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Millions of customers across the country will see a boost to their savings as NS&I announces upcoming interest rate increases across its variable products. This includes the Premium Bonds prize fund rate, which will increase to 4.65% from 4.00%, the highest level since March 1999. Savers holding Income Bonds, Direct Saver, Direct ISA, Junior ISA and Investment Account will also benefit from the rate increases announced today.

The increase to the Premium Bonds prize fund rate will come into effect from the September 2023 prize draw, whilst customers holding Income Bonds, Direct Saver, Direct ISA, Junior ISA and Investment Account will see their savings boosted from 18 August.

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From the September 2023 prize draw, the prize fund rate will increase to 4.65% from 4.00%, its highest level since March 1999. The odds will improve to 21,000 to 1, their best level since the April 2008 prize draw.

Over the pandemic, historic levels of government transfers boosted household income while household spending was severely curtailed by social distancing. This led the personal saving rate to soar (Figure 1), and we estimate that U.S. households accumulated about $2.3 trillion in savings in 2020 and through the summer of 2021, above and beyond what they would have saved if income and spending components had grown at recent, pre-pandemic trends. Since late last year, households have decumulated about one-quarter of these excess savings, as the saving rate has dropped below its pre-pandemic trend.

In contrast, even though households in the top half of the distribution hold the large majority of excess savings (about $1.35 trillion as of mid-2022), this increase in their savings likely had only a modest effect on their spending behavior through 2021. During the first two years of the pandemic, and especially earlier on, their spending was instead much more driven by social distancing. Now that this group is able to travel and spend again, their excess savings are likely contributing to their high levels of spending. However, the recent demand by these households has likely been boosted more by earlier gains in equity and housing prices than by their excess savings. As of mid-2022, household wealth had increased by nearly $25 trillion since 2019, even after accounting for the large equity price declines in the first half of this year, most of which accrued to the top half of the income distribution.

In Section II, we introduce our methodology and derive aggregate excess savings. In Section III, we estimate the decomposition of aggregate excess savings into income quartiles, and in Section IV we discuss the sensitivity of our results and the comparison to other data and estimates.

We start by deriving the aggregate amount of excess savings. The flow of household savings, as defined by the Bureau of Economic Analysis (BEA) in the national income and product accounts (NIPA), can be written as:2

We use a simple approach to calculate excess savings: We add the amount that the components of DPI exceed their trend with the amount that PCE and other outlays are below their trend.3 We then cumulate these flows over time to calculate the stock of excess savings.4

Finally, one other important contributor to excess savings is interest payments (the major component of other outlays). Interest payments have been quite a bit below their trend since 2019 (Figure 4). We think this largely reflects loan forbearance policies for student loans, lower interest rates, and lower household debt balances enabled by higher fiscal support and reduced consumption.

We calculate aggregate excess savings by combining the deviations of DPI, PCE, and other outlays from their trends. The left panel of Figure 5 shows the flow of excess savings over time, and the right panel shows the cumulated stock. At the onset of the pandemic, fiscal support more than replaced other income losses in the aggregate, propping up personal income even as spending fell. By the third quarter of 2021, we estimate that the stock of excess savings amounted to about $2.3 trillion, after which it began to decline as spending picked up and fiscal support diminished. Even so, the stock of excess savings remained at about $1.7 trillion by mid-2022.

To allocate aggregate excess savings over the income distribution, we decompose detailed components of personal income (including fiscal support) and personal outlays across income quartiles. We draw upon existing data sets, whenever possible, and use institutional details and judgment, when there are gaps in the available data. We require that the decomposition of each category of savings adds to its aggregate flow in each quarter; in doing so, the excess savings by income quartile add up to the aggregate excess savings by design. Table 1 gives a summary of the information we use to decompose the different elements of excess savings.

