets (usually) for later use. Future credit is one of those assets. Some "study" somewhere probably shows a correlation of lowering savings habits when the "values" of assets are increasing - as Marshall alludes to. If one's assets are increasing, or seem to be, there is less motivation to increase them by decreased consumption. We have been in an era of increasing asset valuations (practically every form of asset) ever since 1948 (a suggested base date). Increasingly, but probably unconsciuosly, the body public has come to sense that "money" is simply a call on, or right to, future goods and services (including retirement of past obligations); also that most money today is simply forms of credit being passed around. Saving just money, as money, has lost its old functions applied in a less credit oriented society.

A secondary issue calls for consideration of just what assets are available for "savings." Doing so will take the examination back to the preceding premise.

In making comparisons with other countries, the diminshed role (and transactional costs) of intermediaries here should be taken into account. One no longer has to go to a bank to save. Many "asset managers" compete. Still, the trends toward "protection" via regulation will have some cost effects that reduce efficiencies gained in prior periods. R. R. Schweitzer

Eric Krieg writes:

>>We have been in an era of increasing asset valuations (practically every form of asset) ever since 1948

Just curious, why 1948? Is that the last time that there was outright deflation?

Eugene Mondrus writes:

If we consider that savings is used as a force to increase personal liquidity in times of crisis or need, then we can see that the credit rich society of todays has less need for "liquidity insurance" in the form of savings.

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