The Savings Rate

[Jordan Hayes]

I think we need to look at why the savings rate is "so low"
before we can draw any conclusions about what it means for the
future.  I believe that "saving for a rainy day" has been
replaced in the minds of many people with "fund your retirement
vehicle of choice" -- with many people now tapped out on their
contributions to 401k, etc., they *feel* like they are saving.
Add to this employer match funds and a rageing bull market, and
people see themselves as already saving "appropriately" -- so
there's little incentive to engage in additional taxable
savings.  Since unrealized capital gains (and even realized ones
in tax-deferred accounts) are not counted as income, many people
find their "savings" is a small proportion of the value of
these accounts, making the psychological effect even more powerful:
they believe they are "saving" without having added additional
dollars to the account.

I believe this effect on the "savings mentality" of many in the
US goes a long way to explain why the "savings rate is so low" ...

It would be interesting to see some kind of research into the
savings rate of those who don't have access to a defined
contribution plan (last I checked, it was less than half of
the full-time workforce) and whether this is a significant
attribute of the gap between the savers and the non-savers.
Certainly those least in the position to save have been able
to secure access to easy credit terms and thus wind up with
"negative savings" but even in the higher income brackets I
bet you'll find many "negative savers" who nevertheless are
funding (and being matched) in their DC account.

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As for what the implication might be in a recession, I think it
could go a few ways.  But I don't think it's appropriate to
project forward the implications of this phenomenon without
taking into account this tax-deferred incentive.

/jordan