Saving, Investing and Making Ends Meet

Why Aren't You Saving Money?

Posted on Wednesday, February 16, 2011

Ed Nacional For a short time, Americans seemed to be born-again savers. In the second quarter of 2009, in the depths of the Great Recession, households put away 7 percent of disposable income, compared with under 2 percent in the third quarter of 2007. Yet the savings rate is falling again, down to 5.3 percent in December.

According to a Harris Poll released last week, 27 percent of Americans have no personal savings and 34 percent have no retirement savings, an increase from over a year ago.

At the same time, people are spending more. Borrowing is up, perhaps a sign of consumer confidence in the recovery.

Why was the era of thrift so short-lived? Why are Americans spending again, yet unable to save?

No Pension, No Chance
Updated February 9, 2011, 06:12 PM

Thomas Geoghegan, a labor lawyer in Chicago, is the author, most recently, of “Were You Born on the Wrong Continent?: How the European Model Can Help You Get a Life."

Sure: scoff at us for not saving. But let’s get real: even in countries with high savings rates, the poor of the country don’t save. Even in Germany that’s true: the poor are poor!

We have an inequality index that can go head to head with Egypt’s. And we're supposed to save?In the U.S., the over 43 million people living in poverty aren't going to save. We have an inequality index that can go head to head with Egypt’s. Of course food’s cheaper here, so no one’s in the streets. As for the middle class, the collapse of unions explains the rest.

In 1980, two out of three American workers were in defined benefit pension plans with guaranteed lifetime benefits. Now it’s one in five and falling. I know, personally. When plants closed in Chicago, I used to file suits to get pieces of pensions for the older workers. But now in the current collapse, there are no bits and pieces to get.

Labor unions in the glory days of the 1960s and 1970s – before they were smashed – used to act as the nation’s financial planners. Bargainers told the rank and file: “Yes, we could give this to you as a wage increase, but we’re going to sock it away in a pension.”

The Teamsters, the Auto Workers had “30 and out.” That’s right: truck drivers, out at 55, on pensions with more bells and whistles than we imagine public employees get today. And many non-union people, middle managers, who spurned unions, got what the rank and file got. Now they just have dimes dropped in their 401(k)'s.

Indeed, the world of the 1960s and 1970s has turned upside down: once only private sector workers had big “unfunded” pensions, while public sector workers had no right to join unions at all.

Now even our Op-Ed writers, especially those in the “radical middle,” try to whip up anger at the public pensions that only reflect what the private sectors once had. Why should the public sector get a pass from our increasing inequality?

In the old days, Americans loved being “forced to save.” They didn’t want to touch the money. I thought I could make a living as an ERISA lawyer, suing pension funds and helping participants. Well, I had to take on another career.

Maybe the career I should have picked was writing books accusing people of moral turpitude. Of course, in theory we can all save -- even the poor. I am reading the great classic, "The Black Jacobins," by C.L.R. James, and it seems that in a few miraculous cases, certain slaves of San Domingo could save enough to purchase their freedom. I’m sure our pundits now would say: “See, you can do it.” There’s no need to abolish slavery.

And now that U.S. style banking has destroyed social democracy in Ireland, Spain, Portugal – though not, thank God, in Germany – many on the right now hope that the idea of going back to the good old days will perish from our collective memory. Just save your money. That’s the only hope.

Labor unions used to act as the nation's financial planners. Now we have self-help books.But for most people at the median or below, savings is a matter of luck. Yes, I can pick up the self-help books and figure out a budget. But that requires me to lead a charmed life and not to have any kids. I have represented lots of workers who – with no defined benefits, no union to help – did save money. And it can work – if nothing goes wrong.

But something always does go wrong: a wife has a stroke, the boarder you took in to help suddenly lost a job, or … you lose your job. Then it’s on the Visa card, and 20 percent of your income is going to interest of the bank, because of one little accident over which you had no control. Poof: there goes the house, if it was not under water already. Or there go 30 years of savings on an I.R.A., for which your bank out of the goodness of its heart had been paying interest under 1 percent.

The self-help books live in a dream world, where there is no such thing as “nemesis.” But it’s really a nightmare world, in which no one can have a heart, or part with money for one’s child. It’s a country where at the median income or lower even Silas Marner would find it hard to save.

Buried by Bad Mortgages
Updated February 8, 2011, 09:27 PM

Mike Konczal is a fellow with the Roosevelt Institute. He blogs for New Deal 2.0 and the Rortybomb.

The debt and savings crisis actually consists of multiple crises, hitting different age groups and populations in different ways. It’s useful to look at two different populations and how they are coping.

People are desperately trying to pay down bad mortgage debt after the housing collapse.The first crisis is among the young. People out of college now experience an unemployment rate well above 9 percent, and the rate is much higher for those with only a high school diploma or some college experience. Student loans have just overtaken credit cards in the total amount of outstanding debt. Significant budget stresses on states will likely cut college funding, adding to this problem. With poor job prospects, high levels of debt and a social safety net that doesn’t address their needs, it is no surprise young people have trouble saving.

The second crisis is among older workers. People over the age of 55 are having a very difficult time in the job market. Older workers are the most likely to be unemployed for over a year. As retirement benefits eroded during the last few decades, they have become more likely to continue to look for jobs. Having lost much of their savings in their homes, 401(k)s and through the latest unemployment spell, it is no surprise that older workers have trouble saving.

