Menus Subscribe Search

Follow us


piggybank

Why Americans Don’t Save— and What We Can Do About It

• March 07, 2013 • 4:00 AM

Five studies on American’s dwindling savings

Imagine your car needs a new transmission. It’s going to cost $2,000. Can you scrape that together within the month? If so, you’re better off than nearly half your fellow Americans.

We’re used to thinking of the nation’s economic woes in terms of unemployment. But even our sobering jobless rate masks a deeper economic sickness. In 2011, the National Bureau of Economic Research reported that 44 percent of Americans say they would have trouble coming up with two grand in 30 days if they needed to. These “financially fragile” households—one medical bill or busted furnace away from bankruptcy—cut across low-income groups and the middle class alike. What unites this huge swath of America is not an employment problem, but a savings problem.

Savings aren’t just important for buffering life’s emergencies; research shows that financial assets, more than income, are a strong predictor of upward mobility. They’re also crucial later in life. In 2010, 75 percent of Americans who were approaching retirement age—many of them in the tidal wave of aging baby boomers—had less than $30,000 in their retirement accounts. According to economist Teresa Ghilarducci, about half of middle-class workers will live out their golden years on a food budget of about $5 a day. So here’s the question: Why don’t Americans save?

1

Because It’s So Easy to Borrow

In 1923, a battle for the soul of the American consumer economy took place in Detroit. General Motors was eating Henry Ford’s lunch, thanks to a revolutionary innovation: consumer financing. For the first time, ordinary folks could borrow against future earnings from a big corporation. Ford, who despised finance, parried by offering savings accounts at his dealerships. You could sock away money for a new Model T—and you’d earn interest! But Ford’s idea didn’t stand a chance. In modern American history, the availability of credit and the savings rate stand in an almost perfectly inverse relationship. And GM’s peculiar new business model was just the beginning of credit’s availability to the average man. When usury laws were rolled back in the 1970s, easy credit flooded the market. According to analysis by the Federal Reserve Bank of San Francisco, changes in the availability of credit can explain about 90 percent of the long decline in American savings—down to where we are today, with an anemic savings rate of about 4 percent.

Consumers and the Economy, Part I: Household Credit and Personal Saving, by Reuven Glick and Kevin J. Lansing, January 2011

2

Because We Throw Bones to the Wrong Dog

As a nation, we spend about $130 billion each year through the tax code to encourage people to save for the future. Trouble is, almost all of those tax benefits accrue to the wealthy—who of course don’t need the help and would save anyway. According to this paper from the Pew Charitable Trusts, the highest income quintile receives 70 percent of the benefits from these tax incentives. The lowest income quintile receives only 0.2 percent.

A Penny Saved is Mobility Earned: Advancing Economic Mobility through Savings (pdf), by Reid Cramer, Rourke O’Brien, Daniel Cooper, and Maria Luengo-Prado, November 2009

3

Because So Many of Us Live Off the Financial Grid

Roughly 30 percent of Americans have no savings account, while 8 percent have no bank account at all. Absent a relationship with a bank, it’s incredibly hard to build wealth. American banks don’t make it easy for small depositors: minimum balance requirements and onerous fees regularly drive financially fragile savers away. When unbanked Americans need financial services, they often turn to expensive, down-market, sometimes predatory options like payday loans, check-cashing services, and money orders, whose high costs further erode wealth and potential savings. It doesn’t have to be this way: European nations like France, Germany, and Belgium have special banking systems for small depositors—often in the form of post office banks—and boast savings rates in the neighborhood of 10 percent.

2011 FDIC National Survey of Unbanked and Underbanked Households (pdf), September 2012

4

Because You’re Kind of a Jerk to Your Future Self (Unless You Get to Know Him or Her)

Economic models predict that all of us, as rational agents, will arrive at some optimal ratio of savings to income during our earning years so we can maintain a comfortable level of consumption through retirement. But it just isn’t so. Real-life, flesh-and-blood humans engage in “temporal discounting”—we prize immediate gain more than future well-being. Neurological studies have even found that when we think about our future self, we might as well be thinking of a complete stranger. With these findings in mind, a team of scholars writing for the Journal of Marketing Research recently set out to find a way of helping people identify with their future selves. What they found: subjects who were shown images of themselves digitally morphed to look old set aside significantly more money for retirement.

Increasing Saving Behavior through Age-Progressed Renderings of the Self (pdf), by Hal E. Hershfield, et al, 2011

5

Because our D.I.Y. Retirement System Just Doesn’t Work (But Would Improve Dramatically With One Simple Change)

As defined benefit pensions disappear from the landscape of American employment, it’s becoming clear that our 30-year experiment with a voluntary, private retirement system—401(k)s, IRAs, and the like—is a near-catastrophe. But behavioral economists have found that one tweak to the standard company’s 401(k) plan can vastly improve people’s savings behavior. Typically, workers must “opt in” to a company retirement plan: decide on a contribution rate, fill out paperwork, and then walk it all down the hall. This works fine in firms that only hire “rational economic agents.” In the real world, such a system puts the fate of households—and nations—at the mercy of procrastination. Better to put inertia in the service of the greater good: when workers are automatically signed up for retirement plans and assigned a contribution rate (with the freedom to opt out or tweak their rate), they generally stay the course.

The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior (pdf), by Brigitte C. Madrian and Dennis F. Shea, November 2001

Pacific Standard Staff
Pacific Standard grapples with the nation’s biggest issues—with a focus on economics, society and justice, education, and the environment—by paying particular interest to what shapes human behavior.

More From Pacific Standard Staff

A weekly roundup of the best of Pacific Standard and PSmag.com, delivered straight to your inbox.

