Are low interest rates causing low savings rates?
May 15, 2012
A recent study found that nearly half of American workers are not contributing to any form of retirement plan. Is that as self-destructive as it seems -- or simply rational behavior?
You could make the case both ways. People who fail to save money will pay for their short-sightedness in the future, but the decline of savings can also be seen as a logical response to a low-interest-rate environment.
Interest and savings rates
LIMRA, a life insurance and financial services research organization, recently polled 2,697 people who are financial decision-makers in their households. The subject was saving for retirement, and 49 percent of respondents said they were not contributing to any retirement plan.
This lack of focus on saving for the future can also be seen in data on personal savings rates. According to the Bureau of Economic Analysis, the average personal savings rate in the U.S. slipped to 3.9 percent in the first quarter of 2012 -- the lowest level in over four years.
What's the connection between interest rates and low personal savings rates? With savings account interest rates near zero, people are left with little incentive to save. Bond yields are not much higher, and stocks haven't been very rewarding so far in the 21st century either.
If you really want to connect the dots to see how low interest rates can lead to low savings rates, you have to consider one additional factor: inflation. With interest rates running well below the rate of inflation, money in a savings account or other deposit vehicle is actually losing purchasing power with each passing day. In this situation, you actually get more for your money by spending it now rather than waiting to spend it later.
Does this connection with low interest rates and inflation mean that low savings rates are actually a rational response to the current environment? In a narrow economic sense, yes. However, getting the most for your money is only one consideration. Having resources to support your retirement is also an important function of saving, and in this respect people with low savings rates are not behaving rationally.
What makes the LIMRA survey results and the generally low level of personal savings even more disturbing is the context. For one thing, while low interest rates may seem to discourage saving money, they actually make it more imperative. The return on your money is not going to help much in building a nest egg these days, so it is your saving habits that will have to do the heavy lifting.
The other important point of this context is that outside of the government, most people no longer have an employer pension plan to fall back on. The shift from defined benefit to defined contribution retirement plans put the responsibility for saving solely on the employees. Unfortunately, people seem to have responded to this trend by saving less rather than more.
In essence, by choosing more immediate consumption over saving for retirement, people are supporting their current lifestyles at the expense of the future. Even if they can justify this as a rational response to a low-interest-rate environment, this is a decision that many will regret once that future arrives.