Why Do We Have Such A Low Personal Savings Rate?

[Singuy]

My co-worker and I were having a debate about social security and how its purpose is to keep elderly from starving to death. He believes that people making 200k/year combined should pay into social security but shouldn't get the retirement benefits because it should be a tax on the rich, not really a benefit program. Before anyone start making judgement on my co-worker, his combined household income is probably 150k a year so he is not asking for handouts or anything.

Although this is the purpose of social security..I asked the question..why is this program needed at all?!@ He argued that lower income citizens just simply cannot save so they rely on social security for retirement.

The U.S national personal savings rate is at 4.0%. Compared to other countries, our savings rate is 1/3 of Germany, 1/5 of Sweden and 1/9 of the Chinese. So you have people who makes less, or have a cost of living way higher, or taxed beyond your comprehension...and yet these people still manage to blow the U.S out of the water when it comes to personal savings rate.

Making just 4 dollars a day, my parents managed to stash away 70% of their earnings in China. Earning below min wage in the U.S as dual earners, they managed to stash away...70% of their earnings again. Sure I lived with roaches, had roommates, and never turned on the A/C..but we survived and the money was saved...The reason why my parents having the mentality of saving so much is because there's no such thing as healthcare treatment first, and then pay later in China. If you don't have the money, you literally die. When life and death is on the line like that, it makes sense to forgo certain luxury to build your own safety net.

Is consumerism and the love for credit causing the shrinking of the middle class and not really the lack of social programs/tax increase for the rich? I feel like you can tax the crap out of the rich and give it to the poor..but this money will be transferred back again to the top because of the love for STUFF. And this stuff on credit not only drain people's future away, it also massively pollutes the earth causing global warming/deforestation/massive extinctions (honestly, do you really need another iphone when your 5s is capable of doing everything?)

I was thinking..perhaps instead of taxing the crap out of the rich..maybe we should restrict credit use. Banks figuring out 36-42% of your debt to income ratio before taxes is acceptable for a house purchase or credit card companies targeting children out of HS is robbing everyone out of a solid retirement fund. We need to make people in the U.S more financially RESPONSIBLE. Perhaps shame Americans who uses credit..and having credit cards as a symbol of poverty! If you really think about this addiction to credit compared to addiction to drugs..addiction to credit most likely ruined and will ruin more lives than anything in the history of Earth! This addiction leads to high divorce rates, high poverty rates, high suicide rates, high extinction rates, high pollution rates, high prejudice rate, and the list goes on and on and on! This is all because everyone bought WAY more than they could afford or NEED for the sake of economic growth!

My co-worker argues that many social programs designed to help the poor are always getting cut...and it's just making the working class harder and harder trying to get ahead.

Although I don't mind social programs designed to make the unfortunate's lives easier..but I don't think these social program can get anyone out of poverty. My parents utilized two social programs only...free lunch at school and free schooling for myself. We were not using food stamps or subsidized housing. If we were to have such amenities, my parents would of gotten out of poverty a few years sooner..but that's the only difference..not the difference between getting out of poverty and staying in poverty.

My co-worker argued that lower income families just doesn't have the same education opportunities as the middle class. They are stuck in terrible school zones in drug filled neighborhoods.

Although this statement is true..but I feel that lower income families are also NOT trying! If I can only afford a rent of 300/month to get ahead..and this 300/month rent only gets me into a terrible neighborhood..why can't I pool my rent money together with my next door neighbor and rent at a 600/month neighborhood (but now with roommates)? I feel that Americans just need a lot of first world amenities(cell phones with data plans, single family living, cable, A/C, car, working one job, private school, higher rent to get into better public schools. etc etc) in order to "survive"..while these amenities are truly not needed if you want to get to middle class and then to the upper class while earning min wage.

I remember posting "The McDonalds Millionaire Challenge" and got so much hate for it. People said my budget was unrealistic and impossible. Impossible if you feel like you are entitled to have first world amenities...but when compared to someone coming from the third world..clean water and indoor plumbing is already good enough!

What are your thoughts on this? Please keep it civil..no name calling one train of thought "stupid" vs another please...

