Hey, Big Spender! Why the Low U.S. Savings Rate Doesn't Tell the Whole Story

By Dianna Doreen
Writer, mPower

In this Article: Famous Big Spenders What's The Real Saving Story? Retirement Savings - Out of the Equation? Personal Savings Measured Save for Plans By Planning To Save

Famous Big Spenders

The media has recently batted around a government statistic like kids do popcorn on home movie night: Americans have the worst personal savings rate since the Depression, in fact, the worst in national history.

The savings rate statistic from the Bureau of Economic Analysis of the U.S. Department of Commerce was a startling 0.5% for 1998. Why does this figure matter? Economists look to personal savings as an important indicator of economic growth.

But is this statistic, which is based on National Income and Product Accounts (NIPA), an accurate reflection of the state of America's financial health?

According to Sylvia Nasar, an analyst with The National Center for Policy Analysis, economists are wary of it. In Nasar's book, Economists Simply Shrug as Savings Rate Declines, quoted on the NCPA web site, she states: "The savings rate is calculated as the difference between overall personal income and personal spending … miniscule changes in either can produce huge changes in the savings rate."

In October 1999, The Bureau of Economic Analysis revised its methodology as part of its "regular process for improving and modernizing its accounts to keep pace with the ever-changing U.S. economy," a BEA press release said.

The revision put the figure at 3.7%. However, the BEA noted that even though the rate now appears higher, "it continues to show a two-decade long downtrend." Under the new system, the decline from 1982-1998 was from 10.9% to 3.7%, while previously it was from 9.0% to 0.5%.

What's The Real Saving Story?

Since personal savings is shown as a percentage of disposable personal income, and the NIPA calculation doesn't recognize increases in wealth due to such sources as capital gains, this savings rate measure doesn't give the entire picture. Investors who have benefited from the high performance of the stock market in recent years may have been able to increase their spending (using their capital gains) while still socking money away in IRAs and 401(k) plans, even if their "income" did not increase by much, or at all.

The Employee Benefit Research Institute (EBRI) quotes a May 1999 New York Times article as saying " …if the value of capital gains were included in income when measuring savings, the 1997 savings rate would have been 8 percent, as opposed to the NIPA estimate (1997) of 0.8 percent."

Another measure of personal savings is the Flow of Funds Accounts (FFA), produced by the Federal Reserve System. This calculation takes into account the acquisition of consumer durables as a form of saving, while the NIPA calculation does not. Consumer durables are items that are expected to last for at least several years, such as automobiles and major household appliances.

"FFA consistently shows a higher national savings rate than NIPA, but receives less attention in the news media," according to a fact sheet from EBRI.

Retirement Savings - Out of the Equation?

Largely absent from the savings rate discussion is the money US workers have put in retirement savings vehicles like IRAs and 401(k)s. As of mid-1998, an estimated 30.6 million, or 30% of U.S. households owned some type of IRA (Individual Retirement Arrangement). Traditional IRA households owned a range of investments, with more than half holding individual stock (other than the stock of a household member's employer), according to the Investment Company Institute.

IRAs offer solid savings opportunities and possible tax advantages. In general, they let investors access their money more easily than 401(k) plans and other pension plans. So, although the contribution limit is generally lower than for an employer-sponsored retirement plan, a traditional or Roth IRA can be an essential part of retirement savings.

Millions of Americans also invest in 401(k) plans, where they can stash their money tax-deferred until retirement. The assets that accumulate saved for retirement are, ironically, not generally counted in traditional savings rate measurements. According to a January 1999 joint study by EBRI and the Investment Company Institute (ICI), older employees have a considerable amount saved for retirement: "…workers in their sixties with 30 years of job tenure have an average account balance in excess of $150,000."

Personal Savings Measured

Whether using the newly reconfigured NIPA or the Flow of Funds Accounts a one-size- fits-all personal savings rate may not be very useful. One measure, recently adjusted, may be less misleading but still not represent your personal savings rate. The FFA might not be the measure to your liking if you're in the camp that items acquired, such as a car or washing machine, don't count as savings. And if you feel the same about money that's not to be touched except for retirement, here are some tips on increasing your personal savings rate ¾ the one in your savings account!

Save for Plans By Planning To Save No matter where you fall in the saving spectrum, a balanced financial plan should include a certain amount of immediately accessible money for emergencies. Many financial planners recommend having enough to keep you going for four months without any income.

The Institute of Certified Financial Planners suggests non-mortgage debt (credit cards and car loans) should not consume more than 10-15% of your take-home pay, and in any case should not exceed 20%.

Red flags that you may be in trouble with your budgeting and saving habits include:

• borrowing to pay basic bills
• having creditors knocking on your door
• making only minimum credit card payments
• being denied credit

If you do get into trouble, the Institute of Certified Financial Planners recommends establishing a repayment plan with creditors or with a debt-reduction service. Paying off high-interest debts first and establishing a spending can help you find the extra money needed to pay off creditors. Once you pay back your debts, you can put the extra money into savings!