Why has this happened? First, traditional lending has given way to a system of credit lending in which lenders count on the fees, interest rate jumps and lock-ins in contracts for profits rather than simply getting paid back with interest. With a profit model that depends on people rolling over their debt endlessly (like a 21st century form of debt peonage), it is no surprise that savings rates are down — people’s “savings” mostly go towards maintaining debt.

The second reason is the housing bubble. People believed that they were building wealth through the appreciation of house prices. Now that the bubble has collapsed, people are trying desperately to pay down bad mortgage debt amid high unemployment.

As Karen Dynan of the Brookings Institution has found, well over half of the decline in the nation’s debt levels are due to foreclosures and consumer credit write-downs. This is a sign that debt has gotten out of control — the major way people are capable of cutting down their debt load is by not paying it. So this explains how people can be spending less, causing a recession, yet not actually creating real savings.

Addressing these problems would require policy changes. Luckily, we know some of the answers.

A streamlined approach to mortgage debt in Chapter 13 bankruptcy procedures could reduce debt, keep people in their homes, reduce the impact on other lending and screen out speculators. Temporarily reducing the Social Security eligibility age along with a Medicare buy-in for older workers who are unlikely to find work again would help get our labor markets functioning again. Changing the homeowner tax benefit from one that is based on a mortgage interest deduction, which subsidizes indebtedness, to one that allows for a tax credit for ownership will change how we think of homeownership. Adopting these strategies is just a matter of finding the political will.

Four Strikes Against Us
Updated February 8, 2011, 09:17 PM

Tyler Cowen, a professor of economics at George Mason University, is the author of a new e-book, "The Great Stagnation." His blog, Marginal Revolution, covers economic affairs.

Americans have resumed their old patterns of spending, even though we’re barely out of the last recession. There are a few reasons for this.

Household income is stagnant, the job market is dismal, the tax system discourages saving, and it's still relatively easy for the poor to borrow money.First, and most important, median household income has been stagnant for the last 10 years. Yet there are many new attractive goods and services, including iPads, fun vacations and high-speed Internet access. There are also costly emergencies and commitments when it comes to health care and education, two areas which have seen high rates of inflation over the last decade. It’s hard to save money under those circumstances.

The American job market is also spectacularly bad, with the high measured rate of unemployment concealing an even higher rate of underemployment or simple withdrawal from the labor force.

Second, some Americans tend to carry a lot of their “savings” in the form of human capital, namely education and earnings ability based on hard work and creativity. This is most likely to apply at the upper tiers of the income distribution, but those same individuals account for a lot of the earned income. It gives the country as a whole a lower savings rate because there is a sense that “you can always earn some more.”

Third, the American tax system does not encourage savings. Most economists believe that savings and investment income should face a zero rate of taxation and that taxes should be concentrated on consumption. Most West European nations come closer to that ideal than we do, and they have higher rates of saving for the most part.

Fourth, in terms of credit institutions, it’s still relatively easy for poor people to borrow in the United States, compared with, say, Japan or Europe. Both the economic incentives and the cultural norms nudge these individuals in the same direction, namely toward more spending and less savings.

The Upside of Spending
Updated February 8, 2011, 09:21 PM

Amar Bhidé, a professor of international business at the Fletcher School, Tufts University, is the author of “A Call for Judgment: Sensible Finance for a Dynamic Economy."

Living beyond one’s means is a deeply ingrained American habit that survived wrenching depressions in the 19th and 20th century. The passion for thrift stoked by the 2008 financial crisis too shall soon pass.

A dynamic economy needs prudent lenders to restrain the exuberance of borrowers. In the Old World, only a few were entitled to the good things in life; the masses were to skimp, saving as much as they could for the hard times that were sure to lie ahead. The New World was egalitarian and optimistic. Wanting to live well wasn’t just for the rich. If you lacked the funds to pay for the finer coat or shoes, you would borrow and hope to repay when your lot improved, as it surely would. Thrift was glorified but rarely practiced. Borrowing, the historian Lendol Calder observed, was a “heavy burden” for the Pilgrims and a “chronic headache” for George Washington and Thomas Jefferson.

Moreover, widespread spending and borrowing helped transform the American economy. Without mass consumption, there could be no mass production. Henry Ford’s genius would have been for naught without millions of venturesome consumers lining up to buy the Model T. And even though revolutionary manufacturing methods made cars much more affordable, the price wasn’t low enough for most buyers to pay with savings. By 1926, two-thirds of all cars were purchased on credit. Even the Great Depression didn’t deter borrowers. In 1935, the Bank of America blanketed San Francisco with an ad campaign for auto loans.

Today, millions of spendthrift buyers of iPads and of Angry Birds apps have upended the computer industry. Microsoft’s Kinect has become the fastest selling consumer device ever.

Of course, spending and borrowing without limit isn’t sustainable. A dynamic economy needs prudent lenders to restrain the exuberance of borrowers. Unfortunately, public policies have promoted the robotic extension of credit in amounts that can't possibly be repaid. We need to restore careful, case-by-case lending rather than bemoan the venturesomeness of the American consumer. NYT

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