[97guns]

its the american lifestyle not to save, not to plan or look into the future, live for today work tomorrow and live again.

it is very possible for the middleclass to retire early but sacrafices must be made and they are not willing to sacrafice, they want a bigger house, newer car, more toys, eating out.

[Nika]

While luxuries are becoming more affordable, necessities of life have been going up in price. I'm talking about housing, medical care, quality education, quality childcare. Children are segregated very early on, and fall further behind every year.

Yes, there is something to sacrificing lifestyle in order to to advance and planning for the future, and a lot of people do shoot themselves in the foot (you should read some of the clueless financial posts on "family finances" board on some of the baby forums I'm on... it would so reinforce your opinion.

BUT... for a lot of Americans it is not so simple, and there are very serious barriers. For example, if you earn modest middle income in NYC, even if you forego every single luxury and eating at all, you will not compensate enough to get quality housing.

If I can only afford a rent of 300/month to get ahead..and this 300/month rent only gets me into a terrible neighborhood..why can't I pool my rent money together with my next door neighbor and rent at a 600/month neighborhood (but now with roommates)?

They will not rent to you in good areas under such arrangements. They want "quality" tenants, and there is enough demand for housing that landlords do not need to be flexible. Additionally, majority of apartment buildings are run by property managing firms, requirements are simple - your income must be 40X rent. Documented. They absolutely do not want 2-3 families in the apartment. In my area of Bronx, on the "good side" of the highway, where schools are better, zoning prohibits multi-family housing. So the only options are 2-3 million dollar single family houses, which cannot ever become legal multi-families. Probably designed to keep a riff-ruff, that could only afford a 2 mil house if they rented out one floor, out of the neighborhood, to keep it "nice". There are few co-op buildings, before the estate area, but those are nice co-ops that make renting practically impossible, and in the exceptional cases where you are allowed to rent out, for a limited time, the renter must be interviewed by an admission committee, and they will NEVER admit 2 lower income families sharing rent - for same reasons. Richer people call it "protecting their property values".

Also, on baby forums, I can see how much less I have to pay for quality medical care, because my job is good enough to have excellent insurance, compared to people who earn less and have to spend much bigger part of that income to receive a lesser level of care. These things add up quickly, and yes, the playing field is not leveled in many ways.

I can congratulate myself on being responsible and delaying gratification and being financially saavy, but the truth is, we are making end meet and getting ahead a little not only because we are so responsible, but because we make enough money.

[Nika]

Oh, and I believe social security should cover all. That's the purpose of it - to be a social insurance, a net that should be there regardless of anything else that may happen in your personal financial lives. It should not keep devolving into a welfare program.

[snafu]

SS was created in 1935 because the majority of seniors who had been strongly impacted by the Industrial Revolution were clearly unable to support themselves when the 1930's depression struck. Extended families had already been broken when only 26% remained rural, 56% had gone to jobs in the cities.

What help did government provide to your ancestors in 1935 ? The history of the two cultures has been incredibly different. In the 1990's China had it's own version of an industrial revolution Family ties are still strong in SEA, not so much in N America. The messages absorbed by each set of people has been quite different. Americans see people like you come with little and prosper. You come with a work hard, save, help family ethic. Not taught here, have you noticed?

I began spending part of the year in PRC in 2003 and my first reaction was OMG how do all these people manage to work so hard! Everyone in the family works, grandparents look after their grandchild more hours than parents work. Youngsters run errands, teens work part time in spite of school being full time to study hall at 7 PM. I've been in the countryside to see university students load two sows on their motorcycle at 5 AM, drive to market, go to school, return to help clean up at the wet market, return to study hall, return home, presumably sleep and repeat the follow day.

Our kids feel it's their right to have what they want, when they want it, etc. etc and you are commenting on the results.

[Singuy]

BUT... for a lot of Americans it is not so simple, and there are very serious barriers. For example, if you earn modest middle income in NYC, even if you forego every single luxury and eating at all, you will not compensate enough to get quality housing.