Useful addresses:

To compare saving account rates of different institutions:
http://www.fiscalagents.com/rates/savetbus.htm

To compare credit card and mortgage rates, and current interest paid on CD's and IRA's:
http://www.bankrate.com/inm/rate/high_home.asp

For tips on planning to save (American Savings Education Council):
http://www.asec.org

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Hey, Big Spender! Why the Low U.S. Savings Rate Doesn't Tell the Whole Story

By Dianna Doreen
Writer, mPower

In this Article: Famous Big Spenders What's The Real Saving Story? Retirement Savings - Out of the Equation? Personal Savings Measured Save for Plans By Planning To Save

Famous Big Spenders

The media has recently batted around a government statistic like kids do popcorn on home movie night: Americans have the worst personal savings rate since the Depression, in fact, the worst in national history.

The savings rate statistic from the Bureau of Economic Analysis of the U.S. Department of Commerce was a startling 0.5% for 1998. Why does this figure matter? Economists look to personal savings as an important indicator of economic growth.

But is this statistic, which is based on National Income and Product Accounts (NIPA), an accurate reflection of the state of America's financial health?

According to Sylvia Nasar, an analyst with The National Center for Policy Analysis, economists are wary of it. In Nasar's book, Economists Simply Shrug as Savings Rate Declines, quoted on the NCPA web site, she states: "The savings rate is calculated as the difference between overall personal income and personal spending … miniscule changes in either can produce huge changes in the savings rate."

In October 1999, The Bureau of Economic Analysis revised its methodology as part of its "regular process for improving and modernizing its accounts to keep pace with the ever-changing U.S. economy," a BEA press release said.

The revision put the figure at 3.7%. However, the BEA noted that even though the rate now appears higher, "it continues to show a two-decade long downtrend." Under the new system, the decline from 1982-1998 was from 10.9% to 3.7%, while previously it was from 9.0% to 0.5%.

What's The Real Saving Story?

Since personal savings is shown as a percentage of disposable personal income, and the NIPA calculation doesn't recognize increases in wealth due to such sources as capital gains, this savings rate measure doesn't give the entire picture. Investors who have benefited from the high performance of the stock market in recent years may have been able to increase their spending (using their capital gains) while still socking money away in IRAs and 401(k) plans, even if their "income" did not increase by much, or at all.

The Employee Benefit Research Institute (EBRI) quotes a May 1999 New York Times article as saying " …if the value of capital gains were included in income when measuring savings, the 1997 savings rate would have been 8 percent, as opposed to the NIPA estimate (1997) of 0.8 percent."

Another measure of personal savings is the Flow of Funds Accounts (FFA), produced by the Federal Reserve System. This calculation takes into account the acquisition of consumer durables as a form of saving, while the NIPA calculation does not. Consumer durables are items that are expected to last for at least several years, such as automobiles and major household appliances.

"FFA consistently shows a higher national savings rate than NIPA, but receives less attention in the news media," according to a fact sheet from EBRI.

Retirement Savings - Out of the Equation?

Largely absent from the savings rate discussion is the money US workers have put in retirement savings vehicles like IRAs and 401(k)s. As of mid-1998, an estimated 30.6 million, or 30% of U.S. households owned some type of IRA (Individual Retirement Arrangement). Traditional IRA households owned a range of investments, with more than half holding individual stock (other than the stock of a household member's employer), according to the Investment Company Institute.

IRAs offer solid savings opportunities and possible tax advantages. In general, they let investors access their money more easily than 401(k) plans and other pension plans. So, although the contribution limit is generally lower than for an employer-sponsored retirement plan, a traditional or Roth IRA can be an essential part of retirement savings.

Millions of Americans also invest in 401(k) plans, where they can stash their money tax-deferred until retirement. The assets that accumulate saved for retirement are, ironically, not generally counted in traditional savings rate measurements. According to a January 1999 joint study by EBRI and the Investment Company Institute (ICI), older employees have a considerable amount saved for retirement: "…workers in their sixties with 30 years of job tenure have an average account balance in excess of $150,000."

Personal Savings Measured

Whether using the newly reconfigured NIPA or the Flow of Funds Accounts a one-size- fits-all personal savings rate may not be very useful. One measure, recently adjusted, may be less misleading but still not represent your personal savings rate. The FFA might not be the measure to your liking if you're in the camp that items acquired, such as a car or washing machine, don't count as savings. And if you feel the same about money that's not to be touched except for retirement, here are some tips on increasing your personal savings rate ¾ the one in your savings account!

Save for Plans By Planning To Save No matter where you fall in the saving spectrum, a balanced financial plan should include a certain amount of immediately accessible money for emergencies. Many financial planners recommend having enough to keep you going for four months without any income.

The Institute of Certified Financial Planners suggests non-mortgage debt (credit cards and car loans) should not consume more than 10-15% of your take-home pay, and in any case should not exceed 20%.

Red flags that you may be in trouble with your budgeting and saving habits include:

• borrowing to pay basic bills
• having creditors knocking on your door
• making only minimum credit card payments
• being denied credit

If you do get into trouble, the Institute of Certified Financial Planners recommends establishing a repayment plan with creditors or with a debt-reduction service. Paying off high-interest debts first and establishing a spending can help you find the extra money needed to pay off creditors. Once you pay back your debts, you can put the extra money into savings!

Useful addresses:

To compare saving account rates of different institutions:
http://www.fiscalagents.com/rates/savetbus.htm

To compare credit card and mortgage rates, and current interest paid on CD's and IRA's:
http://www.bankrate.com/inm/rate/high_home.asp

For tips on planning to save (American Savings Education Council):
http://www.asec.org

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.