Baby Boomers' Savings Bonanza May Not Pan Out

Accepted wisdom holds that aging baby boomers will push the savings rate in America up sharply - but don't bet on it.

Two recent studies dispute this notion. They suggest that the savings rate will stay low, keeping interest rates high and economic growth anemic.

If contrarians are right, banks should rein in any expectations for dramatic increases in profitability in the near future.

"Low savings rates mean higher investment costs and lower economic growth," said David Bunting, a professor of economics at Eastern State University in Cheney, Wash., and the author of one of the reports.

The savings rate hit a four-year low in June, falling to 3.52%, according to C.J. Lawrence. Before 1985, the personal savings rate never fell below 5% except for two incidents shortly after World War II. Since 1985, it has never been higher than 6%.

But the drop was not all due to aggressive spending by baby boomers, and the graying of the population will not necessarily boost savings rates.

The Poor as |Dissavers'

Factors other than age affect individual saving rates, Mr. Bunting said. He pointed out that personal wealth plays a big part in savings behavior: Poor people are often actually "dissavers," spending more than they earn. Those low-income Americans have been dissaving at an increasing rate, while the savings rate among upper-income groups has not been increasing.

The savings rate of the wealthiest fifth of all households dropped slightly from 1972 to 1986 while the so-called dissavings rate of the poorest 40% more than tripled, he says.

"The rich aren't saving more. The poor are dissaving more. They're finding their incomes farther and farther behind their needs."

Bleak Prospects

What's worse, Mr. Bunting said, the trend looks likely to continue. As the savings of poorer Americans shrink for reasons beyond their control, wealthier Americans show no indication that they will change.

Other economists also question the conventional assumption that demographic shifts will boost the savings rate.

A report by Goldman, Sachs & Co. on the outlook for the savings rate says an examination of demographic trends "exposes the demographic saving thesis as nothing but a cruel hoax."

Savings are supposed to peak when people are between 45 and 54 years old. But "the net influx of households into the 45- to 54-year-old bracket is so small over the next 10 years that all members of this group must save virtually every penny they earn if the national average is to move above 10% on account of the aging of baby boomers alone," the Goldman analysis said.

Investors Turn to Treasuries

The U.S. government is working against a boost in the savings rate, according to William Dudley, a senior economist at Goldman. The deficit is at a record high, and the Treasury is expected to borrow billions more the year is out.

"Government spending is a contributor," he said. With interest rates high relative to long-term historical levels, people with money to invest are often buying Treasury securities rather than investing in productive enterprises.

The effect of all this is apt to be a vicious cycle, the Goldman economists said. Low personal savings rates will keep productivity growth low, and that will keep real wages from increasing and depress savings rates.

Spenders, Not Savers

The U.S. rate is much lower than rates prevailing in many industrialized countries. But consumption, not savings, is the norm in the United States, according to Joseph Wahed, a senior vice president and chief economist at Wells Fargo & Co. "It's a culture where spending is embedded and not saving."

Still, statistics suggest that Americans save more as they get older. And the average age of the population is rising, meaning a greater proportion of Americans will be socking away more of their hard-earned incomes.

"I think the savings rate will go-up principally because of the change in demographics," said Lynn Reaser, senior economist at First Interstate Bancorp and a proponent of the consensus view.

"It's not so much a change in attitude," with yuppies holding on to old VCRs and deferring purchases of new BMWs. "It's more that their attention is attuned to these other objectives," such as being prepared for their own retirement and the costs of educating their offspring.

But these new studies cast doubt on how helpful aging baby boomers will be in turning America into a nation of savers.

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