America’s Saving Rate and the Dollar’s Future

CAMBRIDGE – The saving rate of American households has risen sharply since the beginning of the year, reaching 6.9% of after-tax personal income in May, the highest rate since 1992. In today’s economy, that is equivalent to annual savings of $750 billion.

While a 6.9% saving rate is not high in comparison to that of many other countries, it is a dramatic shift from the household-saving rate of less than 1% that the United States experienced in 2005, 2006, and 2007.

Before it began rising last year, the US household saving rate had been declining for more than 20 years in response to the increasing level of household wealth. The rising stock market and the higher value of homes induced individuals to consume more of their incomes and to save less. As a result, most working individuals reduced the amount that they saved for their retirement, and retirees were able to increase their spending. The net saving rate fell to near zero.

The sharp drop in household wealth over the past two years, however, put an end to that. Dramatically lower share prices and a 35% fall in home prices reduced household wealth by $14 trillion, a loss equal to 140% of annual disposable income. Individuals now have to save more to prepare for retirement, and retirees have less wealth to spend. Looking ahead, the saving rate may rise even further, and will, in any case, remain high for many years.