Now that we are at the end of the 3rd quarter, we are going to start seeing more articles about how dismally Americans are saving. There will be charts and graphs of how the savings rate has dropped dramatically since the 1980s. There will be other articles about how we need to turn this around because we are saving less and less. Yet, the national savings rate is supposed to be decreasing (I will explain why in a second). And, by showing how negative it is, we are just giving an excuse to millions on why they can not save (see no one else is, so I can not either). What we should be focusing on instead are examples of people saving even on $20,000 a year.
First, the personal savings rate looks at income - consumption = savings for the entire country. With more and more people retiring, the consumption portion of the equation is not decreasing that much while income is. Retirees are showing a negative personal savings due to using their pensions and personal savings to consume. Thus, for those who are hoping for a dramatic increase and see a positive number on of these days, it probably will not happen. When approximately 12% of the population is retired (and growing to 20% overtime) who have a negative savings rate, it is hard to offset this unless everyone is saving 10% to 20%.
Second, in showing the dramatic decline, many articles forget to write about the reasons why we have seen a decrease. A main reason was a portion of society felt richer. Many baby boomers got a huge windfall from the stock market (especially those who saved enough already for retirement via the stock market gained the most) and then when the stock market slowed down, the prices for homes started to increase giving people increase in their equity. Thus, those who were financially secured (and unfortunately others who were behind in retirement savings) decided to spend their new found fortune. This did nothing for the income side of the equation because capital gains are ignored while the consumption side of the equation increased thus decreasing overall savings. Now that prices are settling down, hopefully more people are more cautious about spending based on short-term trends in the markets.
Third, we need to be cautious about how we motivate Americans to save. Most of it is based on fear. Yet, if you were in a business where the manager told you that the unit needed to work more. At the same time, the manager is laying off 20 percent of the staff. If he came back and said production dropped 10 percent during this time, what is wrong with you and your good for nothing coworkers, how would you feel? Depressed, sad, angry? How would you feel if you realized you worked 10% more, yet your unit fell behind because 20% of the production staff got fired? We all know negative motivation can work in short-term. Yet, for long-term growth, showing the improvement and building from there usually produces better results. So, why do we treat personal finance any differently? Why do we harp on what is not working versus showing what is working and how others can do the same?
Yes, many families need to save more especially because company-paid pension plans are becoming extinct. Yet, looking at 2005 analysis from Boston College, the working age savings rate is starting to increase which is our goal. So why are we harping on Americans what they can not save with statistics like the personal savings rate that show them losing ground when they are actually starting to turn the corner? Yes, everyone should be looking at their own savings rate to see if it is adequate and not as much on the national rate. Yet, like I said above, by giving a grim picture of what others are not doing (negative savings rate), we are giving excuses to the masses on why they can not save as well instead of focusing on how others are turning the corner (which is something that many bloggers have been doing using themselves as examples - a lesson for others to learn from).