The savings rate is the fraction of disposable income that a household, or a country, does not spend. If it earns 100 and spends 85, it saves 15%. Behind this simple figure lies a great deal of information about confidence, demography and the solidity of an economy.
1 What is the savings rate?
What you set aside rather than spend.
Definition
The share of income not consumed
A household's disposable income serves two purposes: to consume or to save. The savings rate measures the second, as a percentage of income. At the level of a country, all households are aggregated. A high rate signals a population that holds back its consumption; a low rate, an economy where most of what is earned is spent.
2 Why it varies
Saving rarely comes down to character alone.
①
Precaution. Without a solid safety net (health, pensions, unemployment), people save to protect themselves against the unexpected: saving becomes a necessity.
②
Demography. Ageing, family structure or the burden of dependants weigh heavily on the need to accumulate.
③
Confidence and interest rates. Uncertainty drives saving; high interest rates reward it, low rates discourage it.
3 Why it matters
Saving has two faces.
Upside
Investing
Today's savings finance tomorrow's investment and growth.
Downside
Restraining
Excessive saving deprives the economy of demand: things are produced, but no one buys.
4 The right balance
Neither too much, nor too little.
The right measure
Too little saving leaves households without a cushion and dependent on credit. Too much saving, especially when forced by the absence of social protection, smothers consumption and unbalances an entire economy. The right level therefore depends as much on the strength of the social safety net as on individual preferences.
5 Takeaways
To remember.
✓
The savings rate is the share of income not consumed.
✓
It depends above all on precaution, demography and confidence.
✓
Useful because it finances investment, but harmful in excess: it drains demand.
This notion illuminates these analyses