US Savings Rate Drops
Wednesday February 16, 2005
Some might call this drop precipitous. From Alan Greenspan's testimony to Congress on 15 February:
Pension plans are a form of savings that are not captured in this data set. However, companies are regularly abandoning their pension obligations, so is it reasonable to include this data point in a new savings rate calculation?
Home equity is also being touted as an equivalent form of savings.
Whatever new measures are concocted to determine what the "real" savings rate is in the US, one figure from the report is undebatable: since 1991, net borrowing from the rest of the world has increased from zero to five percent of national income. If we can't "borrow" it from ourselves (savings accounts are used to loan money) then we'll borrow it from someone else to finance our insatiable appetitite for consumption -- both individuals and governments.
The sizable gains in consumer spending of recent years have been accompanied by a drop in the personal saving rate to an average of only 1 percent over 2004--a very low figure relative to the nearly 7 percent rate averaged over the previous three decades.Greenspan suggests that we are relying on increased net worth resulting from increased value of our homes. The Bureau of Economic Analysis in September 2004 that the reported 2003 personal savings rate of 1.4 percent was the lowest since 1938.
Pension plans are a form of savings that are not captured in this data set. However, companies are regularly abandoning their pension obligations, so is it reasonable to include this data point in a new savings rate calculation?
Home equity is also being touted as an equivalent form of savings.
Whatever new measures are concocted to determine what the "real" savings rate is in the US, one figure from the report is undebatable: since 1991, net borrowing from the rest of the world has increased from zero to five percent of national income. If we can't "borrow" it from ourselves (savings accounts are used to loan money) then we'll borrow it from someone else to finance our insatiable appetitite for consumption -- both individuals and governments.
Comments
It looks like Bush’s ownership society is really a collateral society.
ie, to borrow against?
kathy
While you are correct in saying that many companies are exiting their pension plans (or defined benefit plan), you forget to mention that many more companies have, and the companies who has defined benefit plans are converting to, defined contribution plans. With this kind of set up, a lot more money is being put into this retirement plan that is not being captured in the saving rate. Also, in looking at the commerce formula for saving rate, they are not looking at wealth accumlation from the stock market.
Yes there has been a migration to defined contribution plans. There is also analysis that suggest such migration shifts finanacial risk to the employee. As far as stock market wealth, I believe it remains concentrated in the hands of a small percentage of Americans.
401k contributions are pretax and hence are not included in the savings rate, nor are any distributions made to your brokerage account or IRAs. All of these are lumped under ’spending’. Yet for most americans they would consider these ’savings’. It is also right to say that capital gains on investments are also not considered to be savings. The only thing the U.S. Savings figure includes in savings is non-spent income in your checking account or savings account. This calculation is antiquated and was originally devised during the depression. It needs an overhaul and the Media needs to stop scaring the wingdings off everyone with the “Sky is falling. There’s no savings!” routine. Report the truth not the hype!!!
Hi, William!
Thanks for your note. I agree with you that most Americans would think of 401K investments as “savings” — it is, after all, a form of “deferred income” plus “rent.”
There’s an interesting commentary from Nov 2005 at Spendtrift Nation which suggests there is a reason for concern, however:
“The ratio of nominal U.S. personal consumption expenditures to nominal GDP has been trending up since the early 1980s and is now hovering near an all-time high of 70%. The U.S. consumption binge has been accompanied by a parabolic rise in household debt; the ratio of total household debt to personal disposable income now stands at an all-time high of 118%.”
Monte and William hit it on the head. According to the US Dept of Commerce, Dept of Economic Analysis, net acquisition of financial assets increased from 7.23% in 2002 to 9.4% in 2005 (2006 data is not available). Net investment in tangible assets increased from 6.3% in 2002 to 7.05% in 2005. US Politic may have a point as it relates to mortgage debt. Mortgage debt was 11.1% of personal income in 2005, 7.6% in 2002 and 2.4% in 1952. Here’s the kicker. Historically, personal consumption has ranged from 7.96% in 1952 to 8.54% in 2005. If we take the music from the same sheet, I’d say we’re not binging ourselves into oblivion. We have simply shifted our investments from very liquid savings to longer term tangible and paper assets. Let’s play fair and refrain from the social engineering infernece Mr/Ms Politics. Thank you.
I appreciate the above postings, since I am on a quest to determine precisely what comprises the US savings rate. Even financial advisors appear to be fuzzy on the concept, and the media have been engaging in the usual hand wringing regarding the negative savings rate, yet failing to define the term. Though I find the above postings to confirm my suspicion that IRA/401K/403B contributions are NOT included in the official savings rate, I have just found an article in the May/June issue of Foreign Affairs by economist Martin Feldstein in which he states regarding net household savings that, “Those savings can take the form of deposits, purchases of financial assets such as stocks and bonds, or investments in real assets such as homes and unincorporated businesses. Contributions to individual retirement accounts (IRAs)and 401(k) plans as well as contributions to defined-benefit pension plans are also counted as household savings… Borrowing is counted against saving, unless the borrowed funds are used to purchase assets or are converted into other types of savings.”
So, we have a major disagreement in even defining the term “savings rate”, and of course the magnitude of the discrepancy is profound. For example, I am employed by a not-for-profit hospital, am over 50, and have for the past 20+ years contributed the maximum to my 403B plan, which last year was 20K, and will be 20.5K this year, virtually all in domestic and international stock funds via Fidelity. Another 4.5k went into a Roth IRA last year, and the max of 5K will be contributed to a Roth this year. A relatively generous defined benefit plan is also provided by my employer. Our home is owned free and clear, as is one rental, and another rental has about $375/month of the mortgage payment going to principal. Because any savings outside of tax-sheltered vehicles is taxed at 25% federal + 9.3% California State Income Tax, I would be extraordinarily foolish to acquire more than the 5K taxable money market emergency fund currently in place.
I am certain that others who have taken an active interest in preparing for their financial futures have similar scenarios. But the statistical implications of situations described above are huge. By one measure, my savings rate is miniscule, i.e. no bank savings (at .25%!!!), and minimal taxable money market saving (at 5%). But, using the other definition provided by Dr. Feldstein, that same savings rate would be in excess of 35%, prudently invested in vehicles with historically high,inflation-beating returns over time. I would submit that the disparity of a zero percentage rate, to a 35% rate is sufficiently vast to skew the data significantly.
I remain curious about this confusing conundrum, and if any has definitive, verifiable information to share, I would be most grateful if you would post it for our edification.
Thank you,
Richard
I was wondering which decade had the highest savings rate in the U.S.
Are employee contributions to a 401k included in the savings rate?
http://www.frbsf.org/education/activities/drecon/2005/0508.html
It is only logical that retirement accounts and pensions and social security taxes are considered ’savings’. Conversly, when these vehicles are cashed in dissaving occurs unless one has enough income from wages, interest, dividends, rentals, royalties, etc. to meet (or exceed) current consumption demands. The big question is: what will the effect of retiring babyboomers cashing in their social securtiy and pension assets be on the US savings rate in the future? Can younger generations of workers “make up” the difference even while generally not having access to defined-benefit pension plans? Or, do we need to open up our borders and enlarge our labor force numbers via immigrant labor… I don’t see any easy answers.
who cares…
Since the term “savings” does not inclued contributions to 401K abd IRA plans it has become a meaningless statistic.
No personal purchases or holdings of equity securities are considered savings.
During the past 30 years people have learnt that seeing saving erode by inflation is not too smart.
Should so much of what was savings be dirverted to investment? I don’t know but I do no that the savings rate has become meaningless because of the trend to choose other methods of savings that currently are not considered savings by economist.