10/3/2012 5:12 PM ET|
Did the economy kill saving?
Americans have started putting away a tad more money, but we're not doing nearly enough to build wealth and fund retirement.
Americans have never had much love for fiscal puritanism. We're a nation of risk takers and consumers. We want it all. We want to hit it big. We don't want to sacrifice the pleasures of today by saving for tomorrow.
Yes, I know the economy stinks, and saving isn't easy. Wages have stalled. The unemployment rate is still above 8%. Home prices are off. Stocks have recovered from the recession, but they have merely returned to highs reached years ago. Saving can also seem pointless when returns -- from investments, savings accounts or whatever -- are low. A lack of disposable income makes it even harder.
But the truth is, even in good times, we didn't save. In the 1970s, when the economy's debt-driven growth, high inflation, favorable demographics and steady increase in asset prices meant it wasn't so hard, we didn't save. We consumed.
From 1976, when the oldest baby boomers were hitting their 30s, through the peak in 2007, household net worth grew from $5 trillion to $67 trillion -- mainly because of the rise in home prices. Accounting for inflation, the rise was around $24 trillion in 2012 dollars.
Yet starting that same year, the savings rate fell from around 10% to a low of 1% in early 2005. And household debt rose from 70% of disposable income to a peak of 134% in 2007. Not only were people not saving, they were borrowing against their new wealth to spend even more.
Now, despite an epic housing bubble, retirement portfolios constrained by the fact the Standard & Poor's 500 Index ($INX) is at levels first reached in 1999, and household net worth below its pre-recession peak at $63 trillion, the savings rate has increased to 3.7%. This is an improvement, but it's far from enough. And we've only started to work down our debt, which has fallen to 113% of disposable income, thanks mainly to mortgage defaults. (Because of falling home prices, debt as a percentage of assets has actually increased.)
Moreover, people who are saving are taking fewer risks, selling stocks and piling into bonds and other fixed-income investments, lowering their potential returns in an environment of ultralow interest rates from the Federal Reserve.
The truth is that for most Americans, saving is dead. People are simply not putting away enough to fund a comfortable retirement, rebuild balance sheets damaged by the housing bust or benefit from the Fed's stated goal of boosting the prices of stocks and housing. And they're not taking enough risks with the money they do save to earn decent returns.
Straightening this out isn't easy, but I'll outline the way to do it below. And it has to be done, unless your retirement strategy involves freeloading off your kids, who'll have problems -- like massive student loan debts -- of their own.
Why saving seems so hard
Why does saving seem like an outdated concept?
Well, part of the reason is that Americans don't like to lower their standard of living unless they absolutely have to. Thus, while wages and some assets have bounced back (to a degree) from the recession, the added capital is going into things like the surge in auto sales or smartphones instead of building -- or rebuilding -- wealth.
That leads Morgan Stanley analysts to believe that Americans aren't saving more simply because they don't feel they can, given budget constraints.
Saving is a also a lower priority here than in places like Germany or even China. It's a cultural thing, too.
And Americans are protecting what money they have saved out of fear of recent market volatility, which explains the shift into "safe" assets like bonds.
What Americans have
Let's take a look at where things stand for the average American.
Because the country's wealth and income are concentrated at the top, economywide measures of income and net worth are somewhat misleading. The Fed's 2010 Survey of Consumer Finances, the latest available, gives us a clearer picture. It suggests that even middle-class, well-educated families are under strain:
- Median family income is down 7.7% since 2007 and stands at $45,800. For families whose primary earner has a college degree, it's down nearly 10% (but down only 1% for those whose primary earner lacks a high school diploma).
- Median net worth is down nearly 40%, from $126,400 to just $77,300 -- returning to levels last seen in the early 1990s. For those with a college degree, median net worth fell 34.6% to $195,200.
- The percentage of families that saved fell to 52% from 56.4% in 2007. Compare that percentage to the 62% of families with a college degree. Back in 2001, nearly 60% of all families saved.
While the wealthiest among us are enjoying a rebound, thanks to a resurgent stock market, the wealth of middle-class families depends much more on home prices. While the Dow Jones Industrial Average ($INDU) has been pushing to new post-recession highs, home prices are just now starting to get up off the mat.
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"people who are saving are taking fewer risks, selling stocks and piling into bonds and other fixed-income investments"
Wrong! Bond are not just a terribly risky investment, they're a screaming loser. Interest rates are at historic lows which means that prices are at historic highs. They have no place to go but down.
The bond market is a Fed-created bubble on par with the recent internet and housing bubbles. The only question is when interest rates will start to rise - and bond prices fall - big-time.
The average worker is not saving because wages have been stagnant for years while prices are moving up every year. What is left to save??? You dont have to be a rocket scientist to figure this out. Free trade has distroyed this country and it is pur greed by big busines who dreamed up this nightmare and put a nice sounding name on it,"FreeTrade". Think back to the time before free trade, people had jobs. Now the Chinese are doing that job for 10 dollars a day.
