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From the Houston Chronicle:

People once again spent everything they made and then some last year, pushing the personal savings rate to the lowest level since the Great Depression more than seven decades ago.

The Commerce Department reported today that the savings rate for all of 2006 was a negative 1 percent, meaning that not only did people spend all the money they earned but they also dipped into savings or increased borrowing to finance purchases. The 2006 figure was lower than a negative 0.4 percent in 2005 and was the poorest showing since a negative 1.5 percent savings rate in 1933 during the Great Depression.

For December, consumer spending rose a solid 0.7 percent, the best showing in five months, while incomes rose by 0.5 percent, both figures matching Wall Street expectations.

There has been some discussion about how the BEA computes the national savings rate. They use the standard economist calculation, which is total income less all expenses. This calculation assumes that people only save after they spend. In other words, it does not include such things as automatic deductions for 401(k) plans, etc. However, four other sources demonstrate that savings is at critical levels.

An analysis of the retirement fund tables from the Federal Reserves' Flow of Funds report indicates retirement savings is at best 3% of GDP over the last 5 years.

In addition, three studies from 2006 indicate the US is facing a savings crisis. The first is from the FDIC, which concluded:

Although 94 percent of families headed by persons ages 45 to 54 held at least one type of non-real-estate financial asset in 2004, the median holdings of financial assets for this group were only $38,600.12 These data include 58 percent of families that held a median of $55,500 in retirement accounts (which include individual retirement accounts or IRAs), but only 18 percent that held the next largest asset category, pooled investment funds ($50,000). Even fewer--less than 7 percent--held the third and fourth largest asset categories, other managed assets and bonds ($43,000 and $30,000, respectively) (see Table 3, next page).13 For the average person, financial assets would not last long in retirement.

The second study is from Boston College concluded:

Almost one in two American families are headed toward years of financial struggle in retirement, according to a recent report that says workers are unprepared for cuts in pension and Social Security income.

The Boston College study presumes that most people need to replace 65 percent to 85 percent of their annual income in their working years to stay secure in retirement. But 43 percent of U.S. households will fall at least 10 percent short of that range, the study found, using what it said were conservative projections.

The percentage of households at risk of an insecure retirement rises to 66 percent under a less rosy set of assumptions--for example, if workers retire at age 63 instead of at 65.

"Unless Americans change their ways, many will struggle in retirement," said Alicia Munnell, director of the study and a former member of the White House Council of Economic Advisers. "The answer is saving more and working longer."

And finally, there is this study from the Employee Benefit Research Group: It found that 63% of people have less than $100,000 saved for retirement. The paltry savings levels reported in the Flow of Funds report backs-up this fact. $100,000 is clearly insufficient to provide for income for a 20-year period, even with social security.

Basically, the US economy is ripe for a huge problem if a lot of people lost their jobs.

I would like to thank my girlfriend for sending me this article.