At the beginning of the year, Washington lawmakers imposed a two percent payroll tax hike on wages earned up to $113,700 as part of the fiscal cliff deal. It was believed at the time that many Americans would be expected to save less, possibly cut their budgets and even take on new debt.
The New York Federal Reserve released a new study Wednesday which looked at how the payroll tax increase has affected Americans. The survey found that 79 percent of workers will cut their spending because the average household earning $50,000 annually is losing $1,000 this year. In total, yearly spending will be slashed by $720.
What might be the most interesting and important aspect of the data is that 20 percent of Americans are cutting their savings by approximately $380 for the average household. Another two percent of American workers will be increasing their debt loads.
Although the year is only halfway over, the New York Fed noted that its studies are usually correct and the projections are carried out by consumers. This means that the tax hikes will reduce consumer spending, create a slowdown in the economy and a decline in necessary debt payments.
Experts will most likely see the paucity of consumer spending as a hindrance to economic growth. However, since savings and investments create an exuberant economy, this could be terrible news for the long-term growth of the United States economy.
The average American has been cutting their savings quite frequently, whether it’s in good times or bad times. Late last year, the Commerce Department found that American spending jumped, while savings were cut in order to spend more money. Last month, the Bureau of Economic Analysis noted how spending increased, but the savings rate still remained low at 2.6 percent.
In fact, Americans are generally not savers. The highest savings rate in the U.S. was at 12 percent throughout the 1970s and 1980s.
With households spending beyond their means, maintaining enormous debt levels, refraining from cutting budgets and lacking any real savings, it could prove trouble in the future, at least according to various financial experts. Whether it’s for saving for a rainy day, an emergency, a retirement nest egg or for the short-term, Americans and even Canadians are being urged to save more.
“The majority of Americans are woefully under-saved for both emergencies and retirement and they know it,” said Greg McBride, a senior financial analyst at Bankrate.com, a personal-finance research and publishing company, in an interview with the Wall Street Journal. “Only one in four Americans has an adequate savings account to cover six months of expenses.”
But with the Fed suppressing interest rates and not providing savers with enough returns, can the average American be blamed? If someone saves $1,000 and gains 84 cents a year in interest, but then that $1,000 is worth $800 two years later, why would someone save money? Argentines are purchasing expensive vehicles because they fear their savings and investments will become virtually worthless due to the high inflation rates.
Take a look at the infographic below.