Spendthrift nation

A penny earned was more than a penny spent by Americans last year, as the U.S. personal savings rate dropped into negative territory for the first time since the Great Depression.

The Commerce Department reported last week that the 2005 savings rate was minus 0.5 percent, meaning that Americans last year spent all of their after-tax income and then dipped into savings to spend even more. December was an especially profligate month, as consumer spending increased 0.9 percent while incomes rose less than half as fast, at 0.4 percent.

The savings rate has been falling steadily in recent years, but it had not gone negative for a full year since 1933. Back then Americans didn't save because they were poor. Americans today aren't saving because they are rich, or at least because they feel rich.

A booming housing market has created what some economists call "the wealth effect": Americans spend more than they earn because the rising value of their homes makes them feel like they do not need to save. Many even take out home equity loans to support their spending habits, in effect "using their homes as ATM machines," as investment strategist David C. Reilly described it in the Baltimore Sun.

These borrowers depend on a strong housing market to keep their heads above water, but the recent double-digit annual increases in housing prices may be a thing of the past. Some ominous signs: The National Association of Realtors reports that existing home sales in December were down 5.7 percent, the third straight monthly decline. Construction of new homes and apartments, meanwhile, fell 8.9 percent in December, according to the Commerce Department. "I'm afraid the home equity fountain of youth is going to dry up,' Wells Fargo economist Scott Anderson told the San Francisco Chronicle.

The other concern is that today's big-spending baby boomers may not be thinking ahead. With corporate pensions on the decline, and Social Security and Medicare facing a debilitating crisis in coming decades, boomers may have to rely more on personal savings in very old age than past generations did.

The idea that immediate consumption is the only purpose for income is as new as it is deeply ingrained. For many Americans today, saving 10.8 percent of personal income would seem impossible. But that was the U.S. personal savings rate in 1984, a time when real per capita income was about 25 percent lower than it is today. Americans made less money but were able to save more.

Throughout the 1960s, '70s, and '80s, savings rates rarely dipped below 7 percent and often reached into double digits. But a sea change in attitudes toward money began to appear in the 1990s. The personal savings rate fell to 4.8 percent in 1994 and to 1.8 percent in 2004, before turning negative last year.

"Americans seem to have the feeling that it is wimpish to save," David Wyss, chief economist at Standard & Poor's, told the Associated Press. "The idea is to put away money for old age and we are just not doing that."