What drives strong saving desire in the US?

The evidence shows that the top 1% of US income holders are the dominant source of savings demand.

It is overwhelmingly concentrated among the top echelons of income holders, particularly the top 1%, whose explosive income growth has fueled this surge in savings, which in turn stimulates the debt production that defines modern financial systems.

Introduction

The global economy has witnessed a paradoxical rise in both the accumulation of savings and the proliferation of debt since the 1980s, a combination that has heightened financial instability and precipitated crises. Understanding the dynamics behind this phenomenon is critical for policymakers and economists alike. This essay investigates the primary driver of this trend: a powerful and concentrated desire to save within the household sector. By moving beyond aggregate data and examining the distribution of savings and income across wealth percentiles, we will identify that the propensity to save is not uniform. Instead, it is overwhelmingly concentrated among the top echelons of wealth holders, particularly the top 1%, whose explosive income growth has fueled this surge in savings, which in turn stimulates the debt production that defines modern financial systems.

To save, an entity must have more financial assets than liabilities. For instance, an individual with $100 in deposits and $120 in loans has net savings of -$20 and net debt of $20. Net savings and net debt are inverse concepts.

Defining the Sectors: Excluding Financial Intermediaries

We begin with the debtor classification used in previous essays. The debtor sectors consisted of households, the financial sector, and the non-financial business sector. Although financial institutions are not the ultimate bearers of debt but rather intermediaries, they were included in the debtor analysis. As corporations, financial institutions are liable for their debts only to the extent of their own capital; in bankruptcy, claims cannot be made against shareholders' personal assets. This separate capital structure means financial institutions also possess their own leverage, which was crucial for our analysis of financial crisis potential (Mian & Sufi, 2018).

However, to identify who is actually saving, we must exclude financial institutions that merely intermediate between borrowers and creditors. The liabilities and assets on their balance sheets ultimately belong to the household and commercial sectors. Therefore, we focus our lens on the savers: households and the business sector. The business sector is further divided into two subcategories: corporate businesses and non-corporate businesses.

Measuring Net Savings Across Sectors

The Federal Reserve aggregates all holdings, including stocks, bonds, and debt instruments, under financial assets. To calculate the net savings of households, corporations, and other businesses, we use the standard definition of total financial assets minus total financial liabilities. This provides a comprehensive view of each sector's financial health and capacity to lend. As households and non-profit organizations are grouped together in the data, we will use this combined category for our household analysis (Board of Governors of the Federal Reserve System, 2023).

At the end of 2020, the net savings (financial assets minus liabilities) of households and non-profit organizations, corporations, and non-corporate businesses were approximately $104.3 trillion, $21.5 trillion, and $13.8 trillion, respectively. This data clearly shows that the household sector's net savings dwarf those of the business sectors. An examination of the growth rate of this measure reveals a pronounced upward acceleration in household net savings since 1980, unequivocally identifying households as the sector driving the strengthening desire to save (Board of Governors of the Federal Reserve System, 2023).

Strong Saving Desire Within the Wealthiest Households

To narrow our focus, we must ask which segments within the household sector are driving this strong savings demand. Dividing households into four wealth groups—the top 1%, the next 9%, the next 40%, and the bottom 50%—provides the answer. Although the data only extends back to July 1989, the chart is highly illustrative.

From 1989 to 2021, the change in the net savings of these wealth groups shows stark disparities. Net savings are calculated by subtracting liabilities from financial assets. Since all liabilities are financial, no further breakdown is needed. It is important to note that because we cannot separate equities from other financial assets, the net savings of each group will appear proportionally higher by the amount of equities they hold. However, given the vast differences between groups, the distribution of equities is unlikely to affect our core conclusions.

If the U.S. government were not a net dissaver (i.e., a net debtor), in a closed economy, private sector savings and debts would be equal. The bonds issued by the public sector increase the private sector's savings. Consequently, the net savings of the private sector are largely equivalent to the net debt of the public sector. This is why, in the chart, only the bottom 50% of the population by wealth show negative net savings.

