Americans are spenders. We take on too much debt—to finance a new home, a car, an education, or by racking up miscellaneous debt on our credit cards.
We are, in fact, encouraged to spend as much as we are encouraged to save, sometimes by different businesses within the same financial services company. A company can have an investment management arm working to educate American workers on the benefits of saving, while it also has a large consumer credit card and mortgage business.
The U.S. government also plays a big role in encouraging America's spending frenzy, sometimes in not so subtle ways. In December 2006, President George W. Bush said that the best thing Americans could do for the country was "to go shopping."
Many economists and fund industry experts say that unless Americans change their spending habits and learn how to save, we will soon be facing a full blown retirement crisis and it may be turn out to be a deeper and more harrowing experience than many have already envisioned.
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"Americans just don't save much," said ICI conference panelist Sheldon Garon, a Princeton University history professor and author of Beyond Our Means: Why America Spends While the World Saves. "Even after the financial crisis hit, in 2008, there was a little bit of a spike in the savings rate, from 5 percent to 5.5 percent, but most households have not fundamentally changed their behavior."
Garon explained that data show how the strength of the economy can be intrinsically linked to lower savings. After the financial crash, the U.S. savings rate trended up from a low of 1.5 percent in 2005 (and not much higher in 2006-2007) to a high of 5.5 percent. In 2011, it declined to 4.2 percent and further in 2012 to 3.9 percent. The first quarter of 2013, the personal savings rate was at 2.6 percent.
Although Europe may not be the model of fiscal discipline today in a global macroeconomic perspective, households in continental Europe have a savings rate that has shown much greater long-term consistency, 7 to 8 percent. The big European economies have shown high personal savings rates of over 10 percent for the past 30 years. In 2011, France was at 12.3 percent; Germany was at 10.5 percent; and Sweden at 10 percent, according to OECD data.
Garon noted that other English-speaking countries, namely the United Kingdom and Australia, tend to share America's inability to put money into savings, be it for emergencies, retirement or for those larger, necessary purchases that may come up.
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"There are huge differences between the U.K. and the U.S. and Europe in terms of people's appetite for risk and their savings styles," said Elizabeth Corley, Global CEO, Allianz Global Investors. "If you go back 20 years, you will see significant savings in the U.K., but what has happened since then, if you look at the savings ratios, was the sudden availability of cheap credit, which has been substituted for short-term savings."
The U.S. is also no stranger to easily accessible credit. The explosion of credit made available in the 1980s and massive deregulation of the financial industry in that decade and the 1990s helped to change the tide. "During that time, we diverged from much of the rest of the world, because it became so easy to get credit," Garon said. The problem intensified with the rapid rise in housing prices from 1995 to 2005. "The early 2000s was really crazy," Garon added.
In Japan—where the savings rate is also consistently high—as well as in Germany and France, there is political and cultural resistance to deregulating the finance industry, and also an aversion to allowing people to rack up debt, Garon said.
It's also harder to get a loan in Europe. In Germany, for example, people are much less likely to take out large mortgages, and home equity loans don't exist. Home ownership in Germany is at approximately 26 percent lower than in the U.S.—about 40 percent versus 66 percent in the U.S.
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Many European governments have set policies that actually try to help stop people from becoming overly indebted. In Belgium, if you are 90 days behind in paying back your credit card, auto or housing loan, your name is reported to the bank, Garon said. A series of services are then triggered, which are designed to help you not only budget, but with any personal problems that may have contributed to your situation, such as alcohol or marriage problems, he added. In France, for example, most credit cards are tied directly to personal bank accounts, Corley noted.
Can the American people, government and financial services industry change their spending habits? The U.S. economy is in recovery mode, though many people are still reeling from the hard hits they took during the financial crisis and from long-term unemployment and the unprecedented level of housing foreclosures.
There is also historical evidence that America was not always a culture of debtors, living beyond their means. After World War II, an increase in household savings did take place. Garon attributed this to the number of government programs and institutions that promoted savings. There were government issued savings bonds, savings & loan banks and the Federal Deposit Insurance Corporation, which promised to protect the money that people did save.
The other factor is that credit was not so available in earlier eras, which created a "deeper savings culture," Corley said. People needed to save a substantial amount of money in order to buy a house or a car or to get the education they wanted.
Yet that was an America of yesteryear. In the Europe of today, "there are safeguards put in place designed to help stop people from getting in too much over their head," Garon said.