Negative savings rate affects everyone

WASHINGTON-While many like to blame the government for the plummeting national savings rate, personal savings plays a major role. Since the 1960s, the personal savings rate has dropped from 8.3% to -0.1% in 2000, according to a recent study by the Government Accounting Office (GAO). To put these numbers in perspective, people are living longer beyond retirement and having fewer children to make up tomorrow’s workforce. Under Social Security and Medicare’s `pay-as-you-go’ program, fewer workers will be supporting greater numbers of retirees until the numbers invert and the system faces insolvency. “The personal saving rate has plunged, with American households spending virtually all of their current income,” the study determined. “Although aggregate household wealth has risen in part as a result of the stock market boom over the 1990s, many individual households have accumulated little, if any, wealth.” The study states that without “meaningful reform” to the Social Security and Medicare systems, the programs will incur “long-term financing problems.” As elderly care and retirement issues receive more attention, funding will be diverted from other American priorities. “Increasing national saving is an important way to bolster retirement security for current workers and to allow future workers to more easily bear the costs of financing federal retirement and health programs while maintaining their standard of living,” the study advocated. Currently, about 3.4 workers support each Social Security recipient. By 2030, the study predicts, the ratio of workers to Social Security beneficiaries will drop to 2.1. Over the next 75 years elderly percentage of the population will nearly double, the study said. As a temporary stay, the 1990s and into the first part of the 21st century brought government surpluses, which the study recognizes adding that policymakers seem content to hold on to the Social Security surplus. “The personal saving rate has largely declined since the 1980s, plummeting in recent years to levels not seen since the Great Depression,” the GAO observed. While in the 1970s savings jumped to 9.6% from an average of 8.3% in the 1960s, the personal saving rate had been down hill since. During the 1980s, the time of `Reaganomics,’ savings dipped slightly to 9.1%, according to the GAO. In the 1990s, while the stock market soared to record heights, savings fell to 5.9% on average. By 1999, personal savings fell to a mere 2.2%, a rate not experienced since the depths of the Great Depression and to start of the new millennium, savings fell into the negatives at -0.1%. The study offers no solid conclusions as to the cause of the declining savings rate, but lists several possible triggers, including the increased availability of credit and optimistic income expectations. Many people do not rely solely on Social Security for their retirement plans, which only pays about 40% of the average workers pre-retirement income. However, less than half of those working in 1998 had a pension plan and less than half of those attempted to calculate how much they needed to save. While credit unions and other financial institutions felt the liquidity crunch of decreased savings coupled with increased spending, lawmakers have just begun working on the issue over the last few years. In the tax bill that was recently signed into law, the maximum allowable contributions to Individual Retirement Accounts (IRAs) and 401(k)s were increased and provisions were included to lessen the burden on smaller businesses to offer these programs. The $1.35 trillion tax cut itself was partially intended to boost savings as well as spur the economy, which could increase savings. Additionally, for the last couple years, Individual Development Account (IDA) legislation has been introduced, which provides savings incentives to lower income persons. Credit unions and their trade associations are strongly in support of educating the public about savings. Many credit unions offer credit counseling services and children’s savings clubs to promote savings at an early age. Several NAFCU board members and President and CEO Fred Becker were invited to meet recently with Treasury Deputy Assistant Secretary for Consumer Affairs and Community Policy Dina Ellis to discuss how the credit union community could help the administrations goal of increasing savings. “[Treasury] looking early in the formulation process at this stage at what they might be able to do to encourage savings long-term,” Becker said. Each of the board members, including Chairman Jim Mills, president and CEO of Three Rivers Federal Credit Union in Fort Wayne, Indiana, provided information to Ellis regarding how they worked to increase savings among their members. Also, CUNA has been working hard together with the National Endowment for Financial Education (NEFE) to bring financial literacy to the nation’s elementary and secondary school students. [email protected]