Recent Posts

October 31 • 4:00 PM

Should the Victims of the War on Drugs Receive Reparations?

A drug war Truth and Reconciliation Commission along the lines of post-apartheid South Africa is a radical idea proposed by the Green Party. Substance.com asks their candidates for New York State’s gubernatorial election to tell us more.


October 31 • 2:00 PM

India’s Struggle to Get Reliable Power to Hundreds of Millions of People

India’s new Prime Minister Narendra Modi is known as a “big thinker” when it comes to energy. But in his country’s case, could thinking big be a huge mistake?


October 31 • 12:00 PM

In the Picture: SNAP Food Benefits, Birthday Cake, and Walmart

In every issue, we fix our gaze on an everyday photograph and chase down facts about details in the frame.


October 31 • 10:15 AM

Levels of Depression Could Be Evaluated Through Measurements of Acoustic Speech

Engineers find tell-tale signs in speech patterns of the depressed.


October 31 • 8:00 AM

Who Wants a Cute Congressman?

You probably do—even if you won’t admit it. In politics, looks aren’t everything, but they’re definitely something.


October 31 • 7:00 AM

Why Scientists Make Promises They Can’t Keep

A research proposal that is totally upfront about the uncertainty of the scientific process and its potential benefits might never pass governmental muster.


October 31 • 6:12 AM

The Psychology of a Horror Movie Fan

Scientists have tried to figure out the appeal of axe murderers and creepy dolls, but it mostly remains a spooky mystery.


October 31 • 4:00 AM

The Power of Third Person Plural on Support for Public Policies

Researchers find citizens react differently to policy proposals when they’re framed as impacting “people,” as opposed to “you.”


October 30 • 4:00 PM

I Should Have Told My High School Students About My Struggle With Drinking

As a teacher, my students confided in me about many harrowing aspects of their lives. I never crossed the line and shared my biggest problem with them—but now I wish I had.


October 30 • 2:00 PM

How Dark Money Got a Mining Company Everything It Wanted

An accidentally released court filing reveals how one company secretly gave money to a non-profit that helped get favorable mining legislation passed.


October 30 • 12:00 PM

The Halloween Industrial Complex

The scariest thing about Halloween might be just how seriously we take it. For this week’s holiday, Americans of all ages will spend more than $5 billion on disposable costumes and bite-size candy.


October 30 • 10:00 AM

Sky’s the Limit: The Case for Selling Air Rights

Lower taxes and debt, increased revenue for the city, and a much better use of space in already dense environments: Selling air rights and encouraging upward growth seem like no-brainers, but NIMBY resistance and philosophical barriers remain.


October 30 • 9:00 AM

Cycles of Fear and Bias in the Criminal Justice System

Exploring the psychological roots of racial disparity in U.S. prisons.


October 30 • 8:00 AM

How Do You Make a Living, Email Newsletter Writer?

Noah Davis talks to Wait But Why writer Tim Urban about the newsletter concept, the research process, and escaping “money-flushing toilet” status.



October 30 • 6:00 AM

Dreamers of the Carbon-Free Dream

Can California go full-renewable?


October 30 • 5:08 AM

We’re Not So Great at Rejecting Each Other

And it’s probably something we should work on.


October 30 • 4:00 AM

He’s Definitely a Liberal—Just Check Out His Brain Scan

New research finds political ideology can be easily determined by examining how one’s brain reacts to disgusting images.


October 29 • 4:00 PM

Should We Prosecute Climate Change Protesters Who Break the Law?

A conversation with Bristol County, Massachusetts, District Attorney Sam Sutter, who dropped steep charges against two climate change protesters.


October 29 • 2:23 PM

Innovation Geography: The Beginning of the End for Silicon Valley

Will a lack of affordable housing hinder the growth of creative start-ups?


October 29 • 2:00 PM

Trapped in the Tobacco Debt Trap

A refinance of Niagara County, New York’s tobacco bonds was good news—but for investors, not taxpayers.


October 29 • 12:00 PM

Purity and Self-Mutilation in Thailand

During the nine-day Phuket Vegetarian Festival, a group of chosen ones known as the mah song torture themselves in order to redirect bad luck and misfortune away from their communities and ensure a year of prosperity.


October 29 • 10:00 AM

Can Proposition 47 Solve California’s Problem With Mass Incarceration?

Reducing penalties for low-level felonies could be the next step in rolling back draconian sentencing laws and addressing the criminal justice system’s long legacy of racism.


October 29 • 9:00 AM

Chronic Fatigue Syndrome and the Brain

Neuroscientists find less—but potentially stronger—white matter in the brains of patients with CFS.


October 29 • 8:00 AM

America’s Bathrooms Are a Total Failure

No matter which American bathroom is crowned in this year’s America’s Best Restroom contest, it will still have a host of terrible flaws.


Follow us


Levels of Depression Could Be Evaluated Through Measurements of Acoustic Speech

Engineers find tell-tale signs in speech patterns of the depressed.

We’re Not So Great at Rejecting Each Other

And it's probably something we should work on.

Chronic Fatigue Syndrome and the Brain

Neuroscientists find less—but potentially stronger—white matter in the brains of patients with CFS.

Incumbents, Pray for Rain

Come next Tuesday, rain could push voters toward safer, more predictable candidates.

Could Economics Benefit From Computer Science Thinking?

Computational complexity could offer new insight into old ideas in biology and, yes, even the dismal science.

The Big One

One town, Champlain, New York, was the source of nearly half the scams targeting small businesses in the United States last year. November/December 2014

Copyright © 2014 by Pacific Standard and The Miller-McCune Center for Research, Media, and Public Policy. All Rights Reserved.