United States: How Inequality Affects Saving Behavior

IMF Blog, September 13, 2012

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Incomes of U.S. households became more unevenly distributed over the past three decades.
Congressional Budget Office estimates cited: after-tax income almost tripled for the top 1 percent of households between 1980 and 2007, but grew only 22 percent for the bottom 20 percent.
Research focus: link between income inequality and saving behavior, given the importance of saving rates for the U.S. economic outlook.

Aggregate saving rate fell from 10 percent of after-tax income in 1980 to 1.5 percent in 2005.
Following the crisis, the saving rate rose to 4 percent in the second quarter of 2012.
The pre-crisis decline in saving rates mirrored an unsustainable boom in consumer spending; the post-crisis rise in saving contributed to a sluggish recovery from the 2008–09 recession.

Household-level analysis used the Panel Study of Income Dynamics (PSID), which follows the same households over time.
Analysis focused on which household types drove the aggregate saving rate down before the crisis and which drove it up afterward.

Households with consistently lower income growth experienced larger declines in their saving rates and a larger rise in mortgage debt before the crisis.
Households in the bottom third of income growth over 1999–2007 accounted for half of the decline in the overall saving rate over the same period.
Households with consistently lower income levels did not show a large decline in saving rates; their saving rates were persistently lower than those of higher-income families.
Evidence suggests households with disappointing income growth tapped housing equity to preserve living standards during the boom years, enabled by easy home equity financing.
Those decisions did not anticipate the correction in house prices and weaker incomes; after the housing crash, households with lowest income growth were more vulnerable with high debt levels.
Decline in saving rates was larger for households in the bottom third of income growth than for households experiencing the top third of house price increases, indicating the pre-crisis saving decline may reflect grasping to avoid declining living standards rather than consumption of windfall housing gains.

Households more dependent on housing wealth and with higher debt levels on the eve of the crisis raised their savings sharply after the crisis.
Because the sharp post-crisis saving increases started from very depressed and even negative saving rates, these households have not yet made meaningful progress in reducing debt and repairing balance sheets.
As a result, these households may face grim future consumption prospects.

At least half of American families had lower net worth (in inflation-adjusted terms) in 2010 than two decades earlier:
- Median American family net worth: $77,000 in 2010, compared with $126,000 in 2007 and $79,000 in 1989.
Share of the population that saved any of their income dropped from 54.6 percent to 52 percent between 2007 and 2010.

Lower income growth for segments of the income distribution was linked to the drop in saving rates and growing indebtedness of American families.
Households that entered the crisis with precarious wealth positions have made limited progress in rebuilding net worth by actively saving out of incomes.
Unless incomes and house prices pick up robustly, many households will need sustained higher savings to rebuild wealth, making it less likely that the American consumer will drive U.S. growth.

Source: United States: How Inequality Affects Saving Behavior, Oya Celasun, September 13, 2012.