Spendthrift in America? On Two Decades of Decline in the U.S. Saving Rate

Abstract

During the past two decades, the personal saving rate in the United States has fallen from 8% to below zero, and the share of GDP that households consume rose by 6 percentage points. This increase in the share of consumption was concurrent with a reduction in the growth rate of real consumption spending per person, high real rates of return, and an increasing ratio of aggregate wealth to income. Despite this last fact, wealth changes can explain little of the boom in consumption spending: The largest increases in national wealth postdate the consumption boom, and households with differing wealth levels nevertheless had similar increases in consumption. The changing age distribution of the U.S. population does not explain the consumption boom, either: While it may be that younger, wealthier cohorts are driving this boom, the preponderance of evidence suggests rather that the rising consumption-to-income ratio is due to a common time effect. The main findings of the paper are consistent with either an increase in discount rates or a general belief in better economic times in the future. Alternatively, the low rates of saving could be due to a combination of factors, such as the increase in intergenerational transfers from the Social Security system, which has raised the consumption of the elderly, and increased access to credit and an expanded menu of financial instruments raising the consumption of the young.