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1 1 (July 13, 2022)

handle is hein.crs/goveihs0001 and id is 1 raw text is: Con gressknoI Research Servio Informing the legislitive debate since 1914 Updated July 13, 2022 Introduction to U.S. Economy: Personal Saving Personal saving, which includes the saving of households but not of businesses or government, can have a significant impact at both the individual and economy-wide levels in the long and short terms. The personal saving rate was disrupted by the COVID-19 pandemic, which resulted in a rapid increase and subsequent decrease in this metric, making future trends in personal saving uncertain. Definition and E conomic C onsiderations Individuals receive a certain amount of after-tax income that they can spend or save. By definition, what is not spent is saved, so saving and spending are inversely related. The personal saving rate, which is the ratio of total personal saving to disposable income, presents a tradeoff between current and future consumption. A relatively low saving rate implies higher current consumption but lower future consumption. Greater present consumption boosts individuals' living standards now; however, it leaves less to be invested in capital projects that will boost future living standards. Conversely, a relatively high saving rate implies lower current but higher future consumption. This tradeoff has short-term and long-term economic implications. Short-Term Economic Impacts In the short term, a rising personal saving rate can temporarily slow economic activity, assuming no other changes to income. If on average individuals begin saving a larger portion of their paychecks, it means less money is being spent on consumer goods and services in the economy. Because consumer spending makes up about 70% of the U.S. economy, even a small decrease in consumer spending can reduce aggregate demand and economic activity. Alternatively, a falling saving rate may result in temporarily faster economic growth as individuals spend a larger portion of their pay on goods and services. Whether changes in the saving rate are helpful or harmful in the short run depend on the state of the economy. A rise in the saving rate during an economic downturn can be problematic. In response to a recession, individuals may rationally respond to increased uncertainty about their future income by increasing their saving rate to provide a buffer against reduced income (caused by job loss, for example) in the near future. As a result, however, the economic downturn is further exacerbated due to the additional decrease in consumer spending resulting from the rising saving rate. By contrast, in the midst of a healthy and expanding economy, a rising saving rate may result in a more sustainable level of consumer spending, thus preventing the economy from overheating. An overheating economy occurs when demand for goods and services exceeds the economy's ability to produce them, which can result in accelerating inflation followed by a recession. Long-Term Economic Impacts In the long term, a higher saving rate will generally lead to higher levels of economic output, up to a point. When individuals save a portion of their income, those savings are generally loaned to businesses to finance new investments. For example, an individual's 401(k) is a saving vehicle for their future consumption after retirement, but before retirement, those funds are generally invested in various companies through the purchase of stocks and bonds. The overall level of investment is one of the main determinants of long-term economic growth. Business investments in physical capital (i.e., machinery, buildings, and factories) allow the economy to produce more goods and services with the same amount of labor or raw materials, increasing the productive capacity of the economy. As personal saving contributes to investment, all else equal, a higher saving rate will result in a higher level of physical capital over time, allowing the economy to produce more goods and services. For further information on business investment, refer to CRS In Focus IF 1020, Introduction to U.S. Economy: Business Investment. How ks Personal Saving Measured? The Bureau of Economic Analysis (BEA) measures the U.S. personal saving rate (see Figure 1) as the difference between aggregate income and consumption spending, which likely introduces some measurement error. The saving rate may understate the level of saving in the economy because certain spending is considered consumption, even though such spending is conventionally thought of as investment, such as spending on durable consumer goods (e.g., automobiles, appliances). Additionally, BEA does not include changes in asset prices or capital gains as income under the saving rate measure. Figure I. U.S. Personal Saving Rate, 1959-2022 35% 28% 21% 14% 7% 0%1 1959 1969 1979 1989 1999 2009 2019 Source: Bureau of Economic Analysis. Alternative measures show that many households are struggling to save a portion of their income, particularly

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