An Explanation of the Behavior of Personal Savings in the United States in Recent Years
A sharp increase in the real interest rates in the U.S. in the 1980s was
expected to induce a higher personal saving rate. Actually, between 1981 and
1983 the personal saving rate fell from 7.5 percent to 5.4 percent and for the
1985-1988 period it had averaged only 4 percent even though real interest rates
have remained high. We argue that one possible explanation for this negative
relation between interest rates and the personal saving rate is the large
fraction of wealth, especially financial wealth, held by persons over 65 years
old (this group has received more than 50 percent of all interest income in the
U.S. during this period). Life cycle theory suggests, as we demonstrate, that
the wealth effect created by an increase in the rate of interest reduces the
savings of old persons and raises savings of the young and hence the effect on
aggregate savings depends on the age distribution in the population.
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