US Households Burn Through Pandemic Savings; High Inflation Saps Spending Power

American citizens are burning through savings accumulated during the COVID-19 pandemic, signaling a rough time for the economy. (Mark Lennihan/AP Photo)

The savings cushion that many Americans built up during the COVID-19 pandemic is dwindling as people struggle with decades-high inflation while the overall savings rate has dropped below pre-pandemic levels, to its lowest in almost 15 years.

U.S. citizens have burned through 35 percent of the funds they had accumulated through curtailed spending and large-scale government aid during the pandemic, and that number could climb to 65 percent by the year’s end, according to estimates by Goldman Sachs.

“At the exact same moment you lost the government transfer payments, you got hit with very high inflation, which made your real spending power lower,” said David Mericle, Goldman Sachs’s chief U.S. economist, according to The Wall Street Journal.

In January 2020, the personal saving rate of U.S. citizens was 9.1 percent, according to data from the Federal Reserve Bank of St. Louis; that spiked to 33.8 percent in April 2020 during the COVID-19 breakout. The rate declined to 13.8 percent by year-end, only to jump to 26.3 percent in March 2021.

But since then, it has largely been a one-way decline with no major increase.

By December 2022, the personal saving rate was only at 3.4 percent, which is considerably lower than the 9.1 percent savings rate in January 2020. The last time the personal savings rate was lower occurred in April 2008.

By the end of 2021, U.S. households had accumulated an extra $2.7 trillion in savings, according to Moody’s Analytics. But that’s rapidly being depleted.

Inflation and Savings

Inflation is cited as a major reason for the depletion. After the pandemic relief measures began to unwind, prices began to soar, which forced people to dip into their savings.

In January 2020, the 12-month Consumer Price Index (CPI), a measure of annual inflation, was only at 2.5 percent. This fell to 0.1 percent in May 2020 and then went on an upsurge. While inflation peaked at 9.1 percent in June 2022, it remains at an elevated level of 6.5 percent as of December 2022.

Lower-income Americans are said to be the most affected by depleting savings. An analysis by Bank of America showed that among its customers with a household income of less than $50,000 per year, the median balance in both savings and checking accounts peaked in April 2021.

By November 2022, the median balance had fallen 36 percent among this demographic. Among households making $100,000 to $150,000 a year, the decline was 14 percent.

2023 Situation, Retirement Withdrawals

The Federal Reserve has been trying to control inflation by raising interest rates multiple times since last year. That makes borrowing much more expensive, which eventually makes people spend less, resulting in slowing growth in prices.

However, a cooling-down of the economy could lead businesses to hire fewer workers or to idle existing employees, resulting in an upsurge in unemployment. That can lead to lower spending and a further reduction in savings.

Plus, some Americans might get nervous about job security and decide to reduce spending.

Meanwhile, the high inflation rate has not only weighed on bank savings but also forced many Americans to dig into their retirement plans.

“A record 2.8 percent of the five million people in 401(k) plans run by Vanguard tapped their retirement savings in 2022 to cope with hardships such as medical bills, eviction, or foreclosure,” Fiona Greig, global head of investor research and policy at Vanguard, said in a LinkedIn post on Feb. 3. “That is up from 2.1 percent in 2021 and a pre-pandemic average of about 2 percent.”

A similar rise in withdrawals from 401(k) accounts was also seen among the users of the federal government’s Thrift Savings Plan, as well as customers of financial services firm Fidelity.