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Why Do Americans Have Such High Incomes and So Little Savings?

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08/26/2016

Americans have more disposable income than nearly every other country on earth. The few exceptions include a handful of northern Western European states and some small city states like Monaco.

Even when accounting for government benefits and taxes, Americans still have more income available to spend than almost anyone else.

As this measure from the OECD shows, the US has a median disposable income at $29,100, behind Luxembourg, Norway, and Switzerland. It's well ahead of large European states like Germany and France, which show a median disposable income levels of $24,200 and $23,300, respectively.

This graphic is taken straight from the OECD's 2014 "Society at a Glance" report:

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These calculations take into account taxes and social benefits. So, with so much income, why are we still hearing about how Americans are working more hours and taking fewer vacations than Europeans? Americans retire later, too. 

Why not just work less and settle for the admittedly-lower — but well above subsistence — standard of living experienced in most of Europe? 

There are cultural reasons behind working more, of course, but one reason that Americans work more and longer is that Americans really like to spend money. And lots of it.

As a result, Americans don't accumulate as much in terms of measurable wealth. They have high incomes, but that's not the same thing as accumulating wealth.

Looking at Credit Suisse's report on median wealth per adult, we find the US to be rather near the bottom when compared to other rich countries:

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The US lies between Denmark and Germany, but well below numerous other Western European countries including Switzerland, Canada, and Norway.

By another measure put out by the OECD, the US still rivals Germany, and is ahead of the Netherlands in this case. Nevertheless, the US leans toward the bottom of the list.1

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In both cases the US is similar to Germany — one of the largest and wealthiest states in Europe — but given its high income, Americans should have wealth that's similar to the countries that report the highest amounts of wealth. 

Now, obviously, some of the divergence results from the way the data is counted. Australia, for example, has a mandatory savings program, which apparently is included in the wealth statistics. There are other factors too, such as the fact that many European countries tend to have higher home ownership rates than the United States, and real estate values are included in wealth calculations. When asset inflation in underway — as it is right now — countries with higher home ownership rates will appear wealthier. 

Meanwhile, many leftists often claim — in kneejerk fashion — that Europeans accumulate more wealth than Americans simply because Americans must spend all their money on health care or other amenities supposedly provided in a more economical fashion by the European welfare states. First of all, it's a myth that the United States spends less on taxpayer funded social benefits than other Western welfare states. (See here, here, and here.) Secondly, even if the US were some kind of haven for free-marketeers, we'd still be left wondering why Germany, the Netherlands, Spain, and Denmark are all similar to the US in terms of wealth, depending on the measure used. 

There must be something else at work. 

What Americans Spend their Money On

One significant factor in the lack of accumulated wealth in the United States is the habit of consumer spending that permeates the culture. Americans like large houses and many furnishings to put in them. Americans like big cars, and they even seem to like more health care than others. Even relatively low-income groups — according to this study — choose to engage in conspicuous consumption. 

Ultimately, spending habits like these will take a bite out of the wealth statistics. 

Credit Cards 

One culprit in this lack of wealth accumulation is the fact that Americans, by far, take on more credit card debt that everyone else. The more credit card debt you hold, the lower will your net wealth be. 

The Atlantic recently compared the US to others on credit card debt, and the distinctions are pretty clear: 

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Nearly 40 percent of US households have credit-card debt while under two percent of Italians are in the same position. In 2012, the AP reported on "Germany's long-standing fear of debt" and noted the aversion to consumer debt in more than one European country. 

Moving Out Early and Buying a University Education

A second reason Americans have less wealth is young people in other countries live with their parents longer and begin saving earlier.

In an earlier article, I discussed how living at home is far more common in Europe than in North America for people in their twenties. 

In fact, Among European countries with high levels of wealth, living at home is especially popular, with 92 percent of Italians age 18-25 living at home, and 80 percent of Swiss young people in the same group. In the United States, the total is 55 percent2:

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And what are those young people doing while they're living at greatly reduced rents under their parents own roof? The data suggests that many of them are saving money. According to this report from the National Bureau of Economic Research, Americans under age 30 save at negative rates, while Germans, Italians, and Brits save at much higher rates: 

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In fact, among the countries profiled here, Americans don't begin to catch up with savings rates until they're 45 years old, which is especially unfortunate since saving earlier in life can bring greater benefits later.

Some may claim that young people outside the United States are able to save more because higher education in many European countries is moe heavily subsidized than in the US. US higher education is highly subsidized, of course, but not to the degree as in many other countries. 

