US Facing An Economic Crisis
Low Savings and Low Wages
By all accounts, the U.S. economy has gained some significant momentum since the 2016 election.
Gallup's Economic Confidence Index rose sharply immediately following the election and has remained high ever since. (The Index is created from a national telephone poll of 3,500 adults. The results are based on the combined responses to two questions, the first asking Americans to rate economic conditions in this country today, and second, whether they think economic conditions in the country as a whole are getting better or getting worse.)
However, there is a counter to the rosy economic data that needs to concern Americans and politicians:
1. The number of Americans without any real savings continues to be at an extremely high level.
2. Wage growth in the U.S. has been stagnant for over 30 years, and is not rising to the levels it needs to for a healthy economy.
The number of Americans with low to no savings has become a significant issue that cannot be ignored.
While most politicians and the media are fixated on the daily assessments of the economy and the latest figures on job growth or the stock market, a series of studies have been churned-out over the last several years (one of the recent studies was reported in CNN Money and conducted by Bankrate) about how the low rate which Americans save money threatens their ability to meet emergency expenses and retirement.
The results from these different analysts and companies done over the last decade or more have been eerily consistent:
These numbers are similar to what Atlantic Monthly reported in 2016 based on data from the Federal Reserve. And there are several other stories over the last few years that have highlighted similar data going back over 10 years:
According to experts and financial planners, Americans need to be saving between 15% and 20% of their annual income in order to cover unexpected expenses and have enough for retirement.
A combination of factors, including rising expenses, lack of wage growth, taxes, and poor government and private sector policies, as well as bad personal habits, are all contributing to this lack of savings.
But, if you ask Americans what they think - they place most of the blame for a lack of savings on their rising expenses and lack of wage growth or a quality job that helps them to make ends meet.
According to Bankrate's study, when asked for the main reason they were not saving more money, the two most significant roadblocks cited were expenses and the lack of a better paying job. This echoes the results found in a separate study, where GoBankRates reported that 40% said they did not earn enough money to save, with almost 25% saying that they were struggling to pay bills - a sign that a higher percentage of Americans were living paycheck to paycheck.
Why is this significant?
Because while there is positive sentiment about the economy in the short-term, a lack of savings means that emergency spending as well as discretionary spending is more likely to be made with a credit card. Without enough money saved to fall back on, a majority of Americans are at serious risk of financial ruin if the economy takes a sudden downward turn as it did during the Great Recession of 2008.
In fact, the Federal Reserve reported earlier this year that revolving credit, which consists mostly of credit cards, increased by $11.2 billion to $1.023 trillion. This amount is higher than the $1.021 trillion high reached in April 2008, which was immediately before the market collapsed and sent the economy into a free-fall.
In one survey from the National Foundation for Credit Counseling (NFCC), 25% of Americans were not paying their bills on-time, while 8 percent had bills go into collection. Both are increases from the previous year.
This data lies in stark contrast to the decline in delinquencies (people who were overdue on their loans by 30 days or more) across eight categories that the American Bankers Association tracks. The ABA also said it saw a similar decline in bank-issued credit cards.
It could be that Americans are prioritizing their debt payments to ensure they keep their home, car, or other big-ticket items, while at the same time, paying other expenses late.
In either case, it is sobering news that shows while there are benefits from a more positive economic climate, there are larger and more complex problems across the economy as a whole that threaten to derail the economic well-being of millions of Americans.
Another reason why a lack of personal savings is significant for Americans is because for every individual who lacks the money necessary for retirement expenses, including health care, the federal government will need to spend more. This is a problem because the federal government is already seeing short-falls in Medicare and Social Security fund collections, and their predictions of fund bankruptcies in the near future.
For example, at its current pace, Medicare will be bankrupt by 2029 and Social Security will go bankrupt by 2034. In the case of Medicare, the revenue shortfall in 2016 alone was $349 billion. Instead of increasing taxes to cover the difference, the government has borrowed more money, and recently passed significant tax reductions, which will reduce future revenue and make the overall budget shortfalls greater. This also will impact Social Security, which is projected to owe more money that it will take in over the coming years.
With healthcare costs continuing to rise, and payments on the debt set to increase as the Federal Reserve raises interest rates, the amount of money available to fund retirement for future generations will be almost non-existent. With such a large number of Americans lacking savings, the financial burden for younger generations could be back-breaking and end up leaving tens of millions of Americans without the care they need.
Americans have not always been bad at saving money. Lower savings is a trend that started about 30 years ago.
Given the rise in news stories about Americans not saving, and lacking money for emergency expenses and retirement, one has to wonder:
Have Americans always been poor at saving money? And if not... When did Americans stop saving money? When did the trend start?
When looking at this as an historical issue, the ability of Americans to save has changed sharply in our very recent history - namely - over the course of the last thirty years.
For example, the bottom 90 percent of households saved 10 percent of their income in the first Reagan administration (1981 - 1984). By 2006, their savings rate was nearly negative-10 percent.
In fact, the Reagan years were the peak of wealth share for the bottom 90 percent of Americans, when they reached 35%.
As the decade came to a close, a number of factors helped change the economic landscape to discourage savings - some political, some technological, and some habitual.
For example, government policy shifted during the late 1980s and early 1990s on a number of fronts. Home-buying became easier, and as a result, mortgage debt skyrocketed. Home ownership and mortgage debt had seen relatively moderate growth through the early 1980s and 1990s. However, by the mid-90s, mortgage debt was rapidly accelerating. While it took approximately 10 years for mortgage debt to double from the 1980s into the early 1990s, from 1995 to 2005, mortgage debt had tripled.
Borrowing, credit, and government financed loans all became easier and easier to obtain for a wide variety of needs, from housing to health care to higher education. The end result is that spending and debt peaked right at the time the Great Recession began.
It also is worth noting that since "wealth share" combines all assets of value net the debts, it is not hard to understand why wealth share, which had been at 35% for the bottom 90 percent by 1985, had all but vanished within a few years. By lower and middle-class Americans taking on greater property ownership, they - in many cases - became cash poor, and had liabilities that greatly exceeded their assets.
When you look at the rise in wages that occurs during the mid-1990s, a period that some analysts say does not explain why savings continued to remain flat or declined among Americans, it becomes clear that wage growth simply was not large enough to account for the new debt that was being accumulated.
To put it to numbers, household debt increased from the "equivalent of 75% of national income in the mid-1980s to 135% of national income in 2009." (See NBER Working Paper Series, Page 25) Since about 90 percent of non-mortgage debt belonged to the bottom 90 percent of Americans, the added housing debt had, in effect, lowered the wealth share of millions of Americans to 1940s levels.
Hence, government policy-making at the time wanted to make home ownership easier, make college easier to attain for more students, and expand consumerism to grow the economic fortunes of larger corporations. The policies all worked. Home-ownership expanded significantly. Public and private college enrollment increased by over 45% (5.5 million students) in just 20 years (from 1985 to 2005). Larger corporations were able to grow larger. And consumer spending increased dramatically. A period of booming economic activity that many still celebrate today as a "gold standard" took place.
Only, these policies had a very unforeseen after-shock, which was the destruction of savings and the subsequent Great Recession, which wiped out the economic gains of millions of Americans.