The Personal Savings Rate (PSR) has been talked about a lot in the news lately, especially now that our economy is in the middle of a recession and people are panicking about their immediate financial futures. Oddly enough, the PSR did not manage to make mainstream news back in 2005 when it dipped into the negative as people spent more and more of their income—and credit—to purchase their slice of the American Dream. It appears that now we are at least heading in the right direction because in March 2009, the PSR made a whopping comeback from that negative number to 4.2% (Bureau of Economic Analysis). But quite frankly, I’m not that excited about the progress.
The graph below shows the household savings rate of several other countries from 2008, and as you can see, the United States is simply lagging behind. China has the world’s most conscientious PSR, while the United Kingdom’s citizens spend more like Americans.
If we further compare our 4.2% PSR with other percentages, it becomes even more painfully obvious that as a nation, we simply are not saving enough. Let’s first look at inflation, or the rise in cost of goods and services at some future date. Experts say that to determine how much we should save for retirement, we should factor in between a 3-4% inflation rate. At our current level of savings rate, Americans are saving enough simply to tread above water. A quick glance at the Social Security system offers even less hope. Americans pay 6.2% of their income into the system, (2% more than the current PSR being paid into people's savings accounts), yet even the Social Security’s own Q&A section of their website states that they are only able to pay out full benefits until 2041 (Click here to see an article about the effect of the recession on Social Security). Many of us in younger generations may not see much of the money we pay in, if any at all. The same could be true of America’s households if they continue to save such a small percentage of their paychecks.
While this information is interesting, albeit a bit sobering, what is more useful for you is to know your own PSR. Of the money you’ve worked so hard to bring home in a paycheck, what percentage do you keep for yourself (divide the amount you save by the amount you earn)? Perhaps you are beating most of the world’s population in beefing up your savings account. Or maybe you find that your PSR is more on par with the citizens of Finland.
No matter where you find yourself, some old but sage advice still rings true: it doesn’t matter how much you make, it matters how much you keep. Here’s an idea: for the next Olympic Games, let’s add the PSR as a category for competition just to rev up everyone’s enthusiasm and patriotism towards increasing our savings. This means we have just a little over one year to pull ourselves together for the winter games, or three years to make it for the summer games. We can do it—would we really bench ourselves and sit idly by while China takes home the gold?
OECD: Organization for Economic Co-operation & Development
**China Household Savings Rate