Crisis in Savings

            Americans are not saving enough money.  They have little money for unplanned emergency expenses.  And, as for retirement—fuhgeddaboutit.  At a panel discussion hosted by the Bipartisan Policy Center, Sen. Susan Collins (R-ME) called the situation “urgent” and a “crisis.”

            “We have a tsunami of retirees facing this country who are going to lack the funds for a comfortable retirement, ” she said.  According to Collins, the average annual Social Security benefit is only abut $16,000, and about 25% of Social Security recipients have no other financial resources. 

            According to a June 2014 CBS News poll, the average amount of retirement savings Americans have is about $3,000; people nearing retirement have about $12,000.

            And it gets worse. A NeighborWorks survey released this year found that about a third of all Americans have no savings at all. 47% of all survey respondents said that while they did have some savings, those savings wouldn’t cover their monthly expenses for more than 90 days.

            The members of the Bipartisan Policy Center’s panel suggested a number of remedies.  Representative Derek Kilmer (D-WA), a second term Congressman, managed to get Congress to adopt a plan allowing banks to create “prize-linked savings accounts.”  Banks would be able to encourage people to save by giving them chances to win periodic lotteries for establishing savings accounts and for making deposits into them.  This makes “savings more fun,” he said.

            To reduce the cost to small businesses of establishing and maintaining retirement savings plans for their employees, Collins is working on a bill that would allow unrelated businesses to create pooled retirement plans that serve all of their employees.  Under current law, companies in different industries may not pool their retirement plans 

            David Johns, Deputy Director of the Brookings Institution’s Retirement Security Project, proposed creating savings plans that employees can opt out of that split savings between retirement accounts and passbook savings accounts.

            Kate Griffin, Vice President for Programs of the Corporation for Enterprise Development, spoke about the importance of teaching children from low income families how to same.  She said that poor children with savings accounts earmarked for college are more likely to graduate than poor children without them.

            And Jason J. Fichtner, Senior research Fellow at George Mason University’s Mercatus Center called for changing the tax code so that low-income savers who don’t have high enough incomes to pay income tax could still benefit from savings incentives in the tax code.

            All of these are good ideas.  They all appear to help Americans save.

            But, listening to the discussion, it was hard to shake the feeling that these proposals would have rather marginal effects.  Financial professionals say that people ought to be saving 15% of their incomes, not the 5%, on average, they’re saving now.  While something is always better than nothing, it is doubtful that the savings programs, tweeks, schemes and gimmicks discussed by the panel are likely to goose the savings rate up by the recommended 10 percentage points.

            Take a look at this graph from the St. Louis Federal Reserve Bank. 

It shows the trend in personal savings rate from 1959 until 2015 (gray bands represent recessions).  From the late 1950s until the recession that ended the Ford Administration, the savings rate was positive.  And that’s exactly what you would expect during a period when the economy was expanding and raising income for everyone.

            For the next 40 years, the trend is negative.

            What happened during those 40 years? There were severe recessions, large-scale layoffs, stagflation, globalization and the transfer of blue collar factory jobs to developing countries, a decline in the power of unions, wage stagnation and a widening of the income and wealth gaps that separate the rich from everyone else.

            According to the CBS poll, 80% of Americans with incomes of $50,000 or less say that its hard for them to both save for retirement and pay their day to day bills.  “There is a segment of the population who cannot afford food and rent and to save for retirement, and they rationally choose food over retirement savings,” said Anthony Webb, senior research economist with Boston College’s Center for Retirement Research.

            Indeed, according to a Washington Post Wonkblog analysis of the Consumer Expenditure Survey released by the Bureau of Labor Statistics in April, the poor save 12 cents for every dollar they spend on food, while “the wealthy sock away $3.07 in pensions and life insurance” for every dollar they spend on food.  The survey shows that poor Americans aren't wasting much money on delicacies, entertainment or other luxuries.

            The fact that Americans lack significant savings to cope with financial emergencies or to supplement the meager amounts they’ll receive from Social Security when they can no longer work is a serious national problem. But, in my mind, it’s a symptom of a more serious problem: Many Americans simply don’t earn enough to be able to afford the luxury of saving.

            If you want to do something significant about the savings problem, you have to do something significant to increase the likelihood that families will have enough money to pay their bills and to put money away.  When poor Americans don’t have to live from paycheck to paycheck, the savings problem will take care of itself.