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March 8, 2012
Bosworth: Why It’s Hard to Save
In this video, a senior fellow at the Brookings Institution talks about his latest book and offers a clear-sighted explanation for complex macro-economic forces that shape all Americans’ saving habits and financial security.
Starting in the early 1980s, stock markets boomed and housing prices increased year after year, and Americans “thought they were getting rich,” explains economist Barry Bosworth. “So they thought, ‘Let’s spend a little bit of it.’ “
Billions of dollars of wealth vanished in the 2008 financial market collapse, marking what may be the end of a golden era of wealth formation and undermining plans laid by workers and retirees, he said. Bosworth’s book was released last month: “A Decline in Saving: A Threat to America’s Prosperity.”
Full disclosure: The book incorporates research funded by the U.S. Social Security Administration (SSA) through the Retirement Research Consortium, which also funds this blog. The opinions and conclusions expressed are solely those of the blog’s author and do not represent the opinions or policy of SSA or any agency of the federal government.
In the full interview, did Barry Bosworth address the impact on savings from the wage stagnation that started at the same time the savings rate began to fall?
As with most things, it is complicated. The book does not focus on wage growth; but, in the past, I (and others) would emphasize the importance of income growth as a determinant of the saving rate – China for example. It is easy to save when one’s income is rising rapidly. However, there is not an obvious correlation with income growth in the U.S. data. I would date the saving decline as starting in the early 1980s. Income and wage growth accelerated up to the late 1990s and labor’s share of national income was stable or rising. Income growth has been low over the past decade and there has been a very marked fall in the labor share, but then it rose over the last few years. There is also some ambiguity about changes in wages since it matters whether we include fringe benefits for health insurance and pensions– as in the national accounts–or focus solely on money wages. The costs of the fringes have been rising faster than overall incomes, holding down the growth of money wages. Also, the growth of money wages is different at various points in the income distribution.
The only thing I would add here is that I don’t think the average American views benefits as part of their salary. They just feel they are being hectored to save more while earning less.