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Last week the Federal Reserve released a disturbing report (PDF) on the financial state of U.S. households. The report’s main findings, that Americans don’t save very much, weren’t that surprising. For the last few decades middle- and lower-middle-class families have been pinched by stagnant incomes and higher spending. But even the many members of the upper middle class are hardly saving. Low or no savings leaves them, and everyone else, in a risky position.
Just 45 percent of upper-middle-class households (income from $75,000 to $99,999) saved anything in 2012, according to the Fed study. That means the other 55 percent didn’t save for a house, retirement, or education. About 16 percent spent more than they earned and went further into debt. The report highlights the consequences of these hand-to-mouth habits: Only half of these households had enough savings to finance three months of living expenses if they lost their job or couldn’t work. A $400 emergency would force about 20 percent of them into months of debt.
The upper middle class may be less vulnerable than lower earners, because of their access to credit—or at least, they feel safer. Even though only half have saved enough to finance three months of unemployment, most higher earners (about 70 percent) feel confident they could get by if they borrowed, often with a credit card. Counting on debt may be fine for the occasional emergency. But it’s a lousy way to finance a long spell of unemployment or a major health-care disaster.
The low rate of saving and thin emergency cushion wouldn’t be so worrying if it were just a hangover from the Great Recession. Households normally cut back on saving when someone in their household loses their job or takes a pay cut. It can take several years to make it up. But the low-saving trend predates the recession. The chart below shows the percent of upper-middle-class nonsaving households over the last 20 years:
Even in the go-go mid-Aughts about 30 percent of upper-middle-class households didn’t save. In 2007, right before the recession, the median liquid savings of this group was only about $7,000. That’s not much of a financial cushion when you’re used to earning $90,000.
There are several reasons why higher-income households didn’t save in better times: The ample supply of credit, credit cards, and home equity loans diminished the incentive to save, and households may not have fully understood the risks they were taking. Until the recession, a long stretch of unemployment was rare; a three-month emergency fund may not have seemed necessary. There’s also evidence that the increase in home prices, which we now know were artificially inflated, made people feel richer and they spent more.
Low savings partly explains why the recession was so severe. It made households of all income levels more sensitive to economic setbacks. One way to read the Fed study is to assume many American households haven’t learned from our most recent history, and that may well be the case. It may also be true that, at least in expensive cities such as New York and San Francisco, upper-middle-class incomes aren’t as ample as they once were, and that’s another problem entirely.