February 16, 2011
The Post probably did not realize that this is what it was telling readers, otherwise it should have been the headline of the article, but this is the logical implication of the assertion in the middle of the article that:
“analysts who study personal finances say that savings rates and debt ratios are not going to return to their 1980s levels.”
This statement means that the savings rate will remain near 5 percent instead of rising back to its historic rate from the 80s and prior decades, which was over 8.0 percent.
If these analysts are right, this means that workers will accumulate less money for their retirement, relative to their income in their working years, than their parents and grandparents. With Social Security providing a lower replacement rate and Medicare premiums and other health care costs rising relative to income, this means that retirees will be relatively poorer in the future than at present. This will be even more true if Social Security benefits are reduced further.
It is also worth noting that a lower private sector saving rate has the same impact on the economy as a higher government budget deficit. Given that the Washington Post has been virtually obsessed with the budget deficit on both its news and editorial pages, it is striking that it appears so little concerned about the prospect of lower private sector savings.
Remarkably this article also never mentions the housing bubble. The run-up in house prices was the cause of heavy consumer borrowing in the years prior to the downturn. Conventional estimates put the housing wealth effect at 5-7 percent, meaning that consumers will increase annual spending by between 5-7 cents for each additional dollar of housing wealth. When the bubble burst, destroying $6 trillion in housing equity, it was entirely predictable that consumption would plummet.
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