A Lack of Savings?

July 27, 2008
By Mukesh Chatter

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An editorial in this Sunday’s Boston Globe, An addiction to borrowing…, touches on the oft-discussed theme of a lack of savings in U.S. households.

Here's the quote that caught my attention:

Last week, The New York Times published chilling data on the imbalance between Americans' saving and borrowing. In 1920, the average US household had annual savings of $1,200 (in today's dollars) and had $4,400 in total debt. In 2008, the average household is on pace to save a measly $400 a year - even though incomes have risen significantly - and owes $118,000.

Is this - and other frequently cited figures about the miniscule rate of savings in the U.S. (especially when compared to other countries) - really true? An average U.S. household contributes 7.5% towards social security (equally matched by the employer) resulting in a minimum 15% savings per year.

This is further enhanced by contributions to a 401K, boosting the net savings to close to 20-25% of the annual household income. If an employer has some matching contribution to a 401K, this rate is even higher.

The overwhelming population of most countries, especially India and China, do not have such social safety nets and, therefore, the households are forced to save towards their retirement - resulting in a very high savings rate.

However, the results are actually comparable when seen in this context, so the idea that somehow a U.S. household just borrows and spends without any level of meaningful savings is just not correct.

I would love to hear your thoughts on this.

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