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Don't Hold Your Breath Waiting For A Savings Revival


Economic Trends

DON'T HOLD YOUR BREATH WAITING FOR A SAVINGS REVIVAL

To put it mildly, economists have been embarrassed by the striking decline in Americans' proclivity to save in the past decade-particularly since it occurred when real interest rates were at historical peaks and just after the government had deliberately altered the tax system to promote saving. But that embarrassment hasn't stopped them from offering explanations for the drop that point to a possible savings resurgence in the decade ahead.

Such theories find cold comfort in an article in the latest Brookings Papers on Economic Activity by Barry Bosworth and Gary Burtless of the Brookings Institution and John Sabelhaus of Towson State University in Baltimore. Their analysis of government surveys of household savings behavior in recent decades not only rejects most of the popular explanations of the savings drop, but suggests that the most likely cause offers scant hope for a savings revival.

Take the idea that savings fell because high-spending baby boomers swelled the work force. The study finds that younger households do save less than older working households, but the differences are simply too small to pin the savings slump on changes in the age structure of the population. What's more, the data show that savings rates declined in almost all age groups in the 1980s and that the smallest drops were actually posted by younger households.

The study also looks at the effect of changing household composition, such as the growth of family households with a single parent. Although such single parents have the lowest savings rate in the population, the study finds that their incomes are too low for their growth to have a noticeable effect on the overall savings rate. More important, the savings rates for all household groups, regardless of family size or number of earners, posted drops in the past decade.

What about the impact of changing income distribution and capital gains on savings? The researchers find big differences in savings rates among different income groups, but the relative income gains made by the most affluent households in the 1980s should have raised savings. Instead, the savings rate fell for every income class, just as it did for every age bracket. Similarly, there is no evidence that capital gains on financial assets affected savings.

In sum, the three economists reject the notion that shifts in demographic or income groups caused the savings slump. Noting that similar savings declines have occurred in countries such as Canada and Japan, they theorize that some common factor is responsible. The most likely candidate, they believe, is the slowdown in income growth that has afflicted the U.S. and other industrial nations since the early 1970s. If a long-term drop-off in income growth is the culprit, they add, it is unlikely "that private savings will recover anytime soon."GENE KORETZ


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