Romney ' WHERE'S THE BEEF' to your 5 point economic plan, all fake.
Romney the numbers don't add up. 8 Trillion means BIG tax increases for middle income.
Romney "47% of the people, I'm not interested in them their victims."
Romney Bain mgt style was corp raider not empathic at all to people.
Romney State run healthcare isn't balanced and fair it's a circus.
Romney Mass. came in 47 of 50 states for job creation, when you were gov'r
Romney "let GM go bankrupt", isn't a plan it's a Bain corp raider tactic
Romney immigrants "let them self deport" ..Romney "women have there place"....
Romney is King.....of 'FLIP FLOPPERS' is the only reality here.....
To understand why, or why not, folks save I think a review of every government program, particularly in the wake of the Great Recession, is in order. The only question you need to ask yourself is whether the program, deduction, policy, etc. was designed to help a saver or a spender. It really is no contest what side of things the policy makers are on.
You don't think Ben Bernanke's .25% Bank Rate did? Right now, rates are too low on anything to be profitable. If revenue sources aren't profitable, no need to save. Only idiots deal in stocks and bonds when control, manipulation and corruption are this rampant. Nope... I see organized wealth getting wiped out very soon when average people who worked their whole lives reach a penniless retirement that YOU get to pay for.
Make up your mind, America... 20 30 somethings living with their mom never had a real job and worth millions from grubbing it out of the mainstream... or crushing those pariah and redistributing excess so the cost of care is mitigated naturally?
I still have the 1st dollar I save in 1968. That is the secret to being in the 2%
Did not get cable until World Trade Center was distroyed in 2001
Did not own anything but an 11 inch black and white TV until 1992. Lived my life like this and even got through the Carter years.
Get the picture!
Stop spending money on Crap.
The stock market is not a mystery, people. Buy high yeiding stocks from companies that aren't going anywhere...McDonald's, large public Utilities (essentially monopolies...Duke, ConEd, etc), IBM, Johnson and Johnson, Pfizer, ExxonMobile, Chevron, CocaCola, Microsoft, FreeportMcMoRan, Boeing, etc and sit on them. Reinvest your dividends. I've done quite well with this approach.
These companies aren't going anywhere, their dividend yields beat inflation, and you're likely to have capital appreciation as well. Add in a little bit of risk with smaller companies. BDCs and REITs pay out hefty dividends, but your big blue chips should be the core of your portfolio. Look out for the occasional bargain as well. BP after the Gulf spill? Yes, please. Toyota and Honda after the Japan tsunami? Done and done.
Interest rates are bad.I make a ton of money in stock dividends.O course, if you don`t
know the stock market or hate it just put your money in CD`s and be thrilled with 1%.
What "killed" savings in America? First, let's be sure that we all agree on what we mean when we say "savings", before we try to actually answer that question: IF we mean "to put money into a bank (or similar), as in a savings-account", then the answer to that question is truly simple: WHY give my money to the bank? They don't pay any interest (OK, 0.1% per-annum IS "interest", but... at that rate, leaving your money in that savings-account will "earn" you about 1.1% over TEN years! So, you put in $100 today, and in 2022 you get back $101.10. wow.). Not to sound mean-spirited regarding those bankers or anything, but what has KILLED "saving" for me is that I can do just about as well if I simply put my money into a sack in my closet (or stuff that mattress, bury it in a can in the yard, etc. etc.). I cannot see WHY I should let the bankers have my money and use it to their advantage - there really is very very LITTLE risk that I'll lose my cash by having it burn up or get stolen from my house. And, if I keep it at home, at least I can play with it and admire it and stuff! Given that they don't wish to pay for that privilege, better me then them!
Putting money into stocks and bonds is NOT, in the narrow definition, "saving". But, in reality, what folks are doing by EITHER putting it into a sack, putting it into the bank, OR putting it into stocks and bonds - investing it - is to FUNCTIONALLY SAVE IT for another day - the difference being whether you have any potential to GROW what you "saved". IF your primary concern is the finite security of today's cash, as versus having enough tomorrow - might just as well put it into a sack! It's really about as safe as if it were in a bank, and you can at least touch it whenever you wish. Of course, putting money into a sack, or into a SAVINGS account at 0.1% per-annum interest are both sure ways to guarantee that you will end up with LESS VALUE "tomorrow. That's right, folks! Inflation continues, and SAVING money means LOSING VALUE!
That, in a nut-shell, is what has KILLED SAVING in America. To save money, in that narrow definition of above, as if it were a gallon of milk or gasoline in a bottle, is to eventually simply lose it. It becomes less valuable into the future. So Americans who have any EXTRA to "save" (and the economy has certainly put paid to that for many!) really should be wary of "saving".
Me? I'll stick to INVESTING my money for my future, in the strong expectation that INVESTING has the best chance of leaving me with MORE VALUE into the future, when I'll need it! SAVING is DEAD, to me!
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