America Faces Savings Disaster

A drop in savings among Americans and a record amount of credit-card debt could spell disaster for the country's economy should a recession hit the U.S. in the coming months or next year, according to experts.

Recent data from the U.S. Bureau of Economic Analysis shows the country's personal savings rate has remained historically low in 2023 compared to the previous year. In July, the latest data available, the rate was 3.5 percent, down from 4.3 percent in June and 4.7 percent in May.

The amount of savings put away by Americans is generally higher than in summer of last year, when it reached a record low of 2.7 percent in June 2022. But it remains much lower than the average annual rate of 8 percent, based on the bureau's data going back to 1959.

According to an exclusive poll conducted by Redfield & Wilton Strategies on behalf of Newsweek, 34 percent of Americans were able to save less money than before the pandemic this year. A majority of 57 percent of respondents said they no longer had extra savings from during the health emergency.

Among all of the respondents, a majority of 59 percent said they had less than $5,000 in savings in their personal accounts. Some 14 percent held between $1,000 or $5,000, 23 percent had less than $1,000, and 22 percent said they didn't have any savings at all.

Some 25 percent of respondents said they would only be able to afford their basic living costs for a few days if they were forced to use only their savings. The poll was conducted between September 3 and 4 among a sample population of 1,500 eligible voters in the U.S.

Why Are Americans Saving So Little?

The idea that many people might be struggling with their finances is backed up by the fact that Americans have recently collected a record amount of credit-card debt, a total of $1 trillion as of August.

"There's been a lot of things contributing to this—interest rates are higher, credit is more expensive, there's inflation, everything is more expensive," Jade Warshaw, a financial coach and debt-elimination expert at Ramsey Solutions, a financial adviser, told Newsweek.

"And what happens is, we don't adjust. We just think, this is what it is now, and whatever margin that you had in your expenses and savings completely evaporates."

While the higher cost of living, which has risen with surging inflation in the past year, might be directly linked to the drop in savings among Americans, behavioral economists and experts said that being bad at saving money is somehow part of the way we're wired as human beings.

"Weak savings habits are a long-standing American tradition, not something new," Greg McBride, chief financial analyst at Bankrate.com, a New York-based consumer financial-services company, told Newsweek. "Saving requires a deliberate decision to defer consumption today in order to consume in the future, and this delayed gratification isn't easy," he added.

"Human nature is not designed for long-term thinking to start with," Dan Ariely, author and professor of psychology and behavioral economics at Duke University, told Newsweek. "And then the economy tries to use our emotions and get us to do things that are good for them rather than for us," he added.

"Every company, almost all companies that are in our environment, want us to spend now rather than later."

Economist Shannon Seery of Wells Fargo told Newsweek that her company estimates that households still have some excess liquidity remaining at the moment, "and depending on how you slice it we estimate excess cash to be depleted by the end of this year," she said.

"Lower-to-middle income households have likely already depleted their excess cash," Seery added. "Even when 'excess' cash runs dry, households can keep spending at elevated rates; it will just leave them more financially vulnerable."

While Wells Fargo's August retail sales data suggested consumers are spending, "we still ultimately believe households will face bigger hurdles in the remainder of the year," Seery said.

"Many have already restarted the resumption of student loan payments, which should prevent discretionary spending elsewhere for those households," she continued.

"Excess savings is drying up and credit is more costly and challenging to obtain. The gradual moderation in the labor market will also crimp the recent string of gains in real income. Households' capacity to spend is dwindling, and we ultimately expect their willingness to spend will follow suit."

According to Mark Zandi, chief economist of Moody's Analytics, the end of the student loan payment moratorium in October will reduce annualized real GDP growth in the fourth quarter by an estimated 0.2 percent.

"Some 21 million borrowers will need to resume their payments, with the average payment of about $300 per month," Zandi told Newsweek.

"This amounts to an increase of close to $75 billion in payments annually or 0.3 percent of GDP," he continued. "But several million of these borrowers will not resume payments as they can't or won't because they will not be reported to the credit bureaus."

What's the Worst That Can Happen?

This lack of savings leaves Americans extremely vulnerable to any potential economic shocks, including the sudden—and at the moment, not expected—rise of inflation or a looming recession.

"When you don't have a margin everything becomes an emergency. Just getting a parking ticket could suddenly become an emergency," Warshaw said.

While inflation has been consistently dropping for months in the country and forecasters have downgraded the likelihood of a recession in the coming months or the next year, the possibility of such a negative scenario would be disastrous for Americans.

"Recessions are never fun," McBride said. "While the odds of a recession have declined over the past several months, we are not out of the woods. Bankrate's quarterly survey of top economists showed 59 percent predict a recession in the next 12 months."

He added that "inflation has done a number on the budgets of millions of households as expenses increased faster than income, leading many to run down their savings and begin accumulating debt to keep up."

"Without a sufficient savings cushion, there is little buffer for unplanned expenses or income disruption that often materializes in a recession," he said.

"I referred to it as kind of this perfect storm of stupid that's going on," said Warshaw, without mincing her words. "We collectively have $1 trillion in card debt, $1.7 trillion in student debt loans," she continued.

"When I look at stuff like that, it can feel frightening, right? It can look like, 'Oh my gosh, we're headed toward the cliff'. Are we going to all go off the cliff?" she added.

But in those moments, said Warshaw—who personally repaid almost half a million dollars in debt with her husband before starting to work as a financial coach—"it's really important to zoom out and kind of look at people as individuals."

If you're reading this article, Warshaw said, you have a choice.

"You as an individual do not have to participate in this disaster. You have choices. You can control your money and your life and you can go, okay, I've been overspending. What do I need to do next? Okay, I've got credit card debt. What do I need to do? I need to get $1,000 saved," she said, adding that this will put you ahead of many Americans.

"They don't have to live on the edge, even though the rest of America is," she added.

On the other hand, there's a silver lining even in such a potential savings crisis, where Americans could find themselves without a job—and without savings.

"People can learn from personal experience," Ariely said. "So if we have rising inflation or a recession and if people lose their job, if people have a hard time paying their bills, that, of course, would be very sad," he added. "But it will become a lesson for life, for at least some of the people who would start saving more. That's sadly how we learn."