They will not rent to you in good areas under such arrangements. They want "quality" tenants, and there is enough demand for housing that landlords do not need to be flexible. Additionally, majority of apartment buildings are run by property managing firms, requirements are simple - your income must be 40X rent. Documented. They absolutely do not want 2-3 families in the apartment. In my area of Bronx, on the "good side" of the highway, where schools are better, zoning prohibits multi-family housing. So the only options are 2-3 million dollar single family houses, which cannot ever become legal multi-families. Probably designed to keep a riff-ruff, that could only afford a 2 mil house if they rented out one floor, out of the neighborhood, to keep it "nice". There are few co-op buildings, before the estate area, but those are nice co-ops that make renting practically impossible, and in the exceptional cases where you are allowed to rent out, for a limited time, the renter must be interviewed by an admission committee, and they will NEVER admit 2 lower income families sharing rent - for same reasons. Richer people call it "protecting their property values".

Although what you say is true, but if one really care about the quality of their child's education and their financial future, the right thing to do is to move as far away from these high cost of living areas as possible. If you are a meat packer, a receptionist, a restaurant worker, etc etc..there are plenty of jobs available to you EVERYWHERE IN walking distance so just leave!

Getting into a good school in NYC is pretty much impossible for anyone..dealing with their lottery systems and such. This doesn't happen in other places of the U.S so if you are a responsible low income adult who cares about your child's future..there's a good chance that you and your friend will have good credit, no debt, and can rent in decent neighborhoods in low cost of living areas without a problem.

[Singuy]

Americans see people like you come with little and prosper. You come with a work hard, save, help family ethic. Not taught here, have you noticed?

I began spending part of the year in PRC in 2003 and my first reaction was OMG how do all these people manage to work so hard! Everyone in the family works, grandparents look after their grandchild more hours than parents work. Youngsters run errands, teens work part time in spite of school being full time to study hall at 7 PM. I've been in the countryside to see university students load two sows on their motorcycle at 5 AM, drive to market, go to school, return to help clean up at the wet market, return to study hall, return home, presumably sleep and repeat the follow day.

Our kids feel it's their right to have what they want, when they want it, etc. etc and you are commenting on the results.

You have no idea how lucky our family was for living in a country such as the U.S. Even with a net worth of -3k when we landed, we were already hundreds and thousands of miles ahead of most people on Earth! You have no idea how making 10 dollars/hr (both income combined) vs 4 dollars/day(dual income) simply blew my parent's mind! It's like going from making 25 dollars/hr to making 600 dollars/hr. This income was from super low level dish washing jobs both had to work.

I think people here needs to travel more and really see how other people around the world live. Don't go to their fancy 5 star hotels..really go walk and around and experience people's daily lives. Perhaps it can introduce Americans to a new perspective on financial responsibilities and entitlements.

[Fishindude77]

This is going to sound like a "I used to walk uphill to school ten miles" rant, but I think basic minimum lifestyle expectations are just a whole lot more than they used to be.

When I grew up in the 60's the working class Americans; factory workers, truck drivers, teachers, policemen, etc. were pretty content with their family living in a small one bathroom house in town on a small lot, one car for the family, no garage, no air conditioning, a TV on antenna, kids sharing bedrooms, etc. Mom stayed home, raised kids, prepared all meals and took care of the house. You had some school and church clothes and shoes, and then some beat up play clothing, everything got handed down. Nobody had the money to get involved in travel soccer or an expensive hockey league, you played in the street, at the parks and maybe a school sport. A vacation was maybe camping or a trip up to your uncles lake cottage an hour away. The only debt your dad might have had is the house loan and it was probably for 10-15 years. If you wanted money for the movies, to buy a bike, etc. you worked for it. If you wanted to swim, you went to a pond, the river or the city pool. Many of us worked from about 10 years old and up, and only the rich kids went to college.

Today's expectations for people in those same jobs include; a three bedroom two bath, two car garage house in the burbs, two late model cars, air conditioning, cable or satellite TV, phone line and internet, several cell phones, computers, full laundry room, dishwasher, bedrooms for each kid, a basement play room, big deck for entertaining and possibly a pool in the backyard, etc. Likely to be a boat, camper Harley in the garage too. Mom works full time too and kids are taken to expensive day care until old enough to stay home alone, half or more meals are eaten out or brought home pre-prepared. Kids have all the latest toys, clothing, gear, etc. and get enrolled in numerous expensive sports and extracurricular activities, plus have their own cell phones and computers. Vacations are to the beach in Florida at spring break and probably another summer trip to some expensive destination. Darned few school age kids work so you have elderly folks filling the entry level and part time jobs at MacDonald's and similar places. Everybody that wants to goes to college and typical families are mortgaging their homes for 30 years, carrying multiple car loans, credit cards with huge limits, college loans, etc.

