Can We Repair the American Savings Crisis?

By Dr. Tim Price, CPA, Faculty Member, School of Business, and Dr. Suzanne Minarcine, Faculty Director, School of Business, American Public University.  Originally published at 

The United States historically has had one of the lowest savings rates in the industrialized world. Arguably, the biggest contributor to this phenomenon is consumerism, the idea that everyone should always acquire more goods and services.

Consumerism is so ingrained in our culture that we no longer notice its effects:

Constant Advertising Encourages Spending, Not Saving

We are bombarded with advertising that encourages us to shop. We’re offered low interest rates on vehicles and we’re told there is a drug to fix whatever ailment we might have. Credit card offers arrive in the mail almost daily, each with its own incentives to make purchases.

Are you too busy to cook but don’t want to eat out? There’s an advertisement for that, too.

Consumer electronics are nearly obsolete before they ever hit the market. For example, Apple releases a new iPhone almost every year, and we need to buy the latest and greatest version, of course.

We are constantly encouraged to spend, no matter what we are doing. Go on Web browsers and social media, and ads will pop up based on your browsing history. We are targeted for spending.

The dollars spent on advertising in the U.S. are significantly higher than in any other country. The spending feeds on itself; you fall into the trap of buying more goods and services to keep up with your neighbors and friends.

How Can We Encourage Americans to Start Saving?

There is much discussion about low U.S. savings rates, but no one individual or group is actively promoting ways to increase them. For example, U.S. policymakers could add tax incentives to encourage savings. Other suggestions include increasing the tax-deductible amounts on IRAs and 401(k)s and making some or all of your interest and dividend income tax-exempt.

For regular savings accounts, the money is taxed before it goes into savings. As interest accrues and the money grows, taxes are paid annually on the amount of interest earned.

Savings needs to be encouraged. Personal finance lessons should be embedded in the messages children receive from an early age, as early as kindergarten and extending into adulthood. Lessons in personal finance could be incorporated into school curricula, like science and math.

Low Savings Rates Means Less Saving and Less Money for Loans

At a macro level, low savings rates foster an increase in consumer spending, which spurs economic growth. However, it also means less investment in the economy, since your dollars are going to consumption rather than savings and investments. Less money in savings means banks have less money to lend.

The investment void is being largely filled by other countries. But there is no guarantee they will continue investing in the U.S. Many economists fear that if the U.S. does not get its federal budget deficit and national debt under control, foreign investors will flee or demand much higher interest rates.

Japan and Germany Have High Savings Rates but Less Economic Growth

It is interesting to note that countries like Japan and Germany have the opposite problem because they have high savings rates. However, that results in less consumer consumption and lower economic growth rates.

Consumer patterns are very different in these countries and putting money into savings accounts is encouraged. This cultural practice also contributes to the trade imbalance between those countries and the U.S.

The next generation is not likely to see any change in the situation unless the U.S. takes drastic action to reduce the deficit and national debt. If we do not, foreign investors will stop investing in the United States.

About the Authors

Dr. Tim Price is a faculty member in the School of Business at American Public University. His teaching interests include accounting, economics, finance and statistics. Tim holds a Ph.D. in Business Administration and an M.B.A. in Business Administration from the University of South Florida, as well as a B.S. in Accounting from Pennsylvania State University.

Dr. Suzanne Minarcine is the faculty director for the School of Business at American Public University. She currently teaches strategic management and entrepreneurship courses.


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