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[IWS] CRS: THE FALL & RISE of HOUSEHOLD SAVING [1 September 2009]

IWS Documented News Service
_______________________________
Institute for Workplace Studies----------------- Professor Samuel B. Bacharach
School of Industrial & Labor Relations
-------- Director, Institute for Workplace Studies
Cornell University
16 East 34th Street, 4th floor
---------------------- Stuart Basefsky
New York, NY 10016
-------------------------------Director, IWS News Bureau
________________________________________________________________________

Congressional Research Service (CRS)

The Fall and Rise of Household Saving
Brian W. Cashell, Specialist in Macroeconomic Policy
September 1, 2009
http://opencrs.com/document/R40647/2009-09-01/download/1013/
[full-text, 14 pages]

Summary
Household saving matters for two reasons. First, it is an important source of funds to finance
domestic investment. Second, it is the means by which workers accumulate wealth and maintain
their living standard into retirement. Congress has indicated its desire to promote household
saving by, among other things, creating individual retirement accounts, and saving is an important
consideration in proposals to reform Social Security. At a time, however, when policymakers
have been looking for ways to increase spending to minimize the downturn and get the economy
growing again, households have begun to save more.

For the 40 months between January 2005 and April 2008, the personal saving rate averaged 1.8%.
In contrast, in the 1970s, the average personal saving rate was 9.6%. In May 2008, the personal
saving rate began to rise. It remains too early to tell with certainty if that represents the reversal of
the long-term decline. What may seem unusual is that it occurred at a time of general economic
weakness. The increase in household saving resulted in more than $300 billion less in consumer
spending than would have occurred had the saving rate not risen.

Prudent individuals might be expected to save enough to avoid a substantial decline in their living
standard on retirement. If consumers seek to maintain a fairly stable level of consumption over
their entire lives, then the level of consumption at any given point in their lives will depend on
their current wealth and some expectation about their income over the rest of their lives.

Changes in household net worth in recent years seem to have contributed to the swings in the
household saving rate. In the 1990s, equity prices rose substantially. Between 1991, the beginning
of an economic expansion, and 2001, the year it ended, the Standard and Poor's index of 500
stock prices rose by 217%. It is widely believed those increases in equity prices contributed to a
decline in the household saving rate.

After the turn of the century, increased house prices insulated household balance sheets from the
effects of a decline in equity values, and the household saving rate fell to near zero.

More recently, both equity and house prices have fallen. The combined drop in asset prices had a
significant effect on household net worth. At a time when current incomes have been falling, the
personal saving rate rose to more than 5%. It may be that the economic downturn is limiting the
saving response to the decline in household net worth. If that is the case, the saving rate might be
expected to continue to rise, or at least remain steady at current levels, when the economy begins
to recover, unless asset prices recover to levels now considered by many to have constituted a
"bubble."

Contents
Introduction ...............................................................................................................................1
Is the Long-Term Decline in Household Saving Over? ................................................................1
Measuring Saving .......................................................................................................................2
An Alternative Measure ........................................................................................................3
Household Saving and Wealth Accumulation...............................................................................4
Asset Prices and Personal Saving ..........................................................................................5
The Decline in Household Net Worth and the Recent Increase in the Saving Rate........................7
Who Saves? ...............................................................................................................................8
Are Households Saving Enough? ..........................................................................................9
Conclusion...............................................................................................................................10

Figures
Figure 1. Personal Saving as a Percentage of Disposable Personal Income...................................2
Figure 2. Flow of Funds Household Saving Rate .........................................................................4

Tables
Table 1. Saving by Income Quintile.............................................................................................9

Contacts
Author Contact Information ...................................................................................................... 11


______________________________
This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.

****************************************
Stuart Basefsky                   
Director, IWS News Bureau                
Institute for Workplace Studies 
Cornell/ILR School                        
16 E. 34th Street, 4th Floor             
New York, NY 10016                        
                                   
Telephone: (607) 255-2703                
Fax: (607) 255-9641                       
E-mail: smb6@cornell.edu                  
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