Forcing Americans to Save Money

Wealth inequality has spiraled out of control for two reasons—middle-class Americans aren't making enough money and they're saving virtually none of it.

It's hard to believe, but there was a time when wealth was growing faster for the bottom 90 percent than for the top percentile in the United States. This remarkable period in American history was called... the twentieth century.

Between 1929 and 1986, the bottom 90 percent saw its wealth grow at real annual rate of 3 percent, compared with 0.3 percent for the top percentile, according to new research released last month. Since the 1980s, the story has flipped. Wealth is growing at an extraordinary pace for the rich—3.9 percent over the last three decades—and not at all for the rest.

The math of wealth is simple. There is income (the money you make), savings (the money you don't spend), and returns (the growth in value of the money you save). The problem facing the bottom 90 percent—not the rich, but the "rest"—isn't merely that they're making less money than they used to, but also that they are saving none of it—virtually, none of it.

In the last 30 years, the savings rate of "the rest" has fallen from 6 percent to negative-4 percent. It now hovers a whisker away from zero. The rich are different. They save. And the really rich really save, even more than they used to, according to a new paper from economists Gabriel Zucman and Emmanuel Saez.

Saving Money: Rich People Do It


As you can see, thanks to a century of making more, saving more, and passing along the inheritance, the picture of wealth inequality in America today makes old-fashioned income inequality look like a socialist's dreamscape. (I elongated this graph until I could see a teensy fleck of red for the bottom 90 percent, a trick some of you might consider gratuitous, but there's nothing here a Piketty reader, or Piketty-summary reader, would find surprising).

Wealth in 2012

It didn't have to be this way. Even with stagnating incomes, the rest could have done a better job building and keeping wealth. If the bottom 90 percent had continued to save 3 percent of its income over the 1986-2012 period, its share of US wealth would be a third higher than it is today. Update: It must be said that, over this same period, interest rates fell dramatically, depressing the returns of ordinary savings accounts.
How do we get poorer Americans to save more money? A good solution should attack both causes of the wealth gap—income and savings.
The most obvious solution is more income—for example, by raising the minimum wages or fattening the Earned Income Tax Credit. Indeed, the typical family isn't making any more than it was in the mid-1990s. But middle-class saving plummeted even during the 1990s, when real wages were growing. Perhaps many lower- and middle-class families were lured into the housing boom, when expanded consumer credit and subprime mortgages persuaded households to shovel their savings into some new, exurban Sun Belt home. But perhaps, even outside the housing market, Americans struggle with saving because financial institutions for the lowest-income Americans make it even harder for them to build wealth.
Low-income employers often don't use electronic payments for hourly, temporary, seasonal, or part-time workers, who are all likely to be low-paid. Even something as simple as direct deposit can change the way we think about saving, since somebody with her paycheck directly deposited into a savings account has to take active measures to spend her money. Credit card companies help their customers automatically pay off their cards, utilities, and other fees. But for somebody without a credit card or automatic billing, it's much easier to miss payments. For the unbanked, the hours of effort trying to turn one's salary into cash and payments can amount to another part-time job.
Saez and Zucman have another proposal to nudge behavior toward saving: a new automatic retirement plan that skims 3 percent of annual earnings up to $100,000. The money would go into a savings account invested in a broad fund to keep its growth near the global return on capital. Individuals could only take money out of the account early for special reasons, like buying a house or going to school.
It's a clever idea. Despite the deep economic, psychological, and institutional pressures of low and stagnant wages, being wealthy starts with not spending money.