The top 50% of the U.S. population by wealth have generated a net savings surplus. Within this group, the net savings of the top 1% and the next 9% approach $40 trillion. The net savings of the top 1% are equal to those of the next 9% (a group nine times larger) and approximately double those of the next 40% (a group forty times larger). Combined, the top 10% of wealth holders possess 82% of all U.S. household net savings. Furthermore, the growth rate of net savings for these two top groups has been higher than that of the next 40% (Saez & Zucman, 2020).

Within the top 10%, the growth rate of aggregate net savings for the top 1% is similar to that of the next 9%. This implies that on a per-capita basis, the top 1% saves nine times faster than the next 9%.

The Driver: Explosive Income Growth at the Top

We now have a clearer idea about the source of the strong desire to save: the top 10% of households are the primary source of savings demand, with the per-capita savings desire of the top 1% being nine times that of the next 9%. This leads to the crucial question: Why do the members of the top 1% want to save so much? The answer lies not in extreme frugality, but in income distribution.

Income distribution has followed a pattern similar to savings distribution. Since 1980, the income share of the top 1% has increased dramatically, while the shares of the bottom 50% and the next 40% have declined. Within the top 10%, the share of the top 1% has grown rapidly, while the share of the next 9% has seen a more moderate increase (Piketty et al., 2018).

To better observe the striking income growth of the top 1%, we examine average income by group, adjusting for inflation using 2019 prices. The resulting chart is revealing. From 1920 to 1980, the average annual post-tax income of the top 1% fluctuated around $250,000. After 1980, the income of the top 1% took flight, surpassing $1 million in the 2010s and remaining at that level.

The income of the top 1% increased approximately fourfold from 1980 to 2019 (Saez, 2021). As the highest-earning segment of the population also experienced this massive income explosion, the natural result was a dramatic acceleration in savings. This influx of capital was subsequently invested in debt instruments, fueling the cycle of debt production described initially.

Conclusion

In conclusion, the investigation into the source of the heightened desire to save since the 1980s reveals a story of extreme concentration. The analysis moves from the aggregate level—where households are the primary saving sector—down to the distributional level, where a profound disparity becomes apparent. The evidence conclusively shows that the top 1% of income holders are the dominant source of savings demand. This is not due to a uniquely frugal nature but is a direct consequence of their disproportionate and explosive income growth over the past four decades. Their vast, accumulating capital seeks returns, which fuels the creation of debt instruments for other sectors of the economy to borrow against. Therefore, the same inequality that characterizes modern income distribution is a fundamental driver of financial fragility, as the savings glut of the wealthy necessitates a corresponding rise in debt elsewhere, creating the leverage that makes the system prone to crisis. This intrinsic link between inequality, savings, and debt underscores the need for economic policies that address root causes of disparity to promote genuine financial stability.

References

Board of Governors of the Federal Reserve System. (2023, December). *Financial Accounts of the United States - Z.1*. https://www.federalreserve.gov/releases/z1/

Mian, A., & Sufi, A. (2018). House of debt: How they (and you) caused the Great Recession, and how we can prevent it from happening again. University of Chicago Press.

Piketty, T., Saez, E., & Zucman, G. (2018). Distributional national accounts: Methods and estimates for the United States. The Quarterly Journal of Economics, 133(2), 553–609. https://doi.org/10.1093/qje/qjx043

Saez, E. (2021). Striking it richer: The evolution of top incomes in the United States. University of California, Berkeley. https://eml.berkeley.edu/~saez/saez-UStopincomes-2021.pdf

Saez, E., & Zucman, G. (2020). The rise of income and wealth inequality in America: Evidence from distributional macroeconomic accounts. Journal of Economic Perspectives, 34(4), 3–26. https://doi.org/10.1257/jep.34.4.3