The Rise and Fall of Pandemic Excess Savings — FRBSF Economic Letter 2023-11
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FRBSF Economic Letter 2023-11, The Rise and Fall of Pandemic Excess Savings, published May 8, 2023 by the Federal Reserve Bank of San Francisco and written by two of its Economic Research Department staff. The letter compares household saving after the onset of the pandemic recession with post-1970 recessions and describes the fiscal response, including stimulus checks and the Paycheck Protection Program. It estimates accumulated excess savings of around $2.1 trillion through August 2021 and cumulative drawdowns of $1.6 trillion as of March 2023, leaving approximately $500 billion. Using Distributional Financial Accounts data, it reports that the lowest income group kept 33% of financial assets in liquid form in the fourth quarter of 2022, compared with 24% before the pandemic. The authors expect excess savings to support consumer spending at least into the fourth quarter of 2023.
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FRBSF Economic Letter Research from
the Federal Reserve
Bank of San Francisco
2023-11 | May 8, 2023
The Rise and Fall of Pandemic Excess Savings
Hamza Abdelrahman and Luiz E. Oliveira
U.S. households built up savings at unprecedented rates following the strong fiscal response and
lower consumer spending related to the pandemic. Despite recent rapid drawdowns of those funds,
estimates suggest a substantial stock of excess savings remains in the aggregate economy. Since
2020, households across all income levels have held a historically large share of savings in cash or
other easily accessible forms. Estimates suggest that those funds could be available to support
personal spending at least into the fourth quarter of 2023.
Pandemic-related fiscal support resulted in a sizable increase in disposable income in the overall U.S.
economy at a time when health-related economic closures and social distancing led to a significant drop in
household spending. As a result, aggregate personal savings rose rapidly, far beyond its pre-pandemic trend
and much higher than in previous recessions.
In this Economic Letter, we examine how household saving patterns since the onset of the pandemic
recession compare with previous recessions. We show that households rapidly accumulated unprecedented
levels of excess savings—defined as the difference between actual savings and the pre-recession trend—
relative to previous recessions. Moreover, despite a rapid drawdown of savings in recent months, there is
still a large stock of aggregate excess savings in the economy—some $500 billion. The distribution and
allocation of excess savings and wealth across the income distribution suggest that households on average,
including those at the lower end of the distribution, continue to have considerably more liquid funds at their
disposal compared with the pre-pandemic period. We expect that these excess savings could continue to
support consumer spending at least into the fourth quarter of 2023. This outlook is uncertain depending on,
for example, whether households have developed a preference for higher savings, significantly shifted their
spending patterns, or substituted other sources of income for the expired pandemic-era cash inflows.
Fiscal spending and excess savings following recessions
The fiscal response to the onset of the pandemic was swift and significant. Between 2020 and 2021, the
federal government launched several stimulus packages that injected about $5 trillion into the U.S.
economy at a time when many people had seen their household incomes dwindle (Bureau of Labor Statistics
2023; Congressional Budget Office 2020, 2021).
Figure 1 shows the sizable fiscal action in the pandemic relative to other recessions. We measure this as
growth in real nondefense discretionary fiscal outlays over a period of two years, starting in the fiscal year in
FRBSF Economic Letter 2023-11 | May 8, 2023
which each recession began according to
Figure 1
the National Bureau of Economic Fiscal spending growth following onset of recessions
Research (NBER), relative to the two
Percent
years preceding the recession onset. 35
Discretionary spending includes all
30
financial obligations by the federal
government that are authorized by 25
congressional budgetary or spending
20
acts, including fiscal stimulus packages
that are introduced in response to 15
economic downturns. By contrast,
10
nondiscretionary spending refers to
government benefits such as Social 5
Security and Medicare. The growth in
fiscal spending during the pandemic 0
1970 1973 1980 1990 2001 2008 2020
period, in nominal and real terms, was Source: Congressional Budget Office.
far beyond growth associated with other Note: Growth in inflation-adjusted nondefense discretionary government spending over
the first two years following the onset of a recession as defined by the NBER, relative to
post-1970 recessions. the two fiscal years preceding it. For simplicity, the two recessions in the early 1980s are
combined.
