Our fragile, but optimistic consumers

As a recent Federal Reserve survey indicates, the lack of financial reserves of many households in the U.S. is distressing. Twenty-four percent of families reported financial distress within the last year. Only 54 percent could completely handle an emergency costing $400 or more. For families having household income of less than $40,000, only 31 percent could come up with $400 needed for an emergency. Astoundingly, 27 percent of those with income above $100,000 did not feel they could come up with the $400. The lack of financial resources of black families is apparent in the survey. For black families with income under $40,000, only 18 percent could come up with the money, while 43 percent of black families with income above $100,000 did not think they could pay for the $400 emergency.

The inability to save makes it unlikely to see a near-term improvement in the dismal statistics cited above. Thirty-seven percent of those surveyed spent all of their income, while another 20 percent spent more than their income. It is perhaps not surprising that only 28 percent of households with under $40,000 of income saved something. But only 54 percent of households with more than $100,000 were able to save.

The inability to save also affects retirement plans. Slightly more than 21 percent plan on completely stopping work after retirement age. Almost 27 percent plan to work as long as possible. The remaining 42 percent contemplate some combination of part-time work or self-employment after retirement.

The plan of many to continue working seems practical, given that retirement savings are in many cases pitifully low. Nationwide, the National Institute for Retirement Security estimates the retirement savings deficit is between $6.8 and $14 trillion dollars. They estimate the median retirement account balance for those near retirement to be only $12,000. Average account balances are somewhat higher due to affluent savers. The BlackRock Global Investor Pulse Survey estimates that the average retirement account balance is about $58,000, in any case woefully inadequate for retirement needs.

Many families lack the ability to pay for health costs. In the Federal Reserve survey, 31 percent of families reported doing without some form of health care due to the inability to pay for the treatment. The percentage jumps to 42 percent for those with household income under $40,000.

Sixty-one percent of those surveyed owned homes. Another indication of the financial fragility of the consumers, of those who wanted to own, 50 percent could not afford the down payment. Given that a 10 percent down payment on a median-priced home in the U.S. ($189,000 at the end of 2014) would only be $18,900, this provides more information about the lack of financial resources for many households.

How to get consumers to save more and become more financially secure? The federal government provides a modest tax savers credit. Expanding the credit could help. The earned income credit, though plagued with fraud, nonetheless provides an income boost to low-skilled workers. Expanding it would put more money in the hands of those who most need to save.

Factory workers who retired in the 1960s and 1970s had generous employer pensions. Those are now mostly gone; 401ks have largely supplanted the traditional defined benefit pensions. Thus, the need to encourage savings is even more critical than it was for workers' parents and grandparents.

Even given these statistics, consumers are surprisingly optimistic about their future. Apparently hope does 'spring eternal ...”

' Gary L. Maydew is a retired Iowa State University accounting professor. Comments: glmaydew@hotmail.com