People save for various reasons. Some save with a specific purchase in mind, such as cosmetic surgery or a Porsche, while others save just to have more money. Economists say that individuals save to buy durable goods and/or accumulate wealth to maintain a certain lifestyle during retirement or in times of financial uncertainty. These reasons all confer benefits to a saver. In the near term, the saver can finally buy the latest and greatest gadget, and in the long term, the saver can be more financially secure during retirement or unplanned unemployment.
Normally, personal saving declines during recessions because people want to maintain their existing level of consumption. During the Great Recession, though, saving increased. The chart shows the personal saving rate, the year-over-year growth rate of gross domestic product
(GDP), and recession periods from 2000 to 2011. Before the Great Recession, the average saving rate for the typical American household was 2.9 percent. Since the recession started in
2007, the average saving rate has risen to 5.0 percent. This increase was largely driven by uncer-
Wait, Is Saving Good or Bad? The Paradox of Thrift
E. Katarina Vermann, Research Associate
“[Saving] is a paradox because in kindergarten we are all taught that thrift is always a good thing.”1
—Paul A. Samuelson, first American to win the Nobel Prize in Economics (1970)
ECONOMICS
NEWSLETTER the back story on front page economics
May
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