The Personal Savings Crisis
Life expectancies are rising faster than ever before. Yet many of today’s workers are not offered any kind of pension or retirement plan at work. Many rely too heavily on Social Security. Many must pay an increasing share of their health coverage at the same time they’re funding their children’s education or supporting elderly parents.
The numbers paint a vivid picture of America’s savings crisis: we’re saving less, taking on more debt, and declaring bankruptcy more often (see graphs at right). To make matters worse, the decline in savings poses a huge risk to our economy—with diminished capital available for the business investments that fuel economic growth. For all these reasons, it’s never been more important to encourage personal savings.
How bad is the problem? In June 2005, the rate of personal savings sunk below zero—after a virtually steady decline since 1982 when the savings rate stood at 11.2 percent. America’s goose egg compares to Germany’s 11 percent and France’s 10.2 percent; in fact, only two industrialized nations have lower savings rates than ours.
At the same time we’re saving less, we’re borrowing more. Household debt rates began increasing by double digits in 2003 and 2004. The debt toll is reflected in the rising personal bankruptcy rate, which doubled between 1994 and 2004.
Perhaps most disappointing is the fact that the zero-savings rate and rising debt arrives at a time when the 76 million Baby Boomers are in their peak earning years, with many reaching 65 as early as six years from now.
We haven’t yet found ways to measure financial literacy. But experts point to statistics such as those above as proxies. If we realized how we’re jeopardizing our financial futures, they reason, we’d take action to correct our course.
Not so long ago, when savings took the form of passbook accounts, credit cards were scarce, mortgages were fixed rate, and retirement meant the company pension plan, the financial marketplace was far less complex and choices, if any, were limited. Today, a sophisticated industry offers a vast array of products and services available virtually anytime, anywhere through a whole host of providers. Consumers are confronted with countless financial decisions their parents or grandparents never needed to consider. Financial education has yet to catch up.
In the meantime, the consequences from a single bad financial decision (or indecision), such as the failure to diversify savings or the delay of saving until midlife or later, can directly, and perhaps permanently, affect your standard of living.
But the impact of financial illiteracy extends far beyond individual well-being. When financial illiteracy is pervasive, the economy is also compromised: the aggregate decisions of uninformed or ill-informed consumers make financial markets inefficient and less competitive. Financial illiteracy can lead to the overuse of credit and can depress savings rates, curtailing the availability of capital to fuel economic growth.
While the workforce prepares for an unprecedented exodus when the Boomers begin retiring, the indications are that many won’t be ready. For most Americans, this isn’t your father’s economy: most of us don’t work for a single company throughout our careers, and many don’t expect to receive a significant pension benefit upon retirement.
The statistics bear this out:
The savings crisis doesn’t begin and end with the retirement income gap. On average, spending to meet medical needs more than doubles after you turn 65. In 2003, Americans spent nearly $1.7 trillion on health care; by 2013, those costs are projected to double. And, increasingly, employers are cutting back—or dropping—health coverage for retirees. Couple the cutbacks with rising life expectancy, and a serious health care shortfall takes shape.
Educating your child is one of the best investments you can make. According to the College Board, the typical college graduate can expect to earn about 73 percent more—or about $1 million—over a 40-year working life compared to the typical high school graduate. But while the value of that education is growing, so are the costs. Over the past decade, average tuition and fees at public, four-year colleges increased more than 50 percent. At the same time, federal aid for higher education has shifted away from grants toward loans.
For economic, fiscal, and social policy reasons, it’s imperative that we address the personal savings gap. For workers facing the need to fund their retirements and their health costs, for parents seeking to ensure educational opportunities for their children, and for businesses requiring capital to pursue economic growth, a zero-savings society does indeed represent a crisis.
The longer we avoid confronting this crisis, the worse it gets; and the worse it gets, the more painful the solutions become. Fortunately, several proposals that would help address this problem are already on the table and one solution in particular is gaining support in Washington. You can make a difference too—ask your Members of Congress to support proposals that help Americans meet their long-term financial goals.
Time can be an ally. It gives people a reasonable window of opportunity to rework their financial plans and to put those plans to use.
The time to tackle the savings crisis is now.