The pandemic-related financial support to U.S. households included direct assistance such as stimulus
checks, expanded unemployment insurance benefits and coverage, and child tax credits. Indirect assistance
to households included the Paycheck Protection Program and several rounds of national and local eviction
moratoriums, which helped people keep their jobs and housing. Those programs injected funds into
households and relieved expenses,
resulting in a striking increase in Figure 2
disposable income in the U.S. economy. Aggregate personal savings versus the pre-pandemic trend
Simultaneously, health-related social $ billions
distancing and business closures 600
combined to deliver a steep decline in
500
consumer spending through 2020 and
Accumulated excess savings
into 2021. As a result, overall personal ($2.1 trillion)
400
savings rose rapidly during the Drawdowns of excess savings
($1.6 trillion)
pandemic, far beyond what the economy 300
would have accumulated without such
shocks, as indicated by the pre- 200
pandemic trend. Personal savings
100
Pre-pandemic
The accumulated difference between trend
0
actual savings and the pre-pandemic 2016 2018 2020 2022
trend can be interpreted as the stock of Source: Bureau of Economic Analysis and authors’ calculations.
Note: Excess savings calculated as the accumulated difference in actual de-annualized
excess savings in the overall economy. personal savings and the trend implied by data for the 48 months leading up to the first
Figure 2 defines the pre-pandemic trend month of the 2020 recession as defined by the NBER.
2
FRBSF Economic Letter 2023-11 | May 8, 2023
as the forward-looking, out-of-sample projection implied by a linear regression on monthly aggregate
personal savings for the 48 months leading to the onset of the pandemic recession. We estimate that
accumulated excess savings, in nominal terms, totaled around $2.1 trillion through August 2021, when it
peaked (green area).
After August 2021, aggregate personal savings dipped below the pre-pandemic trend, signaling an overall
drawdown of pandemic-related excess savings. The drawdown on household savings was initially slow,
averaging $34 billion per month from September to December 2021. It then accelerated, averaging about
$100 billion per month throughout 2022, before moderating slightly to $85 billion per month in the first
quarter of 2023. Cumulative drawdowns reached $1.6 trillion as of March 2023 (red area), implying there is
approximately $500 billion of excess
savings remaining in the aggregate Figure 3
Aggregate excess savings following onset of recessions
economy. Should the recent pace of
drawdowns persist—for example, at
average rates from the past 3, 6, or 12
months—aggregate excess savings
would likely continue to support
household spending at least into the
fourth quarter of 2023. This outlook can
be possibly extended into 2024 and
beyond if, for instance, drawdown rates
moderate or household preferences for
savings increase.
This dynamic in excess savings
associated with the pandemic period is
Source: Bureau of Economic Analysis and authors’ calculations.
remarkably unlike any past recessions. Note: Excess savings calculated as the accumulated difference between actual personal
Figure 3 plots the monthly accumulation savings and the trend implied by data for the 48 months leading up to the first month of
each recession as defined by the NBER. For simplicity, the two recessions in the early 1980s
of excess savings since the onset of past are combined.
recessions, where each of their
respective pre-recession trends are calculated in the same way as described earlier for the pandemic
episode.
The rapid accumulation and subsequent drawdown of excess savings following the onset of the pandemic
recession contrasts sharply with the gradual increase in excess savings observed in past recessions. For
many recessions, excess savings appears to plateau after three or four years instead of quickly reverting
toward their respective pre-recession trends, as seen in the post-pandemic curve. One exception is the Great
Financial Crisis of 2008, which was followed by an extended period of personal savings rising above trend.
Voinea and Loungani (2022) attribute this rise to households slowly making up for the wealth and asset
values lost during the 2008 crisis. The stark contrast between the pandemic recession and prior recessions
holds true when the data are adjusted for inflation, as well as when we look at excess savings as a share of
trend savings or as percent changes from pre-recession periods.
3
FRBSF Economic Letter 2023-11 | May 8, 2023
Household savings across the income distribution
How widely excess savings are spread across households of different income levels is difficult to pin down,
mainly due to whether estimation models rely primarily on pre-pandemic data or pandemic-era
assumptions. Barnes et al. (2022) summarize different estimates of savings across the income distribution,
which arranges households from lowest to highest incomes and divides them into percentile groups.
Overall, estimates suggest the two lowest groups in the income distribution hold between 4% and 29% of
the total stock of excess savings, while the highest income group holds between 32% and 67%. Estimates
that depend more heavily on pre-pandemic data reflect relatively low historic saving rates for lower-income
households, resulting in a smaller estimated share of the total stock of excess savings for these households.
Conversely, other studies model how changes in work income, spending, and targeted fiscal support may
have affected household saving patterns during the height of the pandemic. In general terms, those models
move away from historically low savings at the lower end of the income distribution and, hence, estimate a
higher share for low-income households.
