## United States: How Inequality Affects Saving Behavior

_IMF Blog, September 13, 2012_

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## Bibliographic details
- Authors: Oya Celasun
- Published: September 13, 2012

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### Overview and motivation
- 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.

### Key historical saving-rate changes
- 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.

### Data and methodology
- 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.

### Findings — saving patterns before the crisis
- 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.

### Findings — saving patterns after the crisis
- 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.

### Aggregate balance-sheet and saving statistics
- 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.

### Implications and outlook
- 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.*

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## References

- [income inequality](http://blogs.imf.org/2011/04/08/inequality-and-growth/)
- [study](http://www.imf.org/external/pubs/cat/longres.aspx?sk=26143.0)

_Source: https://www.imf.org/en/blogs/articles/2012/09/13/united-states-how-inequality-affects-saving-behavior_