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Part of the divergence in spending here, though, stems not from the fact that out-of-pocket college costs are higher in the US, but that more Americans simply choose to attend college rather than earn wages in their late teens and early twenties.In general, more Americans attend college than is the case in other wealthy countries, as shown in this World Bank data:

OECD data also shows that higher education in general is less common outside the US. When measuring the adult population that has attained a higher-education degree, the US is near the top suggesting that American students attend college in higher numbers and also stay there longer (France was not included by the OECD in this data): 

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What all these means is that while many Germans and Italians are staying home from college, living at home, and even saving money, Americans are away at higher education institutions, foregoing earnings,and paying rent on housing.

Moreover, Americans will pay larger amounts to attend private, expensive liberal arts colleges, even when far-more-moderately-priced (and more heavily subsidized) public colleges are abundantly available. 

Many Americans impose on themselves high costs in terms of foregone wages and expensive private schools in order to have the "college experience" even when the enrollment data shows that high levels of higher education are not necessary for a highly productive economy. The effects of debt are magnified when American students take out loans to obtain degrees in "women's studies" programs and other areas that are unlikely to help the student pay off loans or find employment. 

Bigger Cars 

Americans also like to have bigger cars. They even take out large loans to purchase them — an activity which further drives down the net worth of Americans. Americans will then spend years paying off those loans. 

It's true that some of the attraction to large cars is encouraged by government regulation. But much of it just comes from the fact that small, economical cars (like the Ford Escort in days past) are not popular in the modern United States, especially when easy-money policies mean auto loans can be had at very low interest rates. So, US auto makers focus on making cars that are popular like large SUVs.

Many leftists like to claim that Americans must spend large amounts on automobiles because of less availability of public transportation. However, a family does not need a large pick-up truck or SUV to drive to work or school. That sort of transportation can be provided by a relatively inexpensive economy-size car with high gas-mileage. As the Boston Globe has reported, "[W]hile lots of larger pickup trucks are owned by consumers who need them for work, including contractors, there are just as many who use the larger vehicles to transport their families."

Bigger Houses 

Americans often take on more debt to buy housing compared to those outside the US. Among those European countries with higher wealth levels, including Italy, Spain, and the UK, the mortgage debt levels are considerably lower than in the US. 

According to the European Mortgage Federation, mortgage debt per capita in the US equals 25,000 euros, while it is more than 10,000 euros lower in Germany, Spain, and France.3

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While it is true that home value is calculated into overall net worth in the measures of wealth used above, the net wealth gained from owning a home depends on the amount of debt still owed on the property. In the US, thanks to a plethora of government programs that reward home buying and increase the opportunity cost of renting, overall debt levels for homes are higher. 

Meanwhile, in spite of the fact that American families are getting smaller and smaller, new housing just keeps getting bigger in the US. When compared to the size of new housing in other countries, we find the US leads by a considerable margin everywhere except Canada and Australia. 

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According to the BBC, average floor space of new homes in the United States is more than twice the size of what it is in Spain, and nearly twice the size of new French homes. Homes in the UK are among the smallest, with American new homes coming in at more than two-and-half times the size of new UK houses:

While American households tend to be slightly larger that European ones, the overall floor space per person remains larger in the US than everywhere else but Australia. 

Health Care 

Leftists also often like to blame an alleged lack of government spending on health care for the reason Americans save so little money. 

If it is true that Americans spend "too much" on health care, it's not for any lack of government spending. In fact, government spending on health care — measured as spending per capita — is higher in the US than in every other country except Norway, Luxembourg,and the Netherlands:

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Government spending on healthcare as a percentage of GDP is also higher in the United States than it is in Switzerland, Canada, Italy, and numerous other Western welfare states. 

In spite of this, though, Americans also spend large amounts of private funds on health care. And, thanks to continued increases in health care regulation brought on by Obamacare, health care premiums will continue to increase. In June the Associated Press reported: "Premiums for popular low-cost medical plans under the federal health care law are expected to go up an average of 11 percent next year...'Premiums are going up faster in 2017 than they have in past years,' said Cynthia Cox, lead author of the analysis."

Essentially, Americans pay twice for health care. They pay once through taxation and regulation which increases subsidies. The subsidies in turn raise prices, just as subsidies always do (ceteris paribus). And then, Americans pay a second time when the time comes to pay those subsidy-inflated prices out of pocket. 

In practice, however, few young people are spending much on health care. Much of the higher cost we see in the aggregate numbers is really due to a relatively small number of patients.

