It's no secret that among the world's wealthy nations, America has one of the worst personal savings rates. Americans Trail of much of the World in Savings ,we see that China savings rate is at 51 % compared to the United States of 10%, that is freighting for a major financial superpower to be in the same status as Greece and Swaziland.
"We've borrowed a lot, maybe more than we should," says Erik Hurst, an economics professor at the University of Chicago's Booth School of Business. Measuring the national savings rate as a percentage of GDP, the U.S. comes up well short, at 10 percent savings rate as one of metric used by world bank.FRBSF Economic Letter
Figure 4 shows that the U.S. personal saving rate has recently started to increase following a decades-long decline that bottomed out near zero in 2005. As described in Lansing (2005), the secular decline in the saving rate appears to have been driven, at least in part, by long-lived bull markets in stocks and housing. The recent price declines in these markets might therefore initiate a sustained rebound in the saving rate over time.A simple model of household debt dynamics can be used to project the path of the saving rate that is needed to push the debt-to-income ratio down to 100% over the next 10 years--a Japan-style deleveraging. Assuming an effective nominal interest rate on existing household debt of 7%, a future nominal growth rate of disposable income of 5%, and that 80% of future saving is used for debt repayment, the household saving rate would need to rise from around 4% currently to 10% by the end of 2018. A rise in the saving rate of this magnitude would subtract about three-fourths of a percentage point from annual consumption growth each year, relative to a baseline scenario in which the saving rate did not change. An even larger subtraction from consumption growth would occur relative to a baseline in which the saving rate were declining, as occurred prior to 2005. In either case, the subtraction from consumption growth would act as a near-term drag on overall economic activity, slowing the pace of recovery from recession.
Reuven Glick Group Vice President ; Kevin J. Lansing Senior Economist
Prize-Linked Savings
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States that allow financial institutions to offer prize-linked savings programs, 2012.
Prize-linked savings (PLS) programs give savings accountholders the opportunity to win prizes when they make deposits. In these programs, financial institutions offer consumers a savings product with a low minimum balance requirement; accountholders make monthly deposits, which qualify them for monthly and/or annual drawings. The possibility of a prize encourages greater savings. Unlike gambling, however, no one loses from participation in a PLS program. Prize-linked savings programs focus on the entertainment value and fun of winning prizes, but without risking any principle and with the knowledge that one is building an asset. Not everyone “wins” one of the prizes, but everyone comes out ahead with increased savings.
To enable PLS programs, states need to ensure that banking and gaming regulations do not prevent financial institutions from holding private lotteries. In some states, laws already allow savings promotions.
Prize linked Savings bill
The bill will allow financial institutions to participate in prize-linked savings promotions, which incent consumer savings by entering participants into drawings for cash prizes.
"This is an important piece of legislation for American consumers," said NWCUA CEO John Annaloro. "Credit unions exist to promote savings and the wise use of credit, and prize-linked savings are another way of achieving that goal."
A great deal of lobbying and education was required to pass this bill as legislators were concerned these savings competitions could open the door to gambling. Staff testified four times, held countless meetings, and worked with the legislation's sponsors to ensure that potential issues were resolved.
"Traditionally, one of our core missions within the credit union movement has been focused on increasing consumer savings," said SVP Stacy Augustine. "We have seen great results from the Michigan pilot program, which resulted in first-time savings plans for 55 percent of participants. Of participants, 44 percent had household incomes of less than $40,000."
Example: Prize-Linked Savings
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One example of a stroke-of-a-pen policy that has gained a lot of attention recently is prize-linked savings.
Prize-linked savings (PLS) programs give savings accountholders the opportunity to win prizes when they make deposits. In these programs, financial institutions offer consumers a savings product with a low minimum balance requirement; accountholders make monthly deposits, which qualify them for monthly and/or annual drawings. The possibility of a prize encourages greater savings. Unlike gambling, however, no one loses from participation in a PLS program. Prize-linked savings programs focus on the entertainment value and fun of winning prizes, but without risking any principle and with the knowledge that one is building an asset. Not everyone “wins” one of the prizes, but everyone comes out ahead with increased savings.
To make PLS programs possible, states need to ensure that banking and gaming regulations don’t prevent financial institutions from holding private lotteries. Ten states currently allow financial institutions to offer PLS programs. Four others – Arkansas, Iowa, Mississippi and New Mexico -- introduced legislation in 2011. This is definitely one stroke-of-a-pen idea to watch!
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