Explaination of Personal Savings Rate Essay

761 Words Nov 18th, 2014 4 Pages
Explanation of Personal Savings Rate

The Personal Savings Rate in the United States is a very important figure to understand. Between the economic crisis and 2007 and the expansionary period of 2009-2012, one can notice clear fluctuations in the figure from year to year (1). Regarding the time period of 2007-2012, there are several noticeable highs and lows, including in 2008 with over 8% whereas middle of 2007 is seeing around 2% (2). What has caused these changes in savings and why such drastic changes? Economists have struggled to produce concrete answers to describe these changes, but one major reason is a shift in the mindset of our country’s lifestyle. In order to really understand this shift, we must look at the trends in savings
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The Personal Savings Rate, the percentage of after-tax income that is saved after household bills are paid, is important for several reasons. First, households must save money in order to avoid a fall in their standard of living later on in life (1). If citizens are not saving, they may see in decline in lifestyle after retirement, especially if Social Security benefits fall through as many predict. Second, household saving is an important source of money to finance capital investment, increasing the capital stock and adding to worker productivity. Finally, personal saving is critical to account for emergencies in everyday life. If households are not saving enough money to handle a crisis, our economy will continue to be burdened.
There are several major economic risks associated with having such a low and unstable person savings rate in the United States. One concern is that consumers could dramatically alter their consumption habits and aggressively begin to save (4). This idea represents the “reversion to the mean” theory, but is somewhat unrealistic without an increase in interest rates. Another issue faced with the savings rate in how different demographics are saving. As shown in the Bureau of Labor Statistics graph, individuals in the highest tax brackets are accounting for most of the personal savings in the

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