Younger Consumers Driving Up Savings Rate

CU360
February 3, 2010 | COMMENTS

Young adults might not be known for their thrifty habits, but the Great Recession has driven home at least one lesson: Live within your means.

Last fall, the nation's personal savings rate was well over 4%, according to the U.S. Commerce Department. During 2009, it ranged from a low of 3.4% to a high of 6.4% in May—the highest rate since 1993.

Whether or not a higher savings rate is a good thing depends on your perspective. In the short term, less spending slows the progress of economic recovery. But for individuals, putting more money aside over time will lead to less debt later and more comfortable retirements.

For aspiring savers, The New York Times recently looked at the trends behind the changing savings rate. Why has it gone up, who's responsible, and how do people manage to set more aside?

Two elements contributed to the upward trend over the last year:

• Limited access. With lower credit limits on credit cards and less access to home equity loans, consumers have a harder time spending more than they take in. Facing the lack of loans to help them out, they might simply choose to spend less.
• Fear. When unemployment hits double digits, employees become more likely to put money aside in case income disappears. About 34% of consumers say retirement is the most important reason for saving, according to the 2007 Federal Reserve Survey of Consumer Finances (the most recent available). “General liquidity” was a close second at 32%, and it might overtake “retirement” in 2010 as the most important reason to save.

Who saved more than average in 2009? Young people seem to have gotten into the savings habit.

• In employee retirement accounts at Bank of America Merrill Lynch, where customers elected to start or stop saving during the first 11 months of 2009, 74% of those age 21 to 35 started to save, while 26% stopped saving—the highest “start” percentage among any age group.
• Though consumers under age 30 save less in real dollars than their elders, they sock away a larger percentage of income. Sixty-one percent spend less than their income, compared with 56% of those age 45 to 53.
• In 2009, 18% of employed consumers age 22 to 35 said saving for retirement was their “most crucial goal”—up from 13% in 2008, according to Fidelity Investments.

Efforts by employers and retirement plan providers might provide an additional boost to long-term savings:

• As many as 70% of retirement account holders make no changes to their savings rate in any given year. And many employers automatically increase workers' savings rates each year by raising their 401(k) contribution. Employees can opt out if they want, but most don't. Automatic enrollment in 401(k) and similar plans also helps boost the number of new savers.
• Besides retirement accounts, consumers are advised to set up savings accounts or 529 college savings plans to deposit money automatically each month. Flexible spending accounts or dependent care accounts also serve as a form of forced savings.

Many of these tactics might not seem like much, notes the Times, but taken together, they can add up to a percentage or two more of income saved.