For the past two years, and for the first time since the Great Depression, Americans are spending more than they earn. In 2006, Americans saved at a rate of negative 1 percent, according to statistics released February 1 by the Commerce Department, meaning they not only spent all of their after-tax income, they also dipped into their savings or increased the amount they borrowed. The savings rate in 2005 was negative 0.4 percent.
Americans are saving at a negative rate for the first time since 1932 and 1933, when they had to dip into their savings for basic items such as food, clothing and shelter. At that time, with unemployment at 25 percent, many had no income and no option but to use their savings. The savings rate reached its record low, negative 1.5 percent, in 1933. These days, Americans are overspending for a variety of reasons.
Many families in America are living above their means. As the gap between the rich and the poor grows, many people spend more money than they have in an effort to keep up with the proverbial Joneses. A lot of people assume that they have all the money they need in the equity in their house; people are using home equity for everything from new cars to vacations.
Many Americans likely believe that, because their investments are accruing good returns, they are financially secure and don’t need to save any money on top of their investments. Some assume they don’t have to save any additional income, because they contribute to a 401(k) or IRA. While investments are of course a means of saving, the negative personal savings rate means that many Americans might be without the commonly recommended savings cushion intended to last three to six months.
The expansion of the global economy might be another reason for the lack of savings. Many jobs have been outsourced to other countries; competition for jobs has thus become greater, forcing some workers into lower-paying jobs.
More than one third of adults admit to sometimes or often spending more than they can afford, according to a recent survey conducted by the Pew Research Center. Based on the negative savings rate, however, it is clear that many Americans just aren’t admitting to having spending habits that outpace their incomes. Some economists consider the negative personal savings rate especially troublesome because 76 million baby boomers are approaching traditional retirement age. The oldest baby boomers will turn 62 next year, which will make them eligible to collect Social Security benefits.
Low interest rates, of which many people took advantage, also played a role in depleting the savings rate. The rising house values of the past several years, coupled with low interest rates, led to increased borrowing on the part of many Americans, who saw 2006 as a good time to tap their home equity for other purchases. Widespread home refinancing gave Americans access to an estimated $900 billion, according to a recent report by the S&P.
Personal savings rate is calculated by subtracting the amount of spending from the amount of after-tax income. A negative savings rate means that consumers are spending more money than they have. The personal savings rate does not account for any money gained through investments or assets.
