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5 Big Reasons Why Americans Don’t Save Their Money

Getting to the bottom of America's dwindling savings.
 
 
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Imagine your car needs a new transmission. It’s going to cost $2,000. Can you scrape that together within the month? If so, you’re better off than nearly half your fellow Americans.

We’re used to thinking of the nation’s economic woes in terms of unemployment. But even our sobering jobless rate masks a deeper economic sickness. In 2011, the National Bureau of Economic Research reported that 44 percent of Americans say they would have trouble coming up with two grand in 30 days if they needed to. These “financially fragile” households—one medical bill or busted furnace away from bankruptcy—cut across low-income groups and the middle class alike. What unites this huge swath of America is not an employment problem, but a savings problem.

Savings aren’t just important for buffering life’s emergencies; research shows that financial assets, more than income, are a strong predictor of upward mobility. They’re also crucial later in life. In 2010, 75 percent of Americans who were approaching retirement age—many of them in the tidal wave of aging baby boomers—had less than $30,000 in their retirement accounts. According to economist Teresa Ghilarducci, about half of middle-class workers will live out their golden years on a food budget of about $5 a day. So here’s the question: Why don’t Americans save?

1. Because It’s So Easy to Borrow

In 1923, a battle for the soul of the American consumer economy took place in Detroit. General Motors was eating Henry Ford’s lunch, thanks to a revolutionary innovation: consumer financing. For the first time, ordinary folks could borrow against future earnings from a big corporation. Ford, who despised finance, parried by offering savings accounts at his dealerships. You could sock away money for a new Model T—and you’d earn interest! But Ford’s idea didn’t stand a chance. In modern American history, the availability of credit and the savings rate stand in an almost perfectly inverse relationship. And GM’s peculiar new business model was just the beginning of credit’s availability to the average man. When usury laws were rolled back in the 1970s, easy credit flooded the market. According to analysis by the Federal Reserve Bank of San Francisco, changes in the availability of credit can explain about 90 percent of the long decline in American savings—down to where we are today, with an anemic savings rate of about 4 percent.

Consumers and the Economy, Part I: Household Credit and Personal Saving, by Reuven Glick and Kevin J. Lansing, January 2011

2. Because We Throw Bones to the Wrong Dog

As a nation, we spend about $130 billion each year through the tax code to encourage people to save for the future. Trouble is, almost all of those tax benefits accrue to the wealthy—who of course don’t need the help and would save anyway. According to this paper from the Pew Charitable Trusts, the highest income quintile receives 70 percent of the benefits from these tax incentives. The lowest income quintile receives only 0.2 percent.

A Penny Saved is Mobility Earned: Advancing Economic Mobility through Savings (pdf), by Reid Cramer, Rourke O’Brien, Daniel Cooper, and Maria Luengo-Prado, November 2009

3. Because So Many of Us Live Off the Financial Grid

Roughly 30 percent of Americans have no savings account, while 8 percent have no bank account at all. Absent a relationship with a bank, it’s incredibly hard to build wealth. American banks don’t make it easy for small depositors: minimum balance requirements and onerous fees regularly drive financially fragile savers away. When unbanked Americans need financial services, they often turn to expensive, down-market, sometimes predatory options like payday loans, check-cashing services, and money orders, whose high costs further erode wealth and potential savings. It doesn’t have to be this way: European nations like France, Germany, and Belgium have special banking systems for small depositors—often in the form of post office banks—and boast savings rates in the neighborhood of 10 percent.

 
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