Americans' savings rate down

The savings rate of American citizens is at its lowest point since the Great Depression.

The Commerce Department says it dropped last year to a negative .5 percent. That means people not only spent all of their after-tax income last year, but had to dip into previous savings or increase their borrowing (go into debt).

According to the Associated Press, the savings rate by U. S. citizens has been negative for an entire year only twice before, in 1932 and 1933. Those were two years when Americans were depleting savings to cope with massive job layoffs and business failures caused by the Great Depression.

Now the reasons are different. Americans seem to be spending more because they feel wealthier because of the soaring value of their homes, which for many, is the largest investment they own.

Analysts caution that this is risky at a time when 78 million Americans are on the verge of retirement. Baby Boomers start turning 60 this year, which means they can start retiring with Social Security in just two more years.

The savings rate stood at 10.8 percent in l984 and has been declining steadily since that time. The year-end tally for 2004 was 1.8 percent.

Sales of existing and new homes are expected to decline this year, under the impact of rising mortgage rates. Weaker sales will translate into slower price appreciation, which, in turn, will slow consumer spending. The slowdown in spending should help the savings rate rise back into positive territory. However, baby boomers will start tapping into their savings to pay for medical bills and other consumption.