Specifically, studies have shown that 28 percent of Medicare spending is spent on costly end-of-life care for only 5 percent of patients. Medicare spending , as noted bty TIME, also translates into private-sector spending:

A recent Mount Sinai School of Medicine study found that out-of-pocket expenses for Medicare recipients during the five years before their death averaged about $39,000 for individuals, $51,000 for couples, and up to $66,000 for people with long-term illnesses like Alzheimer’s.

The fact is, as grim as it sounds, even health care spending illustrates the American penchant for spending on "extras." 

That is, an immense amount of health care spending — both public and private — is going to treatments that would have been considered either futile, impractical, or lavish in other times and in other settings. That is, Americans are spending on "aggressive care" and on much higher numbers of patients — compared to European nations — spent in intensive care units in the last six months of life. 

Moreover, as noted in this article, Americans are more enthusiastic about spending a lot on health care: 

In the 2000s the creation of smart drugs such as Avastin-which acts in a novel way to choke off the blood supply to cancerous tumors-extends the lifespan of some cancer patients for only two months at a cost of about $55,000 for a year. Still, oncologists say that it improves a patient’s quality of life more than other drugs.

As Americans our inclination is to give Avastin to everyone that it might help – an attitude that fits into our heroic-techno-medicine ethos, but also has contributed to the U.S. spending two to three times as much per capita as Britain, Canada, Japan and most other industrialized countries in the Organization of Economic Cooperation.

Europeans long ago noticed the lopsided costs of certain costly types of health care. To address the high costs, those welfare states limit and ration care. When health care is subsidized, the only way to limit costs is to limit care. And, from a pure cost-control point of view, it works.

The downside, of course, is that it takes choice and freedom away from consumers and denies them even the option of spending an extra $50,000 on a procedure that might extend one's life another few months. 

Americans have demonstrated they are more than willing to spend tens of thousands of extra dollars on these procedures. Thus, as Americans spend down their savings for these procedures, the statistics reflect their diminished wealth. This isn't to say that patients should not have the option of spending these larger amounts. It's just important to note that the extra spending leads to lower net wealth levels. 

Would Europeans spend more on these procedures if they had the option? Perhaps. But, in many cases, they simply don't have the choice or the means. 

So, even in health care, Americans like to go that extra mile in spending. They want to live that extra six months with a new hip, just as they want to drive that big car or live in that big house. 

The statistics on wealth reflect all of this. 

Americans "Can't Afford" To Save Money? 

It is common for advocates of greater government intervention to claim that Americans don't save more because they "can't afford to." This is no doubt true in some cases, but Americans at all income levels have long demonstrated a significant fondness for spending money on non-essential consumer products such as nicer houses, bigger cars, and branded college educations. 

Saying that people can't afford to save in 21st century America is nothing less than a cop-out as even Derek Thompson at The Atlantic admits

But the poor can save more money, and it’s not offensive to suggest so. It’s clear that millions of lower-income people can collectively devote tens of billions of dollars to an investment vehicle that holds the promise of future wealth. They already do: The lottery is a $70 billion government-financing initiative disproportionately funded by the poor. This is politically vile, but it is also an indication that low-income people see lotteries as a kind of savings vehicle. Rather than put $200 per year away in a low-risk, low-reward savings account, some put $200 into high-risk, high-reward lottery tickets.

It is crude yet important to point out that if America’s middle-class and poor were cheaper with their money, they would be richer. 

But, in the end, even Thompson falls into the same old trap: Americans would save more if only the government spent more money on social programs. The problem is, the US is already comparable to Norway, New Zealand, and Canada in terms of social spending, while Americans still show little interest in saving. It could be that just maybe government can't solve all our problems after all.

Ryan McMaken is the editor of Mises Wire and The Austrian. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre. Contact: email; twitter.

  • 1. The OECD lists this data in local currency units, so I have converted it to dollars using the World Bank's PPP conversation factor found here
  • 2. The European data is from Eurostat. The US data is from the Census Bureau.
  • 3. The European Mortgage Federation presented the data in euros, and converting to dollars was unnecessary to make the comparison. The data provided by the EMF was in total "residential debt" for each country. I divided that amount by the population of each country to arrive at a per capita level. 

Ryan McMaken (@ryanmcmaken) is a senior editor at the Mises Institute. Send him your article submissions for Mises Wire and The Austrian, but read article guidelines first. Ryan has degrees in economics and political science from the University of Colorado, and was the economist for the Colorado Division of Housing from 2009 to 2014. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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