In 2022, Americans are going to be dipping into their savings as pandemic-related support from Congress and the Federal Reserve recedes.
As of November, workers were putting away less money from their wages into savings compared to what they were saving pre-pandemic. This spells the end of the higher levels of saving seen during the pandemic.
Into the future, the savings rate will shrink more slowly, noted Jason Furman, the former head of the US Council of Economic Advisors in the Obama Administration. Americans are set to eat up about $5 billion extra a month out of a $2.5 trillion in savings.
The US savings rate peaked in the summer of 2020 and with most pandemic-related government benefits ending in 2021, Americans will probably be “scraping the bottom of the barrel” of those excess savings by the summer of 2022, said James Galbraith, an economist at the University of Texas.
“There’s an urge to get back to normal and back to normal is a state of considerable fragility,” Galbraith said.
The savings rate has the potential to fall further if Americans get new access to debt or the debt they currently carry becomes more burdensome, although it should stabilize around the current rate, said Galbraith. When the Fed begins to raise rates, there will be a period where some consumers may take out new loans to cover existing loans that they are struggling to pay and see their savings rates dip further.
The majority of these excess savings are held by rich people, said Wendy Edelberg, a senior fellow in economic studies at the Brookings Institution.
“Lower income households look to have increased checking account balances by about $500 since pre-COVID,” Edelberg said. If they don’t have a job, “that won’t go far.”
Contrary to popular belief, dwindling savings won’t spur people to find more work, said Kate Bahn, interim chief economist at the Washington Center for Equitable Growth.
“There is mounting evidence that has shown precisely the opposite,” Bahn said. Savings and income support has shown to provide “workers with a type of foundation and stability to match into better jobs that pay more and that they’ll stay at longer.”