Put It Away For A Rainy Day

Americans Have Begun To Save More

By Russ Wiles

From The Arizona Republic, January 20, 2003

Americans finally are starting to save more for a rainy day. All it took was a cloudburst over the economy and a hurricane in the stock market.

Preliminary figures show the nation's personal savings rate in 2002 logged its first real improvement since 1998. After three straight years when Americans spent nearly everything they earned, the tide apparently has started to turn.

How important, and enduring, is this new trend?

To economists worried about decades-low savings rates - the 2001 level was the lowest since the Depression - the latest figures are a good sign. A healthy dose of saving and investing provides the raw material for business expansion, through deposits that turn into bank loans, stock purchases and so on.

It also helps keep household balance sheets in the black at a time of record personal bankruptcies and maxed-out credit cards.

"A lot of people show up broke at retirement because they just didn't know how to save," said David Robinson, a Phoenix financial adviser.

Rosemary Oblinger of Cave Creek feels strongly enough about saving and investing that she recently bought special education-oriented piggy banks for her grandkids featuring separate compartments for saving, investing and donating, as well as spending.

"I want them to understand these other things are important too, not just spending," Oblinger said.

Personal savings, as an individual issue, is pretty clear-cut. Millions of Americans need to work harder at saving more and spending less to ensure a comfortable retirement and meet other goals.

But as a macroeconomic issue, the implications of saving aren't so obvious.

The economy actually could be hurt by a sudden, sharp increase in the savings rate since that could choke consumption to the point where growth suffers. President Bush alluded to this danger when he urged Americans not to stop spending after the Sept. 11, 2001, terrorist attacks.

"If it rose too far too fast, we could get into a Japan-type situation where nobody spends anything," said Tracy Clark, an economist at the Bank One Economic Outlook Center at Arizona State University.

Besides, government figures don't reflect everything going on in the savings and investment realm.

The federal Bureau of Economic Analysis estimates personal savings at the national level by compiling personal income, then subtracting all consumption expenditures - food, clothing, vacations, cars, homes and so on, plus taxes.

What's not consumed gets lumped as personal savings.

When people buy stocks or open bank accounts, their saving and investing activities are counted in the savings rate. But any subsequent capital gains or losses don't show up until later, when the investments are cashed out and the proceeds spent or converted to new savings or investments. Paper gains and losses aren't tracked because "we don't feel they're a real source of income over the long haul," said Larry Moran, a BEA spokesman.

That implies that government statistics understate rising wealth levels when the stock market is booming, home prices are soaring and other popular assets are gaining ground. This helps to explain why the savings rate dropped in the late 1990s amid stock market rallies and, more recently, as home values escalated. Even though these gains didn't show up in government numbers, people felt richer and reacted by consuming more while saving less.

More recently, the saving rate has inched higher despite a conflicting capital-gains picture. The stock market absorbed its worst beating in a generation last year, probably encouraging people to save more. But home prices continued to rise as low interest rates touched off a refinancing boom, allowing millions of homeowners to tap into their equity while cutting back on normal savings.

Another important recent influence has been rising concern about job security, a factor that likely has encouraged people to save.

Looking forward, experts say, Americans still have room to boost their savings rate without sapping the economy. At 3.9 percent last year through November, the savings rate for 2002 still ranks low historically. Since 1946, it has averaged 8.3 percent.

Susan Beacham, creator of the compartmentalized "money-savvy" piggy bank that Oblinger bought for her grandkids, believes the nation's savings problem relates to a lack of financial education starting at a young age.

"Parents think they need to protect children from the realities of money," said Beacham, a former bank trust officer who now heads her own firm, Money Savvy Generation in Lake Forest, Ill. "It's the biggest mistake they can make."

But many parents aren't such good teachers themselves. Society's values have shifted over the years toward consumption and away from the savings mentality that was common among people who lived through the Depression.

"Spending feels good to many adults, but the other choices (saving, investing and donating) also can feel good," Beacham said. "There's a high you feel when you have saved or invested enough to achieve a goal."

Reach the reporter at russ.wiles@arizonarepublic.com or (602) 444-8616.