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Updated January 22, 2019
Introduction to U.S. Economy: Personal Saving
Personal saving, which includes the saving of households
401(k) is a saving vehicle for their future consumption after
but not of businesses or government, can have a significant
retirement, but before retirement, those funds are generally
impact at both the individual and economy-wide levels in
invested in various companies through the purchase of
the long and short terms.
stocks and bonds.
Economic Considerations
The overall level of investment is one of the main
The saving rate, which is the ratio of total personal savings
determinants of long-term economic growth. Business
to disposable income, presents a tradeoff between current
investments in physical capital (i.e., machinery, buildings,
and future consumption. A relatively low saving rate
and factories) allow the economy to produce more goods
implies higher current consumption but lower future
and services with the same amount of labor or raw
consumption. Greater present consumption supplies
materials, increasing the productive capacity of the
individuals now; however, it leaves little to be invested in
economy. As such, all else equal, a higher saving rate will
capital projects that will boost future living standards.
result in a higher level of physical capital over time,
Conversely, a relatively high saving rate implies lower
allowing the economy to produce more goods and services.
current consumption but higher future consumption. This
For further information on business investment, refer to
tradeoff has implications for both short-term and long-term
CRS In Focus IF11020, Introduction to the U.S. Economy:
economic growth.
Business Investment.
Short-Term Economic Impacts
How is Personal Saving Measured?
In the short term, a rising personal saving rate can be a
Economists generally track economy-wide saving via the
temporary impediment to economic activity, assuming no
personal saving rate (see Figure 1).
other changes to income. If on average individuals begin
saving a larger portion of their paychecks, it means less
Figure 1. Personal Saving Rate
money is being spent on consumer goods and services in
the economy. Because consumer spending makes up about
70% of the U.S. economy, even a small decrease in
consumer spending can reduce aggregate demand and
economic activity. Alternatively, a falling saving rate may
result in temporarily faster economic growth as individuals
spend a larger portion of their pay on goods and services.
A rise in the saving rate during an economic downturn can
be problematic. In response to a recession, individuals may
rationally respond to increased uncertainty about their
future income by increasing their saving rate to protect
them from potential job loss or reduced income in the near
future. As a result, however, the economic downturn is
further exacerbated due to the additional decrease in
consumer spending resulting from the rising saving rate. By
Source: Bureau of Economic Analysis
contrast, in the midst of a healthy and expanding economy,
Notes: Ratio of total personal saving to total disposable income in
a rising saving rate may result in a more sustainable level of
the United States. Grey bars represent recessions.
consumer spending, thus preventing the economy from
overheating. An overheating economy occurs when demand
Since the early 1970s, the U.S. personal saving rate has
for goods and services exceeds the economy’s ability to
fallen from above 12% to a low of 1.9% in 2005. Following
produce those goods and services, which is often
the beginning of the 2007-2009 recession, the saving rate
characterized by accelerating inflation followed by a
briefly increased before beginning to fall again. Over the
recession.
past year, the saving rate has averaged about 6.7%,
suggesting that for every $100 of disposable income
Long-Term Economic Impacts
individuals are spending about $93.30 and only saving
In the long term, however, a higher saving rate will
about $6.70.
generally lead to higher levels of economic output, up to a
point. When individuals save a portion of their income,
The personal saving rate produced by the Bureau of
those saved funds are generally loaned out to businesses to
Economic Analysis (BEA) is measured as the difference
finance new investments. For example, an individual’s
between aggregate income and consumption spending,
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Introduction to U.S. Economy: Personal Saving
which likely introduces some measurement error into the
Figure 2. Average Real Hourly Earnings
indicator. The saving rate may understate the level of
Production and Non-Supervisory Employees
saving in the economy because certain spending is
considered consumption spending, even though such
spending is conventionally thought of as investment, such
as spending on durable consumer goods (e.g., automobiles,
appliances). Additionally, BEA does not include changes in
asset prices or capital gains as income under the saving rate
measure.
Alternative measures also show that many households are
struggling to save any portion of their income. According to
the Federal Reserve, in 2016, about 47% of adults reported
saving some portion of their income over the past 12
months, whereas 31% of adults reported their income was
equal to their spending, and 16% reported spending more
than they earned. Additionally, saving varies dramatically
Source: CRS calculations using data from Bureau of Labor Statistics
based on income level, as shown in Table 1. Among
Notes: 2018 Dollars. Adjusted for inflation using the Consumer
families with an income in the bottom 20th percentile, less
Price Index. Grey bars denote recessions.
than one-third of families saved any portion of their
income. Among families with an income in the top 10th
In addition, according to some measures, real (i.e.,
percentile, about 82% of families saved some portion of
inflation-adjusted) wages for non-managers fell between the
their income.
mid-1970s and the mid-1990s, as shown in Figure 2. In the
face of falling real wages and purchasing power, some
Table 1. Family Saving by Income Level, 2016
families may have reduced the proportion of each paycheck
Percentile of
Median Income
Families That
they saved to maintain their lifestyle and consumption
Income
(Thousands)
Save (Percent)
patterns. The decline in real wages may have resulted in
some of the decline in the saving rate, though the increase
Less than 20
15.2
32.1
in wages since the mid-1990s has not been accompanied by
a return to the peak saving rate of the 1970s.
20–39.9
31.4
45.2
Foreign Investment Inflows
40–59.9
52.7
57.2
Following the declining U.S. personal saving rate, net
60–79.9
86.1
64.9
national saving and investment (as percentages of GDP)
have also been in decline over the past few decades. Net
80–89.9
136.7
72.5
national saving includes all personal, business, and
90–100
260.2
82.3
government savings. Net national investment includes all
investment in capital goods and services, less depreciation.
Source: Federal Reserve, Survey of Consumer Finances, 2016.
U.S. net national investment tends to exceed net national
Notes: Income percentiles based on total family income.
saving, due to investment inflows from abroad. Investment
inflows from abroad likely support higher levels of
Declining Saving Rate
investment and economic activity in the United States than
Economists posit a number of reasons for the decline in
would be possible using domestic saving exclusively.
saving. The most prominent explanation involves the
increase in asset prices, including the stock market and
However, these investment inflows from abroad have
housing prices since the mid-1980s. The overall increase in
implications for aggregate income within the United States.
value of the stock market and housing prices increased the
Investments generate income streams for those who make
net wealth of households holding these assets. The increase
the investment. When investments are made from abroad,
in wealth tends to lead to increased consumption spending
the income generated from those investments are paid to
by households, driving down the personal saving rate.
individuals abroad, whereas when investments are made by
However, not all households own homes or financial assets.
individuals inside the United States, the income generated
is paid to individuals in the United States. As such, a higher
An alternative explanation for the declining saving rate
share of investment from abroad, while supporting
involves an increase in access to consumer credit over the
economic activity inside the United States just the same as
past several decades. As access to credit increases,
domestic investment, results in a higher share of the income
individuals generally increase their consumption, taking on
generated within the United States being distributed abroad.
debt to finance those purchases. This increase in
(Note: This In Focus was originally authored by Jeffrey
consumption spending has not been fully matched by an
Stupak, former CRS Analyst in Macroeconomic Policy.)
increase in disposable income, leading to a decline in the
saving rate.
Marc Labonte, Specialist in Macroeconomic Policy
IF10963
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Introduction to U.S. Economy: Personal Saving
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