Personal Responsibility Primer
By Ann Futrell on Nov 08, 2010
Facts at a Glance
- In 2008, more than a quarter of households had credit card debt over $10,000.
- One quarter of the households in the U.S. pays more than 20 percent interest on their credit cards.
- In 2002, the average college senior had six credit cards.
- In 2009, an estimated 1.4 million Americans filed for bankruptcy.
- The mortgage delinquency rate reached 10 percent in 2010, the highest on record (since 1972).
- Average student loan debt for the class of 2008 was $23,200.
I. Household Debt
II. Household Income
III. Personal Savings
IV. What Individuals Can Do
In recent decades, many Americans, like the federal government, have spent more than they earned. Even during booming economic years, American households have accumulated alarmingly high and rapidly rising levels of debt in the last three decades. Between 1950 and 1980, the average household held debt equal to about 60 percent of its disposable income. In the 1980s and 1990s, however, debt rose rapidly, averaging 81 percent of disposable personal income. During the 2000s, debt skyrocketed to an average of 117 percent of household’s available income. This means that households owe more in debt than they earn every year, after taxes.
Figure 1. U.S. Household Debt as a Percent of Disposable Income, 1952-2008
With easy access to credit, lax mortgage policies, and rising college costs, debt has become a norm in American households. Total consumer debt in the United States grew seven times in size from 1980 to 2010, now standing at $2.5 trillion. Americans now own over 1 billion credit cards, with the average credit card holder owning 3.5 cards. With the real estate bubble and rise of subprime mortgages in the years leading up to the recent financial crisis, many Americans also bought homes they were unable to afford. Between 1989 and 2007, the median value of mortgages more than doubled from $49,900 to $110,000.
Even young people are now usually indebted from an early age. More than half of college students graduate with debt. The average debt load for the class of 2008 was $23,200, compared to $12,750 for the class of 1996.
II. Household Income Trends
Contrary to what the rising debt trend might suggest, Americans’ earnings as a whole have not fallen over time. In fact, average personal income has significantly increased in the last four decades, even adjusted for inflation. Average per capita income rose from $13,888 in 1967 to $26,964 in 2008 (in 2008 dollars).
However, this growth has not been uniform. In fact, low income households have experienced little to no income growth, while the earnings of upper-income households have increased substantially (see Figure 2).
Figure 2. Income Growth by Quintile in the United States, 1980-2007
Even with rising incomes, American households have been saving dramatically less in recent decades. Four times every year, the Bureau of Economic Analysis reports personal savings, which equals total disposable income (the amount of all households’ after-tax income) minus total personal consumption expenditures (the amount that all households spend).
As Figure 3 shows, the personal savings rate (which equals savings as a percent of disposable personal income) total hovered below 5 percent during the Great Depression era.. Savings shot up during World War II, when citizens helped finance the war by buying savings bonds. They remained high during the next few decades, averaging 8.5 percent between 1950 and 1980. Savings steadily declined during the 1980s (from a high of roughly 11 percent in 1982) and into the 1990s, with an average of 7 percent for those decades.
However, it was during the 2000s that personal savings plunged to alarmingly low levels. By 2005, the personal savings rate reached the very low levels seen during Great Depression, even though the economy was booming. The average personal savings rate in the last decade was 2.9 percent; considerably lower than it had ever been in the previous 50 years. The slight uptick in savings shown for the year 2009 is a result of more cautious spending in the face of the recent recession, which is temporary, and concerns about the future.
Figure 3. Personal Savings Rate, 1930-2009
The current personal savings rate in the United States is also lower than norms in other developed countries, as Figure 4 shows.
Figure 4. International Comparison of Personal Savings Rates
Why should low personal savings concern us? On an individual level, they mean that many American families are ill-prepared for future economic downturns, and for retirement. On a macro level, low personal savings could mean that as the government becomes unable to fund its large and growing deficits domestically, it has to rely heavily on foreign lenders. This economic position could compromise our national interests. Additionally, personal investments in financial assets increase the capital stock of American businesses, and contribute to the nation’s sustained productivity. The returns on those investments stay within the U.S. instead of flowing abroad to foreign investors. Low personal savings leaves us with fewer domestic resources to invest in products, equipment, research and development, science and technology.
During the recent recession, American households, which were low on savings, had to reduce spending much more dramatically than if they had rainy-day funds. The U.S. economy depends on consumption. Personal consumption is more than 70 percent of GDP in the U.S. and much less elsewhere. The drop in consumer demand and spending exacerbates the economic decline, causing more job losses. American households are likely to face a similar scenario of austerity when they face retirement, especially considering rapidly rising health care costs.
IV. What You Can Do As a Citizen
- Establish a personal budget and stick to it. This website gives you tips on saving, and allows you to create a personal savings plan for the year.
- If you are an adult, no matter your age, create a personal financial plan that considers the following questions:
- What are my short-term and long-term personal financial objectives?
- What major milestones do I need to prepare for (e.g. education, family, retirement)?
- When do I see myself retiring? How much will I need to spend after I retire? How can I realistically save to meet that goal? Have I considered that for each year I delay my retirement, I can substantially increase my retirement income for the rest of my life?
- Become more responsible in decisions to spend and use credit, and educate yourself on the economics of credit card payments and mortgages. Check out the Federal Reserve’s Consumer Guide to Credit Cards and their guide to Home Mortgages.
- Invest your savings wisely. A good starting point to learn about investment options is the SEC’S Beginners Guide to Investing.
- Teach children the importance of planning, saving, budgeting, investing, and using credit responsibly.
Other Helpful Resources:
Articles and Reports
Personal Savings Rate: Worse Than We Thought (CNN)
The New Squeeze: How a Perfect Storm of Bad Mortgages and Credit Card Debt Could Paralyze the Recovery (Demos)
Making Your Nest Egg Last a Lifetime (Center for Retirement Research at Boston College)
Is There Really a Retirement Savings Crisis? (Center for Retirement Research at Boston College)
Workers’ Response to the Market Crash: Save More, Work More? (Center for Retirement Research at Boston College)
How Economic Security Changes During Retirement (Center for Retirement Research at Boston College)
Student Debt 101 (Demos)
Retirement Security Factsheet (Demos)
Fact Sheet: Will Baby Boomers Drown in Debt? (Center for Retirement Research at Boston College)
Federal Reserve: Assets and Liabilities of Households and Nonprofit Organizations (The Federal Reserve)
BEA Tables: Personal Income and its Disposition (U.S. Bureau of Economic Analysis)