From the January 2008 issue of Investment Advisor • Subscribe!

Recession Fears Changing Money Habits

Workers and retirees plan to save more, spend less in New Year

When 40% of Americans say their top New Year's resolution is paying off credit card debt, and 39% say their priority in 2008 will be putting more money into their savings accounts, it is clear that fears of an impending recession are growing.

That's only natural, given how well both the U.S. and the global economy have been doing over the past few years, says Dan Houston, executive VP of retirement and investor services at Des Moines, Iowa-based Principal Financial Group, which every quarter polls 1,154 employees at growing businesses and 514 retirees to put together the Principal Financial Well Being Index (WBI).

Now, though, things look set to change, Houston says, and according to Principal Financial's latest WBI, nearly three-quarters, or 71%, of American workers and 72% of retirees either believe the economy has fallen into a recession or fear that it is headed in that direction. Workers are also showing increased concern about their job security--more than one-third (37%) of those polled by Principal Financial expressed concern about their own job security, a figure that's up significantly from only the second quarter of this year when just 22% of workers expressed concern, Houston says. "The last time I saw these kinds of fears was in 2000, when people were looking at the tech bubble and waiting for it to burst," he says.

The years following the tech stock debacle were marked by a slowdown in the U.S. economy, which then picked up steam in 2004, and since then, "the consumer has kept us in the hunt, representing two-thirds of the American economy," Houston says.

He believes that the next WBI, which Principal Financial will put together in the first part of March 2008, will be even more negative than 2007's fourth-quarter findings. But even if Houston--who has been with Principal Financial for 23 years--has seen a number of economic ups and downs, this time he has a little more credence in people actually practicing what they preach. That's not because the American consumer has changed, but because legislation that forms part of the Pension Protection Act (PPA)--in particular the automatic enrollment feature that goes into effect in January 2008--is by its nature going to "make people do the right thing," he says. "We work with advisors to help employees save more," Houston says. "We're hoping that our first WBI after the automatic enrollment period in January will reflect some good news from advisors, even if people remain generally negative on the economy."

The Benefits of Legislation

To be sure, Houston is encouraged by the pace of legislative changes, designed to help the current generation of Baby Boomers deal with the complexities of their working and retired lives. With Social Security benefits diminishing, defined benefits virtually a relic of the past, and after-tax savings anemic, life for today's baby boomers is a far cry from what it was for their parents, he says. "We've entered a period where we are going to stretch the outer boundaries and there is tension all around, even if American consumers need to prioritize their retirement savings before buying the next plasma TV," Houston says. "The PPA, in particular the automatic features, gives me confidence."

As for other findings in this quarter's WBI, more than 76% of workers and 49% of retirees say they would eat out less often, if America does indeed go through an economic slowdown. Sixty-nine percent of workers and 49% of retirees said they would cut back on buying clothing and consumer goods, while 63% of workers and 39% of retirees say they would cut back on entertainment, such as going to movies and concerts.

Americans even indicated they would go as far as reducing their coffee intake-- more than 27% of workers said they would purchase coffee less often--a favorable comparison, perhaps, to the mere 11% of workers who indicated they would lower their retirement plan contribution rate.


Savita Iyer is a freelance business journalist who is currently based in Arnhem, The Netherlands. She can be reached at siyerwriter@yahoo.com.
Reprints Discuss this story
This is where the comments go.