Sorry for the rant, but I really believe the "perceived needs" are a whole lot larger than "actual needs" today. Hard to save anything when you have to have all of these activities and stuff, and money is loaned so freely.

[corn18]

I often wonder why my wife and I cannot return to living on $18,000 / year ($34,500 / year in today's dollars) and not be happy. We were very happy back in 1989 doing just that. Loved each other, had good jobs, did a lot of fun things, had great friends, no debt, two cheap cars, a dog. Life was good. And we were saving 5% of our income. I did manage to screw all that up and ran into this issue:



I also know my daughter makes $35,000 / year and is managing to save 5% of her income while living on her own. She is happy but because of my lack of financial leadership, she has a longing for the finer things she had growing up.

I think the majority of Americans have a mental aversion to saving.

Tom

[Nika]

Although what you say is true, but if one really care about the quality of their child's education and their financial future, the right thing to do is to move as far away from these high cost of living areas as possible. If you are a meat packer, a receptionist, a restaurant worker, etc etc..there are plenty of jobs available to you EVERYWHERE IN walking distance so just leave!

Getting into a good school in NYC is pretty much impossible for anyone..dealing with their lottery systems and such. This doesn't happen in other places of the U.S so if you are a responsible low income adult who cares about your child's future..there's a good chance that you and your friend will have good credit, no debt, and can rent in decent neighborhoods in low cost of living areas without a problem.

There are reasons that lower income people flock to HCOL mega cities - it is a world wide phenomena. I don't know all the reasons, but the city swells up to this size because millions of people made a choice to live here.

Curiously enough, there was an article recently in NYT that life expectancy of the poor in HCOL cities is longer than that of poor in poor areas. Super expensive cities like NYC, SF, Santa Barbara, etc... rank at the very top in life expectancy for the poor.
There must be other factors like access to healthcare, or better social services...

As far as quality education, it is a very tough one. "Good schools" is a relative term. What is "good" for New York City, does not even exist most places. But yes, getting getting into them is harder than getting into Ivy league. (and unless you can write multi-million dollar checks for the school's capital improvement project, being a 99% scoring tri-lingual 5 year old does not get you a spot, as we are learning in practice. But the resources available to the lucky few who can get in are unbelievable. We are trying few things, and will try every year, not quite ready to give up. Currently in an 8 out of 10 rated public school (which, if compared to the best private ones we toured, will seem like a dump, but if compared to most of the country, I think will stand up very well) waiting to see if there is a spot for us in a G&T programme this year. We tested in last year as well, but no spot. If we could get into G&T in this school, we are good for the next 4 years, and have 4 more years to figure something out.

In spite of all the challenges, I still don't want to move. (the places I would like to temporarily move, also happen to be very HCOL cities).

[disneysteve]

I could make an incredibly long post but I'll try to refrain. Let me just touch on a few things.

1. The cost of necessities has risen far faster than wages. And I mean actual necessities like food, housing, and health care. Every year my take home pay drops because my health insurance premium goes up and my salary doesn't.

2. You suggest all of the workers move out of the HCOL areas. Great. Then what happens to those areas that are now devoid of workers? How do all of the hotels, restaurants, hospitals, and other businesses in NYC function when everyone has moved to Nebraska for a lower cost of living?

3. If you pay into SS, you should be eligible to collect from SS. Period. I do think that the income cap on contributing should go away though.

4. Fishindude77 is absolutely right. Times have changed. Lifestyles, even for the poor, are far better today than they were 30 or 40 or 50 years ago. In many ways, that's a good thing. It's a sign of a healthy economy and a prosperous population. OP, do you really think we should all be living in poverty with roaches, no air conditioning, multiple roommates, and no TV or internet in order to be able to save more of our income? No thanks.

