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In Brief: How Americans Save

By: Charles Ford, AARP Public Policy Institute; | March 1, 1999

Introduction

Most Americans are not saving enough. Not only is the U.S. savings rate low, but it has been steadily declining over the last 25 years (Figure 1). This decrease in the savings rate cuts across most age, income, and family status categories.

Retirement saving may be especially inadequate, which suggests that many retirees, including baby boomers, will not be able to maintain their preretirement living standards during retirement. This brief highlights the key observations about retirement savings in the Public Policy Institute's Issue Paper, How Americans Save, by Sophie M. Korczyk¹. The report reviews the relevant savings literature and examines the assets and the saving behavior of older men and women who participated in the first (1992) wave of the Health and Retirement Study (HRS).

Who Saves for Retirement?

Neither economic theory nor statistical evidence on saving patterns suggests any absolute barriers to saving. Nevertheless, some groups are clearly more vulnerable to financial insecurity during retirement than others, as findings from the 1995 Survey of Consumer Finances (SCF) indicate:

Retirement savings increase with age. While savings for retirement increase with age, nearly 4 in 10 SCF households with a head younger than age 35 report some form of retirement savings.

Not surprisingly, retirement savings increase with income. Only 6 percent of households with annual incomes below $10,000 report retirement savings, compared with 85 percent of those with incomes of $100,000 or more. Households with annual incomes below $10,000 have median savings of $3,500, while those with incomes of $100,000 or more have median savings of $85,000.

Racial and ethnic disparities are less pronounced in relation to retirement savings than all savings. While the median net worth of white non-Hispanic households was over four times that of non-white or Hispanic households, their retirement savings amounted to less than two times the savings of non-white or Hispanic households.

Homeowners save more for retirement. Homeowners are not only more likely to save for retirement--52 percent of homeowners versus 26 percent of renters--but they also save more than renters do.

Saving and Baby Boomers

The baby boomers, often considered a group that is "living for today," have been the focus of much speculation regarding their preparation for retirement. Douglas Bernheim of Stanford University calculates that the baby boom generation is saving about one-third (36 percent) of what it needs to maintain its current living standards during retirement. At the same time, research by William Gale of The Brookings Institution suggests that two-thirds of baby boomers are saving at least as much as they should for retirement. Although this conclusion initially appears more encouraging than Bernheim's, Gale goes on to warn that fully half of these baby boomers would fall below adequate savings levels if they sustained any deterioration in their current circumstances. According to Congressional Budget Office estimates, however, the retirement incomes of boomers will match or surpass those of their parents as long as average real wages continue to grow.

Nonetheless, certain groups of baby boomers are particularly vulnerable to insecure old ages as a result of inadequate retirement saving. These groups include the following:

The poorly educated. Younger baby boomers who lack a high school diploma are less likely than others to have employer pensions. Consequently, these individuals are expected to be heavily dependent on Social Security benefits in their retirement years.

Single parents. Single mothers, in particular, face obstacles to saving because of their intermittent work histories and low wages.

Non-homeowners. Housing is the single most important asset of all families. The net worth of homeowning families is seven times that of renters.

Racial and ethnic groups. Pensions are an important income source for many in old age. Unfortunately, many workers lack pension coverage. Sixty-two percent of whites have pension coverage through their own or a spouse's employment, compared with 54 percent of African Americans and 47 percent of Hispanics.

Saving Incentives

Saving incentives appear to work if their efficiency is measured solely by the amount of money in tax-favored accounts. But the sizable deposits in employer-sponsored pension plans or IRAs alone do not necessarily prove that saving incentives work. Savings are fungible and can thus be transferred from one account to another. For some individuals, therefore, savings in 401(k)s and IRAs may be increasing while their savings in other types of accounts are decreasing, resulting in no net increase in total saving. Researchers, however, disagree on the importance of such offsets.

The HRS: Personal Experiences and Saving

While sociodemographic factors are clearly important in understanding the saving behavior of HRS respondents, life events also have an impact on the ability to save. Family, job, and health-related events can all play a role in eroding household savings. For example, How Americans Save found that persons who experience unemployment, forced retirement, a change in health, or work-reducing disability are less likely to own certain assets than the HRS sample as a whole; these persons may find it especially difficult to plan for retirement.

Attitudes of High Savers

Paralleling the How Americans Save literature review, examination of the HRS shows that as income increases, the likelihood of having retirement savings increases, as does the amount of those savings. But what about the savers in lower-income groups? Attitudinal data on "high" savers in low-income groups reveal a clear pattern: persons who are oriented toward the future and predisposed to think ahead are more likely to save. Views about the importance of leaving an inheritance are not, however, related to household savings patterns. Interestingly, those who believe Social Security benefits will improve and those who believe they will worsen both seem to act on their expectations, with optimists saving less and pessimists saving more.

Conclusions

How Americans Save observes all groups, no matter how economically disadvantaged, have their share of savers. People who look ahead appear to be the best savers, regardless of income. Still, the fact remains that saving is far more difficult for those with few financial resources.

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Footnote

¹ How Americans Save, PPI Issue Paper #9806 (Washington, DC: AARP, July 1998).

Written by Charles Ford, AARP Public Policy Institute March 1999 ©1999 AARP May be copied only for noncommercial purposes and with attribution; permission required for all other purposes. Public Policy Institute, AARP, 601 E Street, NW, Washington, DC 20049