It seems that Americans really don’t like to save their money. When times are good we spend and it seems that only when times are not so good that we are more careful about saving for a ‘rainy day’. I know, I know — monetary policy has a little something to do with that. Central banks will lower interest rates to discourage saving and encourage spending when the economy is suffering in the hope that we can ‘spend our way out of’ a downturn. That is, more consumer spending leads to greater demand for goods and services which leads to higher levels of employment which are all good for the economy. On the other hand, when the economy gets ‘overheated’ and all of that spending causes a rise in prices (inflation), the central bank might raise interest rates to encourage more saving and less spending. The trouble with tying our personal spending to the general economy is that we find ourselves unprepared to weather a downturn or a negative shock to our own personal economy. Consistent personal saving (and investing) is the best way to prepare for the future whether it is cloudy or sunny.
Historical Personal Savings Rate
Just to prove my point, I sauntered over to the website of the Bureau of Economic Analysis to grab a little data. The good people at the BEA track all kinds of things including how much people save as a percentage of their disposable income. This percentage is called the personal savings rate. I graphed the BEA’s personal savings rate data from January 1959 to December 2010. If you take a look at the graph, a couple of things should stand out. First, personal savings fell steadily from July 1981 when it was 11.1% to October 2001 when it was 0.9% except for a brief recessionary period in the early 1990s. Second, the personal savings rate has been climbing steadily throughout this most recent recessionary period but have not come close to the double-digit rates we saw in the 1970s and 1980s and the standard 10% minimum that many financial advisors recommend.
History tells us that economies are cyclical and downturns are bound to occur. When citizens are not building up personal savings, they are ill-prepared for these events. The greater the number of people who are underprepared, the greater the impact is on the greater economy. For these reasons, many policymakers and researchers have been trying to come up with ways to encourage folks to save. The latest innovation is the prize-linked savings account. While it first became popular outside the United States, many advocates have been drumming up support for this idea within the United States. So far, they have been piloted in Indiana, Michigan and now Alabama. The idea is that consumers open special accounts and their deposits make them eligible for cash and/or merchandise prizes.
Results So Far
When a credit union in Indiana offered a prize-linked savings program at all 22 of their branches in 2007, they opened over 1,400 accounts and collected over $500,000 in deposits in the first five months. In Michigan, credit unions throughouth the state are participating in their “Save to Win” program where nearly 12,000 residents saved over $8.5 million in 12 months. Next up is Alabama. A local organization will give a $20,000 U.S. Savings bond to one family at the end of the tax season. Eligible families will receive one entry for every $50 they invest in U.S. Savings bonds. This program is designed to promote the relatively new provision (since January 2010) that allows tax payers to use their tax refund to buy U.S. Savings bonds.
Will it Help?
What do you think? Will these incentives increase the personal savings rates? Many of these programs are targeted toward lower income families. These are the folks who typically save the least and are hardest hit by economic downturns. Some call these programs “no-lose lotteries” because your savings activities earn you automatic entries into a prize drawing. The no-lose feature is the fact that you will earn interest on your deposits regardless of the drawing outcome. Of course in some states, the word “lottery” — officially or otherwise — makes some folks uncomfortable. It will be interesting to see how this progresses. In the meantime, I’d love to hear your thoughts!