5. When SS was created, the average life expectancy was 58 for men, 62 for women. Retirement age was 65. The expectation was that the majority of people wouldn't survive long enough to ever collect a penny in SS benefits. Today, life expectancy is 76 for men and 81 for women but people still want to start collecting SS at 65 or even 62. That's where the problem lies.

That's enough for now.

[Singuy]

I could make an incredibly long post but I'll try to refrain. Let me just touch on a few things.

1. The cost of necessities has risen far faster than wages. And I mean actual necessities like food, housing, and health care. Every year my take home pay drops because my health insurance premium goes up and my salary doesn't.

2. You suggest all of the workers move out of the HCOL areas. Great. Then what happens to those areas that are now devoid of workers? How do all of the hotels, restaurants, hospitals, and other businesses in NYC function when everyone has moved to Nebraska for a lower cost of living?

3. If you pay into SS, you should be eligible to collect from SS. Period. I do think that the income cap on contributing should go away though.

4. Fishindude77 is absolutely right. Times have changed. Lifestyles, even for the poor, are far better today than they were 30 or 40 or 50 years ago. In many ways, that's a good thing. It's a sign of a healthy economy and a prosperous population. OP, do you really think we should all be living in poverty with roaches, no air conditioning, multiple roommates, and no TV or internet in order to be able to save more of our income? No thanks.

5. When SS was created, the average life expectancy was 58 for men, 62 for women. Retirement age was 65. The expectation was that the majority of people wouldn't survive long enough to ever collect a penny in SS benefits. Today, life expectancy is 76 for men and 81 for women but people still want to start collecting SS at 65 or even 62. That's where the problem lies.

That's enough for now.

2. Supply and demand. Once these people move out, HCOL areas can become ghost towns therefore it's no longer a HCOL area.
Essentially right now you have people barely making their means, making starbucks coffee for the wealthy..if you leave then they either have to pay more for coffee makers OR decrease housing prices to accommodate all the empty apartments.

4. I think you are missing the point. 76% of Americans are living paycheck to paycheck and our overall savings rate is an abysmal 4%. Our cost of living is not as high as some of these European nations, and we make much more than people in China or India..and yet their savings rate is MUCH higher than an American citizen. We have to invent all sorts of social programs and safety nets to ensure senior citizens doesn't starve themselves. None of this makes any sense to me! So YES! If you make nothing, then expect to live with roaches in order to get ahead! You can't have your cake and eat it too.

If life was a video game, the U.S is on ultra easy mode while other parts of the world is on ultra hard mode..and yet we have some of the lowest number of people beating the game.

[corn18]

3. If you pay into SS, you should be eligible to collect from SS. Period. I do think that the income cap on contributing should go away though.

I'm ok with that but then they should also not limit the amount used to calculate benefits. For example, I pay SS tax until I hit the max income limit. And then when they calculate my benefits, they use that max as my income for that year even though I made more than that. If I have to pay SS tax on all my income, then all my income should be used to calculate my benefit. For someone making 500k / year, that's a lot of tax but it's also a lot of benefit. If it isn't done this way, then you are taxing without any benefits.

I will say that if my plan works out, I won't need SS. If the gov't would agree to give me a tax break somehow, I would be glad to give it to someone who needs it. But I get to pick the someone that gets my benefits, not the gov't.

[tripods68]

Don't worry, those HCOL places mention like parts of New York, DE, Carolina's down to South Florida will get flooded and inhabitable eventually due to climate change (rising sea water level). Those millions of people nowhere else to live, migrating to South, Midwest, West coast.

[pflyers85]

Obviously expectations have changed among working middle class and upper middle class folks. Both expect more in terms of house, cars, vacations, consumer goods, etc compared to prior generations.

The other issue is that savings quite frankly is not encouraged from a banking standpoint. The American economy is totally dependent upon debt based consumption and as such interest rates have been kept so low for so long to keep the economy from falling into another recession/crash. Right, wrong, or indifferent the US has gone all in on transforming the economy from a once savings based production economy to a credit based consumption economy as a way to survive in a globalized economy. The consequence to that is the growth of lower paying service sector jobs, rising prices, and lower savings rates.