February 2, 2007
The Savings Rate Posted by John Steele Gordon at 04:20 PM EST Once again, the government has released the statistic called the personal savings rate. Once again it is down from the year before. Once again, newspapers ran tut-tut stories about Americans being a bunch of shiftless grasshoppers, spending like there was no tomorrow, when we should all turn into ants and save for a rainy day, not to mention our retirement. The American savings rate was negative in 2006, -1 percent, to be precise. It’s the second year in a row that that has happened. The only other two years in American history when the savings rate was negative were 1932 and 1933, when families were dipping into savings—at least those families that had any savings left to dip into—to make up for absent paychecks. That’s terrible, right? No, it isn’t. The trouble here is not with Americans; it is with the definition of the savings rate, which is hopelessly out of date. That definition is the percentage of after-tax income that is not spent. If a family takes home $50,000 and spends $47,500, its savings rate is 5 percent. If it takes home $50,000 and spends $50,500, its savings rate is -1 percent. That definition was not a bad one in 1932 and 1933, when few American families owned their own homes, were the beneficiaries of company pension plans, held any substantial financial assets, or paid any income taxes. Today it is a meaningless statistic. Just consider. Every time a family sends a mortgage check to the bank, part of that money increases their equity in the house. But that doesn’t count as savings. Contributions, by employer and employee, to a 401(k) or other retirement plan don’t count because they are made with pre-tax income. Unrealized capital gains in stocks, bonds, or real estate don’t count. Social Security taxes don’t count either, even though they amount to 12.5 percent of total income from salaries or wages up to a little less than $100,000. Americans today have $3.2 trillion socked away in 401(k) and other retirement accounts. They have total assets of well over $50 trillion, mostly in real estate, which has been appreciating almost without interruption for several decades now. That is why the Federal Reserve reports that 88 percent of Americans over the age of 51 have adequate resources to fund their retirement. It might be noted that the savings rate peaked in 1977, when it was over 11 percent, and has been in near continuous decline ever since. Why? In 1978 the 401(k) revolution began, and more and more Americans, more than happy to have Uncle Sam help out, began saving out of pre-tax income rather than after-tax income. So the statistic called the personal savings rate declined while the amount of wealth being saved in the real world began to increase sharply. Chicken Little, call your office.
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