SAVINGS

Savings are the amount of income left after a consumer has finished making personal expenditures and paying taxes. People save to pay for retirement, education, or vacations. They usually put their savings into bank savings or checking accounts, invest them in securities like stocks or mutual funds, or keep savings as cash. The percentage of personal income that people save depends on how optimistic they are about their future income, their own personal inclination to spend now or "save for a rainy day," and the amount of interest or return they expect to get by saving or investing.

Economists generally regard saving as good because the economy can only grow if some consumers refrain from consuming and instead invest in the factories and equipment that enable companies to expand production. However, in a phenomenon called "the paradox of thrift," economists have also shown that when economic growth is threatened by weak demand, too much saving will actually result in slower economic growth because consumers will be buying less.

The amount of income that people in the United States save has varied significantly throughout the twentieth century. During the Great Depression (1929–1939) for example, consumers needed all their income for necessities—saving rates were consequently negative. During World War II (1939–1945), however, government rationing and savings bond drives encouraged people in the United States to save. By 1944 U.S. citizens were saving 25.7 percent of their incomes— the highest savings rate in the century. In the postwar years, U.S. citizens have saved less and less. By 1981 consumers were saving only 9.4 percent of their incomes; by 1989 only 5.1 percent, and by 1997 only 3.8 percent—the lowest rate since the Depression. To encourage U.S. citizens to save more, Congress created Individual Retirement Accounts (IRAs) in 1982. IRAs did encourage consumers to invest more, but the savings rate continued to fall because easy-to-obtain credit cards and low home mortgage down payments enabled consumers to buy homes and other goods without first saving for them.

By the late 1990s some economists estimated that U.S. consumers were saving only a third of what they needed to maintain their standard of living in retirement. As the twentieth century ended, politicians debated several solutions for increasing national savings, including scrapping the income tax system in favor of a flat tax or a national sales tax and creating governmentsponsored "Universal Savings Accounts" that would let U.S. citizens invest part of their taxes in mutual funds or bonds.

See also: Investment