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Americans Are Saving Less

The picture of Americans' savings at any one moment differs according to which measure you use. But the long-term pattern is indisputable: we've been saving less and less money over the past three decades.

Not only are we saving less money, but we've also entered what the Harvard historian Niall Ferguson call "The Age of Leverage." Americans have taken on record amounts of personal debt over the last few decades, from home mortgages to car payments to revolving credit card balances. The best way to illustrate this is to look at the historical ratio of Americans' total debt to our total disposable personal income (income after taxes have been paid). After World War II, our debts equaled approximately 25 percent of our collective annual incomes; if our paychecks totaled $100 million, then we owed $25 million for our homes, cars and possessions. By 2007, that ratio had climbed to an astonishing 141 percent. If we earned $100 million, we now owed $141 million. Much of this gigantic leap can be accounted for by rising home ownership rates, but the increase is also a function of the fact that we're buying bigger and more expensive homes, we're charging more education and medical bills, we're buying more stuff, and we're socking away less money. Our wealth is now concentrated in illiquid investments like houses, computers and home entertainment systems, things that can lose value fast and are tough to unload, rather than in safe financial instruments like savings accounts and government bonds.

At the end of 2007, for example, household mortgage debt totaled $10.5 trillion, up from 2.5 trillion in 1990. And according to the research company CardTrak.com, in 2007 avereage credit card debt for households with at least one piece of plastic reached $10,687--nearly twice the inflation-adjusted average of $5,576 in 1990.

The figures conceal a multi-layered reality. As economic inequality mounts, the people at the top of the income scale are amassing large reserves of wealth. In general, they are saving plenty, in the form of home equity, stocks, cash, and other investments. In 2007, the wealthiest 10 percent of American families had an average net worth (assets minus debts) of $3.3 million; they owned approximately 70 percent of all the personal wealth in the country. that same year, upper-middle class households were worth an average of $375,000. In addition, government incentives for saving--such as tax-advantaged programs like Individual Retirement Accounts--skew overwhelmingly to the wealthy, meaning Americans of all classes are subsidizing the retirements of already-affluent people.

But the situation is serious and sometimes dire for Americans in the middle and working classes. According to a 2007 study by the Comsumer Federation of America, more than 75 percent of Americans with incomes below $25,000 have no savings fund set up to protect them in case they face an emergency like job loss or an urgent root-canal operation. Among middle-class Americans--those in the middle 60 percent of the income scale--only 29 percent had enough money salted away in 2004 to weather a spell of unemployment (down from 39 percent who were prepared for that disaster in 2001).

We are also spending a significant portion of our incomes to service our debts; in 2007, families carrying debt paid an average of 18.6 percent of their income just to cover interest and minimum payments on principal. The problem is expecially severe for low-income and middle-class families. According to the Federal Reserve's Survey of Consumer Financies, 27 percent of debtors in the lowest income quintile are in what economists call "high debt"--the dangerous position of paying 40 percent or more of their income simply to pay off loans of various types. And 14.5 percent in the middle of the income scale are in the same boat. These high payments cut into family budgets for food, rent, and educational expenses and, of course, make it nearly impossible for them to save money for the future.

For more information about Americas' savings habits, please read the book, "In Cheap We Trust, The Story Of A Misunderstood American Virtue," by Lauren Weber.

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