New Study Highlights Economic Impact of Household Savings
Saving is the source of investment that fuels an economy’s long-term growth, with rising living standards and a more stable economic environment being the key benefits. And so, by raising household savings, we can enhance America’s ability to finance its future, lift potential growth rates, and contribute multiple trillions of dollars in added output over coming decades. The question is, in terms of encouraging increased saving, where do we need to go from here, and how do we get there?
Recently, the New England Council partnered with nearly a dozen financial services, non-profit and policy-analysis organizations – including Council members AARP, Bank of America Merrill Lynch, John Hancock Financial, LPL Financial, Natixis Global Asset Management, and Putnam Investments – to produce a report on retirement savings in the United States. Our group of organizations worked with Oxford Economics to produce this report, titled Another Penny Saved: The Economic Benefits of Higher US Household Saving. The study demonstrates that the goal of raising America’s household savings should be a policy imperative. Some of the key findings include:
Americans are saving less. From 1950 to 1985, personal saving averaged 11.1%. Now, according to the Bureau of Economic Analysis, the household saving rate, which fell to low single digits in the run-up to the 2007–08 financial crisis, is just 3.8%.
That trend is unlikely to change without action. Projecting the current rate forward, and adjusting only for the aging of the population, the saving rate will likely fall to an extremely low 3% in the 2030s.
The saving gap is large for many households – especially lower-income individuals and families – and filling it will be a struggle. Those in the bottom quartile must save roughly 21% more of their pre-tax income than they presently do to support an adequate lifestyle in retirement.
The optimal range for the household saving rate is between 5% and 9% of GDP. And investment should fall within a range of 20% to 25% of GDP.
There are added benefits to saving. A boost in saving would make the US less dependent on foreign capital, make households more secure, and strengthen long-term economic growth.
Existing savings incentives and vehicles should be preserved, simplified, and restructured to maximize saving. In particular, employers should consider nudges and passive incentives – such as opt-out and auto-escalation – for broader adoption in their workplace payroll savings plans.
You can find all of the report’s resources, including the white paper, an executive summary, and video of the June 24th unveiling event in Washington, D.C., at http://www.anotherpennysaved.com.