Figure 6 shows what our detailed decompositions imply for the paths of DPI and PCE for each income quartile relative to their typical trend. The left panel shows that, with the exception of the top quartile, DPI has remained above its trend and with considerable spikes in 2020:Q2 and 2021:Q1. These spikes coincide with stimulus payments and other fiscal support provided by major legislation, such as the CARES and ARP Acts, the bulk of which flowed to households in the bottom half of the income distribution. Fixed-dollar top ups to unemployment benefits also drove up savings among lower-income households, given large job losses among lower-income workers. Incomes among top-earners were little changed on net, but spending fell dramatically (right panel), reflecting the larger share of discretionary services spending by higher-income households.5

After combining our assumptions for the decomposition of each detailed component of personal income and outlays, we arrive at a decomposition of total excess savings across the income distribution. The left panel of Figure 7 shows the path for this decomposition of excess savings over time, while the right panel shows the main contributors to excess savings held by households in each income quartile as of mid-2022. As suggested by the right panel of Figure 7, the primary driver of the excess savings for households in the top quartile has been their foregone consumption, whereas the primary driver of excess savings for the bottom half of the income distribution was the roughly $1.5 trillion in fiscal transfers received through the end of 2021.

It is important to note that there is high uncertainty in these decomposition estimates. Indeed, while the range of other forecasters' estimates of aggregate excess savings have all been quite close to ours, the range of the estimates of the amount held by households at the bottom of the income distribution is quite large.7 While the distributions of fiscal support and earnings losses are closely tied to data or institutional details, data limitations require us to rely heavily on assumptions about the distribution of PCE across income quartiles.8

In our baseline, we estimate spending among households in the bottom half rises about 10 percent above its pre-pandemic trend following the CARES Act in 2020 and remains well above trend through 2022. Even assuming such elevated levels of spending, we estimate households accrued considerable excess savings over the past couple years. In fact, we would have to assume that the bottom half of the distribution consumed nearly 25 percent above their typical trend level in 2021, about twice as much as our baseline assumption, if we were to find that their excess savings had been fully exhausted by the end of 2021. We have not found any evidence in the available data that the consumption rates could have been even close to that high, on average, last year.9 In the other direction, had households in the bottom half of the income distribution kept their consumption at pre-pandemic trends in 2020, their excess savings would have accrued to about $750 billion as of mid-2022, with most of the difference accounted for by the bottom income quartile.

The Distributional Financial Accounts, which rely on historic relationships to extrapolate household balance sheets at various points in the income and wealth distributions, also suggest considerable increases in liquid asset holdings among lower income households. While extrapolation based on historical relationships is likely not applicable in the current setting, as the distribution of the shocks to income and spending during the pandemic was quite different from prior experience, Batty et al. (2021) provide bounding exercises suggesting substantial excess savings throughout the income distribution even under alternative assumptions.

Measures of financial distress may also provide an indirect measure of household balance sheet strength, as accrued savings provide a buffer to fund spending and service debts. As shown in Figure 8, delinquencies dropped precipitously during 2020 when the first tranche of fiscal stimulus went out and stayed low through 2021.11,12 Likewise, payment rates on credit card balances rose and stayed elevated through 2021, consistent with conclusions of Adams and Bord (2020). Delinquency and payment rates have levelled off or shown signs of deterioration this year, but both measures remain in a healthier state than before the pandemic. These patterns are consistent with the gradual drawdown of excess savings, and they support our finding that household balance sheets in the bottom half of the distribution are still relatively healthy.

In summary, our estimates suggest that households across the income distribution continue to have a buffer of excess savings to help them navigate higher prices and/or a tightening cycle. While this buffer is dwindling, for now it is likely still providing some needed balance sheet support that could help to stanch a negative feedback loop were the economy to slow.

4. For simplicity and to preserve additivity, all components of personal income and outlays are measured in nominal dollars. Therefore, our trends implicitly assume that both prices and real values move along their pre-pandemic trends. Nominal excess savings have been boosted by above-trend price inflation since early 2021, but we think that deflating the flow of nominal excess savings only leads to a small upward bias relative to the flow of excess savings measured at constant prices, given that the trend saving rate is relatively small. That said, with inflation boosting PCE prices in 2022:Q2 by about 10 percent above their pre-pandemic level, this could reduce somewhat the real (consumption-equivalent) value of previously accumulated excess savings, especially for households that have not used their savings to reduce debt or invest in inflation-protected assets. Return to text 006ab0faaa