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Personal Savings Rate Dips to Zero for First Time Since Great Depression

Posted on: Tuesday, 31 January 2006, 00:00 CST

By Laura Smitherman, The Baltimore Sun

Jan. 31--From baby boomers ill-prepared for retirement to twentysomethings deep in credit-card debt, the personal savings rate of Americans dipped below zero last year for the first time since the Great Depression.

The Commerce Department reported yesterday that the personal savings rate in 2005 fell to negative 0.5 percent, meaning that Americans spent their paychecks and then dipped into savings or borrowed to spend more. In December alone, personal savings was a negative $67.4 billion.

It was first time since the 1930s that the government recorded that personal spending has surpassed personal income overall for an entire year. The figures released yesterday are preliminary, however. They could be revised upward, as has happened in previous years when the savings rate at first appeared negative but rose above zero after more data was collected. Nonetheless, various experts see a troubling trend.

"We're consumers on steroids," said Don Blandin, president of the Investor Protection Trust, a consumer education group in Washington. "We can't continue this trajectory without scary consequences later on."

The national savings rate has been drifting downward for decades, but hasn't fallen below zero for an entire year since 1932 and 1933, when it was negative 0.9 percent and negative 1.5 percent as the country was in the grip of widespread unemployment.

Yesterday's report set off alarm bells with economists, who have been eyeing consumers for signs of spending restraint. That could ripple through the economy and slow growth. Meanwhile, financial planners say the report confirms their worst fears about the ability of young workers and baby boomers, who started turning 60 years old this year, to prepare for retirement.

Many economists blame the American desire to spend lavishly to keep up with the Joneses, as the cliche goes. "We're spending on HDTV sets, bigger houses, bigger cars, not to mention gasoline to fill them," said David Wyss, chief economist for Standard & Poor's in New York.

Browsing through stores at the Mall in Columbia yesterday, Jenny Bolton, an accountant from Pasadena, said she's trying to instill in her children an appreciation for saving and planning financially for the future. But, she said, that can be a hard lesson to learn. Besides, she said an occasional indulgence is a must.

"You do a little bit of saving, a little bit of spending and a little bit of splurging," Bolton said.

Mary Angela and Don Peters may be the exception to the average American consumer -- they're not in debt. The Oella couple, who shopped at the same mall yesterday, said they pay off their credit card bills every month and hunt for bargains.

"Most people we know are up to their eyeballs in debt," said Don Peters, who is retired. "We're conservative. We don't get too outrageous with our purchases."

The government calculates personal saving by counting income such as wages and dividends -- but not capital gains -- and subtracting taxes and outlays such as spending on goods and services.

"People are not only spending but they are taking on more debt, and it's going to get to a point, unfortunately, where that cannot possibly be sustained," said Michael Kitces, director of financial planning at Pinnacle Advisory Group, a private wealth management firm. "We see baby boomers who are behind the ball and have a lot of catching up to do for their retirement, and we see twenty-somethings who have a frightening amount of credit card debt."

Economists contend that the negative savings rate can be explained by the "wealth effect," in which rising investment portfolios or home prices make consumers feel rich enough to spend money they don't have on hand. The wealth effect can fuel consumer spending when the stock markets are up, as they were in the 1990s, and when homes appreciate, as they have been in recent years. As the housing boomed, so did the market for home equity loans.

"People have been using their homes as ATM machines," said David C. Reilly, director of portfolio strategy at Rydex Invesetments.

But signs are that the housing market has deflated somewhat. Home prices in the region are down slightly and the number of homes sold in December declined from the year before. At the same time, stock market returns have been lackluster compared to the go-go years of the 1990s . The Standard & Poor's 500 index brought a return of 3 percent last year.

Without homes appreciating at double-digit rates or hot investment portfolios, some economists expect consumers to put away their wallets. That wouldn't bode well for the overall economy because consumer spending accounts for nearly three-fourths of the nation's economic output.

"I think we finally hit a wall, and that means the economy is going to slow down," said Peter Morici, a professor at the University of Maryland's Robert H. Smith School of Business. "Some people have been able to refinance but not for much longer, and credit card delinquencies are at fairly high levels, so they can't get money that way either."

The number of credit card accounts 30 days or more past due stood at 4.7 percent in the second quarter, down from a record high of 4.81 percent in the second quarter of 2005, according to the American Bankers Association. Past-due payments on home equity lines of credit rose to 0.46 percent from 0.43 percent.

In addition to energy prices that spiked after Hurricane Katrina and translated into higher gasoline and home heating bills, consumers have been struggling to keep up with the rising cost of health care and college.

"There are a lot of other pressures for people," said John M. Blamphin of Retirement Strategies of Maryland, which offers financial planning.

Workers paid an average of $226 a month last year for family coverage, up from $149 in 2001, according to a survey conducted by the Kaiser Family Foundation with the Health Research and Educational Trust. Costs for one year at a private university were $21,235, an increase of 5.9 percent over the year before, according to the College Board.

With negligible savings to put into Treasury bonds, a traditional savings vehicle, some economists worry that foreign nations are buying up too much of the United States' debt. Countries, including Japan and China, have financed much of the government's borrowing in recent years.

"Foreigners own about 40 percent of our long-term Treasury debt," said Wyss, the economist for Standard & Poor's. "What if they decide to stop doing it, or worse, they decide they want their money back."

Sun reporters Eileen Ambrose, Sandy Alexander and Laura Cadiz contributed to this report.

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Source: The Baltimore Sun, Maryland

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