Household Savings Rate Plunges to Record Low

A small business owner earned a net 5.3 million won (3,810 U.S. dollars) last month excluding payroll and taxes. He will have less than 100,000 won (72 dollars) left after he pays private education tuition for his two daughters, insurance and other living expenses.

“I’ve hardly saved any money since I borrowed so much to buy my own home in late 2006,” he said.

As more people are hit by excessive debt and private education costs, several think tanks say the household savings rate will fall to a record low of under two percent.

Lee Bu-hyeong, head of the real economy department of Hyundai Research Institute, said, “Korea’s savings rate is estimated to have fallen under two percent last year due to weak employment, snowballing household debt, inflation and high interest rates.”

○ World’s lowest savings rate

After reaching 23.2 percent in 1998, Korea’s household savings rate took a sharp fall in slightly staying above two percent in 2002. The figure jumped to 5.7 percent in 2004 but fell again to 2.3 percent in 2007 and continued to decline last year.

The household savings rate refers to the percentage of money saved out of disposable income excluding tax and interest payments. Regular and installment savings and fund investment are all considered as savings. If a household’s savings rate is one percent, it earns one million won (719 dollars), spends 990,000 won (712 dollars) and saves only 10,000 won (seven dollars).

As of 2007, Korea’s household savings rate was far lower than those of Germany (10.8 percent), France (12.4 percent), Switzerland (13 percent) and Spain (10.2 percent).

Worse yet, Korea’s savings rate was lower than Japan’s (3.1 percent) despite Tokyo’s long-time policy of super-low interest rates. Considering that the U.S. savings rate plunged to 0.4 percent in the fourth quarter of 2007 but rebounded to five percent in January this year, Korea apparently has the lowest such rate among major economies.

○ Growing corporate savings vs. falling household savings

Korea’s household savings rate has plummeted since real income has grown moderately, but household debt and spending has rapidly increased. Real estate investment supported by low interest rates and rising private education expenses have significantly deprived Korean households of disposable income to save.

As more people borrow money from banks to purchase homes, Korean household debt more than tripled late last year to surpass 800 trillion won (575 billion dollars) at the end of last year. The share of educational expenses in household consumption has jumped from six percent in the 1980s to 12 percent.

On the other hand, aggregate savings rate, or the combined savings rate of the government, business and individuals, remained above 30 percent. That means Korean companies have internal reserves of 100 trillion won (72 billion dollars) but households have generally failed to save money.

A lower savings rate can be considered a positive sign of robust consumption, but can also indicate a mounting debt burden, not robust spending. This reason can discourage Korean households from spending.

Korea’s social safety net is a far cry from those of advanced economies. If Korea’s lower savings rate is combined with an economic slowdown and a decline in the value of assets, this can pose a serious social problem.

Shin Min-yeong, head of financial research at LG Economic Research Institute, said, “Measures should be established to provide income for the low-income bracket. The government should help households gradually decrease their debts by providing job security and creating more jobs.”

jaeyuna@donga.com