This is on today’s WSJ — I am amazed to see that people under the age of 42 have a negative saving rate of 18%!!!
So don’t think that either first-time buyers or renters (assume that they’re mostly young and carrying debt) will rise up and solve home owners/sellers’ financial problems…
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Fund Fiend
Benefits of Saving
Wasted on Youth
By IAN MCDONALD
August 7, 2006; Page R1
Day by day, it’s painfully clearer that we’re on the hook to pay for our own retirements. Someone should tell folks in their 20s and 30s.
The national personal-saving rate — the fraction of after-tax income left after spending — has been falling for a long time. Between the end of World War II and the early 1980s, U.S. citizens consistently saved about 9% of their income after taxes. So far this year, average savings are negative by more than 1%, according to data from Moody’s Economy.com Web site. This calculation doesn’t include capital gains on assets you already own and counts tuition and a Hummer as the same type of “spending,” but the numbers are still ugly enough to merit worry.
You would think the necessity of socking away a little money might be clearest to young people. After all, their careers coincided with the proliferation of 401(k) plans and a decrease in the role of pensions, now so rare they verge on being quaint. They also came of age with the notion that Social Security’s financial support is iffy. The saving rate for post-baby boomers — people 42 years old or younger — has steadily slipped during the past 15 years. It was nearly minus 18% in the year ended March 31. That is chilling, considering that most pundits suggest we save 15% to 20% of pretax income for retirement and other goals. “It’s absolutely counter to the fact that the vast majority of us will have to fund our retirements,” says Mark Zandi, chief economist at Economy.com.
What gives? One theory says the under-42 crowd has been spoiled by above-average returns from stocks, bonds and real estate, combined with low interest rates and inflation. U.S. stocks averaged an 18% annual gain in the 1990s, compared with a 10% historical average. While cooling now, high housing values led many to borrow through equity loans.
People who expect big returns, low interest rates and low inflation may figure they can meet their goals with paltry savings today — or none today and a little tomorrow. This wastes the advantage of a longtime horizon for reaping compounded investment gains.
These folks haven’t had a deep economic downturn to underscore the importance of saving over spending. As the economy has slowed, young people have spent more, not build up cash cushions. Let us know how that works out.