Regarding asset allocation, households Figure 4
have kept more of their financial assets Household financial asset allocations by liquidity type
in liquid holdings and investments— % Pre-pandemic avg (2016-2019) Latest: 2022:Q4
100
defined as currency, checkable deposits, 76 75 81 86 87 Illiquid 67 74 79 84 85
90 assets
time deposits, short-term investments,
80
and money market fund shares—since
70
the start of the pandemic. This seems
60
particularly true for people at the lower
50
end of the income distribution, as shown
40
in Figure 4. According to Distributional
30
Financial Accounts (DFA) data, which
20
are quarterly estimates of the
10 Liquid
distribution of U.S. household wealth 24 25 19 14 13 assets 33 27 21 16 15
0
published by the Federal Reserve Board Lowest 2nd 3rd 4th Highest Lowest 2nd 3rd 4th Highest
of Governors, households in the lowest Household income distribution from lowest 20% to highest 20%
Source: Distributional Financial Accounts and authors’ calculations.
group of the income distribution kept
Note: Liquid assets include currency, checkable deposits, time deposits, short-term
33% of their financial assets in liquid investments, and money market shares. Illiquid financial assets include long-term and
less-accessible investments.
investments in the fourth quarter of
2022, compared with 24% in the four years leading up to the pandemic (Board of Governors 2023). For the
highest income group, liquid assets as a percentage of total financial assets grew from 13% to 15% over the
same period, as shown in Figure 4.
The underlying DFA data suggest that households in the lowest-income group generally experienced steady
growth in the dollar value of their total financial holdings from 2016 to 2019, in both inflation-adjusted and
nominal terms. Since then, a drop in the dollar value of long-term less-accessible illiquid assets was
partially offset by low-income households owning more liquid funds. Conversely, for the highest-income
4
FRBSF Economic Letter 2023-11 | May 8, 2023
group, although illiquid financial holdings depreciated somewhat in 2022, both asset types generally grew
in value before and since the pandemic began.
Data on checking accounts confirm that households have generally held larger cash balances for more than
two years following the onset of the pandemic. For example, data by the JPMorgan Chase Institute (Wheat
and Deadman 2022) show that median cash balances remained elevated through the middle of 2022 for all
income groups relative to pre-pandemic balances. Compared with mid-2019 levels, inflation-adjusted data
show that households in the lowest fourth of the income distribution held 41% more in their checking
accounts, while those in the highest income group held 29% more.
Overall, a range of data sources and model-based estimates suggests that households across the income
distribution continue to hold more liquid funds than in the pre-pandemic period.
Conclusion
U.S. households accumulated excess savings at an unprecedented speed following the onset of the pandemic
recession, relative to other post-1970 recessions. Despite recent rapid drawdowns of those savings, a large
amount—around $500 billion—remains in the overall economy.
A great deal of uncertainty surrounds precisely how the savings are distributed across household income
levels and in what kind of assets they are being kept. Nonetheless, data on household assets and checking
account balances support the view that households across the income distribution generally have
considerably more liquid funds at their disposal compared with the pre-pandemic period.
Overall, we expect the aggregate stock of excess savings will continue to support consumer spending at least
into the fourth quarter of 2023. However, uncertainty also surrounds this outlook, including the
possibilities that households may now have a higher appetite for savings, significantly shift their spending
habits, or receive other sources of income that offset the expired pandemic-era cash inflows.
Hamza Abdelrahman
Economic Analyst, Economic Research Department, Federal Reserve Bank of San Francisco
Luiz E. Oliveira
Senior Associate Economist, Economic Research Department, Federal Reserve Bank of San Francisco
References
Barnes, Mitchell, Wendy Edelberg, Sara Estep, and Moriah Macklin. 2022. Bolstered Balance Sheets: Assessing
Household Finances since 2019. Report (March), The Hamilton Project, Brookings.
Bureau of Labor Statistics. 2022. “Effects of the Coronavirus COVID‐19 Pandemic (CPS).” Labor Force Statistics from
the Current Population Survey, November 2.
Congressional Budget Office. 2020. “The Budgetary Effects of Laws Enacted in Response to the 2020 Coronavirus
Pandemic, March and April 2020.” June.
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FRBSF Economic Letter 2023-11 | May 8, 2023
Congressional Budget Office. 2021. “The Budgetary Effects of Laws Enacted in Response to the 2020-2021 Coronavirus
Pandemic, December 2020 and March 2021.” September.
Voinea, Liviu, and Prakash Loungani. 2022. “Excess Savings Are Recession-Specific and Compensatory: Evidence from the
U.S.” Intereconomics 57(4), pp. 233–237.
Wheat, Chris, and Erica Deadman. 2022. “Household Pulse through June 2022: Gains for Most, but Not All.” JPMorgan
Chase Institute.
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