MONEY The Economy

The Surprising Reason You Need to Save More

While households are encouraged to spend for the good of the economy, history shows that high savings rates actually correspond with strong economic growth.

Does the U.S. save enough?

I’ve heard lots of rhetoric spilled on that question, but few facts.

That’s why I was intrigued by an analysis published this year by Ned Davis Research. The investment research firm looked at seven decades of data and compared “net national savings” with real growth in the U.S. economy.

National Savings

Net national savings is the sum of all the savings by individuals and families, corporations and the government. This number is then divided by gross domestic product (GDP) to get the national savings rate. Here are some of the findings:

* A “high” savings rate of 8.2% or better corresponded with an annual rate of GDP growth of 3.6%, on average.

* A mid-level savings rate of between 2.8% and 8.2% corresponded with GDP growth of 3.4%.

* And a “low” rate of below 2.8% corresponded with GDP growth of only 2%.

The conclusion: “The more money people have in savings, the more money there is to invest, and the better the economy performs,” wrote Ned Davis, head of the research firm.

During and after the financial crisis of 2007-2009, the savings rate plunged into the low zone, and actually turned negative in 2010 and 2011. Only very recently has the savings rate — barely — climbed back into the medium zone.

“The net national saving rate is greatly improved,” Davis wrote, but remains in “troublesome territory.”

Personal Savings

The personal savings rate (leaving government and corporations out of the picture) also deserves close attention. For years in the 1960s and 1970s it stayed near 8% of household income or above. In 2006-2007 it fell to around 3%, and lately has climbed back up to around 5%.

US Personal Savings Rate Chart

US Personal Savings Rate data by YCharts

Is that enough to finance a new boom in the U.S.? My guess is probably not. I’d like to see the personal savings rate resume its historic rate of 8% or more.

What Can Be Done?

Suppose the U.S. wants to improve its national savings rate? What needs to be done? To me, two things stand out.

First, we need to cut the budget deficit, probably through unpleasant but necessary measures such as making Social Security and Medicare slightly less generous. Why pick on these popular and important programs? For a simple reason: That is where almost half the money in the Federal budget goes.

Defense spending, which accounts for roughly 20% of the budget, can’t go unscathed either.

Second, if we want people to save, we need to wean ourselves gradually off the emergency medicine of super-low interest rates that was used to head off a potential depression in 2008. From 1990 through 2008, the average rate paid on savings account was 4% or more almost every year — sometimes much more. Today it’s around 1.75% or less.

No one wants to throw a monkey wrench into the economy’s engine by raising rates too abruptly too soon. But if we want people to save, it would help to pay them something to do it.

John Dorfman is chairman of Thunderstorm Capital LLC, a money management firm in Boston.

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