Understanding Low Savings Rates: Causes & the Wealth Effect

Low Savings Rates

The Federal Reserve Bank of San Francisco reported in 2001 that "the personal saving rate in the United States has fallen sharply." While historical savings rates are approximately 8% and savings rates in other industrialized nations are about 13%, the US savings rate has averaged 1%.

The “Wealth Effect”

One possible cause is referred to as the "wealth effect," and it postulates that rising capital gains and real estate values edged out savings for many households during prosperous years.

“Wealth Effect” Insufficient

However, according to the Federal Reserve, the failure of savings rates to rise again during years of recession indicates that other factors must also contribute to low savings rates.

Labor Productivity

Another possible cause is the rising labor productivity of the late 1990s. It is thought that these productivity gains, if believed by households to continue into the future, influences the present value of future expected income, reducing a perceived need to save money for the future.

Relaxed Liquidity Constraints

A third explanation is that liquidity constraints relaxed after household access to credit markets increased.

Predominant Cause

Although it is likely that all three of these causes have played a role in the low savings rate in the US, it's not clear from the available evidence which is the most predominant.