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Updated February 27, 2025

Introduction to U.S. Economy: Personal Saving

Personal saving, which includes the saving of households but not of businesses or government, can have a significant impact at both the individual and economy-wide levels in the long and short terms. The personal saving rate was disrupted by the COVID-19 pandemic, which resulted in a rapid increase and subsequent decrease in this metric, making future trends in personal saving uncertain.

Definition and Economic Considerations

Individuals receive a certain amount of after-tax income that they can spend or save. By definition, what is not spent is saved, so saving and spending are inversely related. The personal saving rate, which is the ratio of total personal saving to disposable income, presents a tradeoff between current and future consumption. A relatively low saving rate implies higher current consumption but lower future consumption. Greater present consumption boosts individuals’ living standards now; however, it leaves less to be invested in capital projects that will boost future living standards. Conversely, a relatively high saving rate implies lower current but higher future consumption. This tradeoff has short-term and long-term economic implications.

Short-Term Economic Impacts In the short term, a rising personal saving rate can temporarily slow economic activity, assuming no other changes to income. If on average individuals begin saving a larger portion of their paychecks, it means less 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.

Whether changes in the saving rate are helpful or harmful in the short run depend on the state of the economy. 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 provide a buffer against reduced income (caused by job loss, for example) 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 contrast, in the midst of a healthy and expanding economy, a rising saving rate may result in a more sustainable level of consumer spending, thus preventing the economy from overheating. An overheating economy occurs when demand for goods and services exceeds the economy’s ability to produce them, which can result in accelerating inflation followed by a recession.

Long-Term Economic Impacts In the long term, a higher saving rate will generally lead to higher levels of economic output, up to a point. When individuals save a portion of their income, those savings are generally loaned to businesses to finance new investments. For example, an individual’s 401(k) is a saving vehicle for their future consumption after retirement, but before retirement, those funds are generally invested in various companies through the purchase of stocks and bonds.

The overall level of investment is one of the main determinants of long-term economic growth. Business investments in physical capital (i.e., machinery, buildings, and factories) allow the economy to produce more goods and services with the same amount of labor or raw materials, increasing the productive capacity of the economy. As personal saving contributes to investment, all else equal, a higher saving rate will result in a higher level of physical capital over time, allowing the economy to produce more goods and services. For further information on business investment, refer to CRS In Focus IF11020, Introduction to U.S. Economy: Business Investment.

How Is Personal Saving Measured?

The Bureau of Economic Analysis (BEA) measures the U.S. personal saving rate (see Figure 1) as the difference between aggregate income and consumption spending, which likely introduces some measurement error. The saving rate may understate the level of saving in the economy because certain spending is considered consumption, 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.

Figure 1. U.S. Personal Saving Rate, 1959-2024

Source: Bureau of Economic Analysis.

Introduction to U.S. Economy: Personal Saving

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Alternative measures show that many households are struggling to save a portion of their income, particularly lower-income households. According to the Federal Reserve, in 2022, about 56.5% of adults reported saving some portion of their income over in the previous 12 months. As shown in Table 1, among families with an income in the bottom 20^th percentile, 30.9% saved some portion of their income, whereas among families with an income in the top 10^th percentile, 83.7% saved some portion.

Table 1. Family Saving by Income Level, 2022

Percentile of

Income

Median Income

($ thousands)

Families That

Save (%)

Less than 20 20.1 30.9

20–39.9 43.1 48.7

40–59.9 70.3 56.0

60–79.9 115.0 66.6

80–89.9 189.2 77.3

90–100 390.1 83.7

Source: Federal Reserve, Survey of Consumer Finances, 2022. Notes: Income percentiles based on total family income.

Trends in Personal Saving

From the 1970s to the 2007-2009 financial crisis, the personal saving rate in the United States had generally trended downward from about 10%-13% to 3%-4%. After the crisis and before the pandemic, it rebounded partially but leveled off at about 7%, as shown by Figure 1. Economists have suggested the overall decline in saving across this time period could be due to increasing asset prices and access to consumer credit, both of which could increase consumption as a proportion of income. (Recall as personal consumption increases relative to income, personal saving as a percentage of disposable income decreases.)

Savings spiked at the onset of the COVID-19 pandemic, increasing rapidly to 33.7% by April 2020 as consumer spending plummeted. After some intermittent surges and declines, the personal saving rate fell back to levels more in line with pre-pandemic trends and, most recently, fell below its 20-year average (3.8% as of December 2024 compared to an average of 5.9% from January 2005 to December 2024).

The personal saving rate increased rapidly during the pandemic for several reasons, including precautionary saving, the inability to spend money due to business closures, and increased personal income from various stimulus programs, including three rounds of economic impact (stimulus) payments. The inability to spend money due to business closures and social distancing may be a primary reason for the spike in the personal saving rate. Most of the increase in saving appears to have been due to high-income households, according to one real-time economic tracker based on private sector data. Despite the overall increase in the personal saving rate, some

individuals borrowed or used savings from retirement accounts to cover financial obligations, according to the Federal Reserve Survey of Household Economics and Decisionmaking (SHED).

The post-pandemic drop in the saving rate is likely due to a confluence of factors—such as a strong labor market, the significant stock of savings accrued during the pandemic, and high inflation, as well as longer-term cyclical trends, all of which tend to decrease individual saving.

Personal Saving and the Individual

Prior to the COVID-19 pandemic, the personal saving rate was below 10% for a majority of the previous two decades. In historical context, this was relatively low, with rates between 10% and 15% for much of the 1950s through 1980s. While the personal saving rate increased substantially during the pandemic recession, it did not remain so and is now below average by historical standards. Regardless of any future trends in the personal saving rate, the prolonged low rates have implications for individuals, such as the ability to save adequately for retirement or the ability to pay unexpected expenses. According to SHED, in 2023, 37% of adults would need to borrow or sell something to pay for an unexpected expense of $400, while 13% would not be able to cover the expense at all.

Since 1989, median retirement accounts have grown substantially for families in the top 10^th percentile of income, but much less for all other families, as shown by Figure 2. Further, for those families in the bottom 60^th percentile of income, the median retirement account holds $74,000, which may not be adequate for an average retirement length in the United States.

Figure 2. Median Retirement Account by Income Level, 1989-2022

Source: Federal Reserve, Survey of Consumer Finances, 2022. Notes: Income percentiles based on total family income. Dates correspond to survey years.

(Note: This In Focus was originally authored by Jeffrey Stupak, former CRS Analyst in Macroeconomic Policy.)

Lida R. Weinstock, Analyst in Macroeconomic Policy

IF10963

Introduction to U.S. Economy: Personal Saving

https://crsreports.congress.gov | IF10963 · VERSION 34 · UPDATED

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