Budget Basics
Pennies Saved Americans Dig Deeper Into Debt, Fewer Building Nest Egg
Thursday, January 01, 2004
Marc Beauchamp
Redding.com
But north state credit counselors and bankruptcy attorneys are fretting over other, downright troubling statistics - among them, the plunging national savings rate, record levels of bankruptcies and a growing mountain of credit card debt. In 1980, the personal savings rate was 9.3 percent. At the end of 2003 it stood at just 1.3 percent, meaning Americans are saving just more than a penny from each dollar of after-tax income.
In the past decade, consumer debt has more than doubled, to $1.98 trillion. That debt - which includes credit cards and car loans but not mortgages - translates into some $18,700 per U.S. household. Credit card debt stands at $735 billion, or nearly $7,000 per household. More ominously, since about 40 percent of credit card users pay their balances in full each month, the per-capita debt of those who carry balances is closer to $12,000.
Debt has risen despite record numbers of mortgage refinancings in recent years. Many refinancings yielded cash that consumers used to pay down credit card balances. Personal bankruptcies rose 5.6 percent last year - to a record 1.6 million.
"A large number of people are saving (for retirement)," said Dennis Cowan, a Redding bankruptcy attorney, noting that workers are contributing to IRA and 401(k) retirement plans, money that's not counted in federal statistics on the national savings rate.
The problem, Cowan said, is that "the credit card has replaced the standard savings account." Instead of socking away enough "rainy day" money to live on for six months, as financial experts recommend, consumers are using plastic to pay for emergencies as well as consumer goods, he said. "People should be saving not just for retirement, but for big ticket items," Cowan said. Charging such purchases can dramatically increase their price.
"What people don't realize is they're buying a commodity that dies in the short term, but they're paying it off in the long term" if they make the minimum payment to the credit card company, said Joe Rodola, director of Consumer Credit Counseling Service in Redding.
"Heaven forbid if you pay for a lunch or a set of tires for 25 years," he said. "We grow up in a debt society," said Jeremiah Martin, chief executive of Financial Health Services of Redding. "Instead of savings and investing, too many Americans are dumping that money into high-interest credit cards."
"The savings rate is pathetic," said Howard Dvorkin, president of Florida-based Consolidated Credit Counseling Services. "People are loading up on debt and credit cards and sucking the life out of their mortgages to finance lifestyles they can't afford," Dvorkin said by phone from his Fort Lauderdale office. "It's a terrible situation."
Whether consumers can afford it or not, all this spending has been good for the economy - so far. "The national economy runs on consumer spending and a substantial amount of it is consumer credit," said Martin. "In the short term it's good for the economy, as long as people are able to handle the bills."
Americans spend 18.1 percent of after-tax income to cover debt, including mortgages. Experts say that could limit their ability to borrow and spend more, and consumer spending accounts for about two-thirds of the economy. Credit counselors blame credit card companies for pushing cards through the mail.
"Since the '50s, it's gotten progressively easier to get plastic," Rodola said. "You used to have to apply and sit down with someone. Now you talk to no one and you're preapproved and get the card in a week. There's no pressure, no anxiety." Credit counselors also blame a lack of financial education. "In high school and college, until recently, we weren't taught about saving and investing and the power of compound interest, Martin said. What to do?" "The number one investment one can make is to get out of debt," Martin said. "There's no point in saving and investing if you're paying high credit card interest."
All this debt has long-term implications for the American lifestyle, Dvorkin said. "Many people won't be able to retire or they will retire in poverty," he said. "I'm turning 40. Will I get Social Security as we know it today? Probably not."
Indeed, Federal Reserve Chairman Alan Greenspan warned recently that Social Security benefits may have to be reduced in order to keep the program financially secure. A day of reckoning is looming, Cowan fears. As evidence that consumers are increasingly stretched, he notes that car purchase contracts have gone from three to five years in length. "That reflects higher prices for cars, less money available for down payments and the fact that people buy more than they can afford to pay. You see an awful lot of $35,000 pickup trucks out there," he said.
Dvorkin even suggests that U.S. national security could be on the line. "You can't be the greatest nation in the world and have all your people broke. It just doesn't work that way."
