Roll Call: Latest News on Capitol Hill, Congress, Politics and Elections
October 23, 2014

Income Inequality Drives the Savings Gap

Ryan McCarthy highlights a recent paper by the International Monetary Fund showing that the “relatively new boost in Americans’ savings…is not equal opportunity.”

“Nearly 30% of households don’t have access to a savings account, according to a FDIC report released this week. Another recent report suggests 28% of Americans have not saved anything at all… The authors argue that without higher home prices or growing incomes, Americans are still not saving enough to fix their post-crisis financial situations.”

From author Oya Celasun: “Our key finding is that that households with consistently lower income growth experienced larger declines in their saving rates and a larger rise in their mortgage debt before the crisis… households with disappointing income growth attempted to preserve their living standards in the boom years by tapping into their housing equity… With the subsequent housing crash, those households already suffering from lowest income growth found themselves more vulnerable, with high levels of debt.”

“We found that those more dependent on housing wealth and those with higher debt levels on the eve of the crisis indeed raised their savings sharply after the crisis. Yet, as this sharp correction started from very depressed and even negative saving rates, these households have not yet made meaningful progress in reducing debt and repairing their balance sheets. Hence, these households may face grim future consumption prospects.”

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