Foreign Affairs

Foreign Affairs

May/June 2006


The Return of Saving
Martin Feldstein

MARTIN FELDSTEIN is George F. Baker Professor of Economics at Harvard University and CEO of the National Bureau of Economic Research.


The savings rate of American households has been declining for more than a decade and recently turned negative. This decrease has dramatically reduced total national savings despite a rise in corporate saving. In 2003 and 2004, the combined net savings of households, businesses, and government were only about one percent of gross national income -- the lowest level in at least 50 years.

This sharp decline in saving has had important implications for the United States and for the global economy. It has reduced productivity-enhancing net business investment in the United States to less than four percent of GDP and made the United States increasingly dependent on capital from the rest of the world to finance that investment. At the same time, the decreased national savings rate -- and the increase in consumer spending that it implies -- has induced a rise in U.S. imports. Those imports have contributed to the growth of output and employment in many countries around the world.

The downward trend in U.S. household saving will likely soon be reversed. In the long term, a substantial rise in household saving will have a positive effect on the U.S. economy. But the initial effects will pose problems for the United States and its trading partners. If these effects are not managed well, the result could be declines in output and employment and a corresponding rise in U.S. protectionism.


To appreciate the significance of these developments, it is helpful to have a more precise definition of net household savings. Household saving is the difference between what households receive in after-tax income (including wages, salaries, fringe benefits, interest, and dividends) and what they spend on goods and services. Those savings can take the form of bank deposits, purchases of financial assets such as stocks and bonds, or investments in real assets such as homes and unincorporated businesses. Contributions to individual retirement accounts (IRAs) and 401(k) plans as well as employer contributions to defined-benefit pension plans are also counted as household savings. So too is money used to pay down a mortgage or other loan. Borrowing is counted against saving, unless the borrowed funds are used to purchase financial assets or are converted into other types of savings.

Individuals in their 40s and 50s tend to save money, whereas many in their 60s and beyond are "dissavers," people who are spending the assets that they accumulated in their working years. A negative U.S. net household savings rate implies that the saving of the savers is less than the dissaving of the dissavers. Net household savings in the United States fell from an already low 1.7 percent in 2004 to -1 percent in the second half of 2005. This low and declining savings rate stands in sharp contrast to the rate until the mid-1990s: 7 percent or higher, which was enough to finance most investment in business infrastructure and equipment and in housing.

That household saving has declined should come as no surprise. The rising prices of stocks ...