Many factors influence the rate at which we save. Confidence is one important factor. Periods of recession, marked on the graph by vertical lines, tend to be periods in which confidence is low. When we are uncertain, we tend to hunker down, reduce our spending and save money. The personal savings rate rises during these periods.
The decade of the 1990s was a period of growth and optimism. Savings rates plummeted as we began to spend freely. The personal savings rates seen in the late 1990s are the lowest recorded since these data have been collected (1946). Economists attribute this, in part, to the "wealth effect." This term refers to the tendency of households to increase spending levels as the value of their assets (homes, mutual funds, investments of all kinds) increase. During the 1990s the stock market, in which more Americans than ever are now invested, rose sharply as did home values. Together, these changes account for the dramatic reduction in the savings rate.5
What impact will this low savings rate have on the trend towards early retirement? It will likely end the trend. It may even reverse that trend.
In essence, the "wealth effect" described above can operate in reverse. Households will tend to decrease spending as the value of their asset-base decreases. During the end of 2000 and in 2001, the stock market showed sharp declines. The value of pensions and savings invested in the market also declined. The economy slowed. Households began to spend less. In this environment people are far less likely to choose early voluntary retirement. But will the trend towards early retirement reassert itself once the economy recovers?
A quick look at two scenarios suggests that the answer to that question is No.
1. The economy recovers strongly - In this case, the demand for well-educated workers will also increase. Since the Baby Boom generation is followed by two smaller generations, there will be pressure to keep as many of the Baby Boom generation working as long as possible. Pressure to remain in the workforce will be high.
2. The economy is slow for an extended time — We did not save money at high rates during the economically strong 1990s. This period was followed by an economic slowdown and by a sharp decline in the stock market. The value of our asset-base declined. Under these circumstances, it is unlikely that people will voluntarily retire early. They will, more likely, remain in the workforce until the age of 65 at which point full Social Security benefits become available. Furthermore, if the age at which full Social Security benefits come into effect is increased, then the pressure to stay in the workforce even longer will increase as well.
Our failure to save money, our lengthening life spans, and the demographic pressures of the Baby Boom will almost certainly combine to stop, and possibly reverse, the trend towards early retirement during the beginning of the 21st century.
Source: U.S. Department of Commerce. Bureau of Economic Analysis. Personal Income and Its Disposition. Online. Available: http://www.bea.doc.gov/.
1 Qualified employees are those who worked for at least 1,250 hours for the employer in the previous year. Family leave may be taken for use in the care of a newborn, a newly adopted child, or a newly placed foster child, to care for a child, spouse, or parent who has a serious health condition, or to treat one's own serious health condition.
2 "School Break: States take a new look at classroom leave," Wall Street Journal, January 15, 2002, page 1
3 Richards, Cindy. "Eight States Introduce Paid Family Leave Bills," Women's News, downloaded on January 14, 2002, available online at http://www.womensenews.org
4 The system is, of course, far more complex than this statement suggests. The Social Security System has been expanded many times since its inception. It now covers workers, disabled persons, and the dependents of each. The system also adjusts benefits for inflation annually, something that was not done in its first four decades. All of this complicates the statement that if fewer pay in than withdraw from the system the well will run dry. However, the essence of any insurance fund relies on the fact that it will take in at least as much as it pays out.
5 If this explanation of a drop in the savings rates is correct, one can expect to see rates begin to climb again starting in 2001 as the economy slows and stock prices fall.
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