Many of Us Are Living Paycheck to Paycheck. That’s Bad for the Economy.

The number of people living on the edge has an immediate impact on household well-being, but it also incurs long-term economic costs, such as higher debt levels and uneven retirement preparedness. . These trends could also slow overall economic growth.

Unsurprisingly, people with lower incomes are more likely to struggle, but even those who are perceived to be well-off are susceptible to salary shocks. According to the survey, about 78% of Americans earning less than $50,000 a year say they are living within their paychecks. But 51% of Americans with annual incomes of $100,000 or more say they still don’t have enough money.

Fiona Greig, Vanguard’s global head of investor research and policy, says living paycheck to paycheck is a fairly “ubiquitous” situation. That’s because U.S. adults generally tend to need a larger cash buffer than expected. Additionally, many consumers face a higher cost of living as inflation reduces their purchasing power, she says.

The latest Harris Survey data shows the percentage of Americans living paycheck to paycheck is higher than the roughly 60% reported in August. Reality check: Paycheck to paycheck Research series. This difference is likely due to differences in the study population and rising energy costs, which have hit consumer budgets in recent weeks. Gasoline prices nationally averaged $3.83 per gallon at the end of September, 2 cents higher than in August and 7 cents higher than a year ago. According to AAA.

Data from the Reality Check series has fluctuated since the start of the coronavirus pandemic. About 66% of people surveyed in March 2020 said they were using up their paychecks. About 52% of Americans were in such a predicament in April 2021, just after the most generous federal stimulus package went into effect. The latest share is 60%, almost unchanged from last year.

Generous government stimulus measures have boosted consumer savings during the coronavirus pandemic, but spending has declined.of Estimates from the Federal Bank of San Francisco Americans have accumulated a total of $2.1 trillion in excess savings during the pandemic. The bank estimates that as of June, only about $190 billion remained on consumers’ balance sheets. Researchers expect data to show that excess savings have completely disappeared by the end of September.

Overall inflation also suffered, reducing Americans’ purchasing power. Headline inflation, as measured by the Consumer Price Index, has fallen from a high of 9% hit in June 2022, but prices in September rose at an annualized pace of 3.7%, the Federal Reserve’s goal. This far exceeded the 2% target.

Even as Americans withdraw their savings, their coffers are not refilled. The personal savings rate (personal disposable income as a percentage of gross income) in the United States is 3.9% in August, according to the Bureau of Economic Analysis. Although this is 0.7 percentage points higher than a year ago when inflation was high, interest rates are now well below the pre-pandemic average.

The decline in savings suggests Americans are relying more on credit now than during the pandemic, and the data bears that out. Total credit card debt in the United States hit a record high of $1.03 trillion in the second quarter, according to the New York Fed.

Lower savings rates and higher borrowing levels will have long-term implications for many Americans. vanguard research This shows that despite the influx of cash during the pandemic, the majority of Americans are not on track to meet their retirement spending needs, including Social Security income and personal savings. This is the latter number. This problem is especially acute for low-income households.

Vanguard reports that Social Security benefits will replace about 62% of the retirement income for households earning about $22,000 a year after they quit their jobs. But even high-income Americans rely on Social Security. According to Vanguard, households earning about $173,000 a year receive about 18% of their retirement income from Social Security.

Although Social Security is protected from inflation, cost-of-living adjustments affect the amount of benefit payments and, therefore, the program’s projected long-term solvency. Social Security benefits are scheduled to increase by 3.2% in 2024, an average increase of $1,790 per month by $57.

The high percentage of economically vulnerable Americans, whether working or retired, raises broader issues. Personal consumption accounts for approximately 70% of the US economy. If Americans cut back on household spending because they have to pay interest on credit cards and loans or don’t have enough savings for retirement, it could hurt the country’s growth.

So far, most Americans have continued to pay down their debts while continuing to spend. As of the second quarter, overall delinquencies are largely under control.

Buoyed by a strong labor market, the U.S. economy added 336,000 jobs in September, much more than expected. Still, the imbalance between labor supply and demand continues to narrow, Fed Vice Chairman Philip Jefferson said in a speech last Monday.

“We’re at a kind of tipping point in the economy,” Greig says, noting that this could be a tipping point for consumers.

Contact Megan Leonhardt at megan.leonhardt@barrons.com.