The Debate over Negative Returns on Savings

Our newly released report on thrift in the United States has gotten some good play in the media but has also sparked internal and external debate, domestically and internationally, on the importance of savings and thrift relative to credit and consumption. The report advocates a culture of thrift and a renewed focus on savings (as opposed to our current focus on credit and culture of indebtedness). As a team, the Asset Building program promotes these goals and others heavily in our domestic work as well as internationally through the Global Assets Project.

In recent weeks we’ve received a lot of feedback (from within our organization and among practitioners and policymakers in microfinance and related fields) wondering if, in a time of higher inflation, we’re advocating irrational behavior among our target populations. For instance, Sherle Schwenninger, the director of the Global Economic Growth program here at New America, challenged the asset building team’s focus on pushing people to save when typical interest rates on savings accounts are lower than the rate of inflation. That basically means that people are losing money on their savings, instead of gaining interest over the long run on their deferred consumption. On popular microfinance listservs like MicroFinancePractice and DevFinance, the report sparked similar debates over encouraging thrift in developing or emerging economies, which are typically less stable than advanced economies. In India, many savers are earning 1% interest or less on their savings in an 8% inflation climate. In Zimbabwe’s hyper-inflation, money not used today is tomorrow’s fire kindling. But that is an extreme example. Essentially, the argument is that, in the absence of better products, we are irrationally encouraging people to save up, but to nothing.

Or so it seems, if you don’t look at the bigger picture:

• Yes, the poor, low and moderate income populations, particularly those traditionally excluded from low-cost, appropriate and mainstream financial services do indeed need and deserve access to more attractive savings and investment options, one’s that do not deteriorate their financial assets, but protect and build them.
• However, in the U.S. but most especially in many parts of the developing world, the poor lack access to a safe place to put away their savings in the first place. Experience in the micro-savings field has shown that the poor are quite often willing to pay a fee to have someone or some institution safely hold their savings, as it’s a much safer prospect than stashing the money under the mattress. They are much less concerned with making a return on their savings than the prospect of loss or mismanagement that comes with not having it safely locked away until needed. Where these options don’t exist, you face a potentially tumultuous and threatening environment where even small lump sums are not safe. This isn’t just a problem in the developing world. Here in the United States, unbanked Latino immigrants are increasingly targeted for robbery, as because of their undocumented status, they are often paid in cash and lack access to a bank account to store their money.
• And for those among this population who do have access to basic savings products, the fact of the matter is that the vast majority are not saving with the intent to make a return on those savings. They need lump sums to pay for certain expenditures like marriage, education, property and even funerals; they need a nest egg to protect them against economic and environmental shocks to which they are disproportionately more vulnerable.

Losing money on savings is very much a bad thing and seems an irrational choice. But then again we must consider all the options from which certain populations get to choose. I mentioned negative return on savings in India, a sad case that turns ever sadder when considering that over 50% of India’s population has absolutely no access to formal savings products in the first place, something the government in India is aggressively trying to change.

While designing and offering short and medium-term higher-yield savings products for the poor and underserved around the world is important work and an ultimate goal, it will be of little value until we 1) can provide effective access to banking services and 2) increase understanding of the value of savings and thrift for long-term financial growth and asset building for those populations who have for too-long gone underserved and excluded.

I’m glad that this new report on thrift is forcing us to acknowledge these realities and to think more deeply on how to get people not only into, but benefiting from, formal financial systems.