Savings rate lowest since the great depression (living on borrowed time?)

The Cincinnati Enquirer ^

[AZRepublican]

The Commerce Department reported Monday that the nation's savings rate was a negative number last year.

You read it right. The average household didn't save a dime last year. In fact, the report said, Americans either took on more debt or dipped into previous savings in 2005 - to the tune of one half of one percent of their after-tax income.

The savings rate in the United States hasn't been this low since the Great Depression. But back in 1932 and 1933, unemployment was rampant, and many families had to break the piggy bank just to keep food on the table. This time, the analysts are saying, Americans seem to be spending money they don't have just to maintain a lifestyle to which they've become accustomed.

[Toddsterpatriot]

The Wall Street Journal’s David Wessel wrote last week that “American people, businesses and government don’t save enough.” Citing the Commerce Department’s official U.S. personal savings rate, 0.2 percent, the Los Angeles Times’s Bill Sing wrote, “It doesn’t help that people in the U.S. are spending like there’s no tomorrow.” Sing’s and Wessel’s assumptions are as bogus as the government statistic on which they’re based.

To see why, one need only understand how the government calculates personal savings. Not surprisingly, the calculation is a simplistic one that involves a subtraction of cash outlays from disposable income. David Malpass, NRO Financial writer and chief economist at Bear Stearns, recently noted that savings statistics “understate actual additions to savings by excluding cash flow improvements from realized gains on equities, houses, and mortgage refinancings.” Importantly, the government savings rate either cannot factor in, or would calculate negatively, how Americans purchase the instruments of the wealth that Malpass mentions.

To begin with, 401(k) accounts have become highly popular investment vehicles for Americans over the last 20 years. Since 401(k) deposits come out of pre-tax income, the significant savings built up within those accounts would not factor into government calculations of money saved over outlays.

The Savings-Rate Myth

[irishjuggler]

Since 401(k) deposits come out of pre-tax income, the significant savings built up within those accounts would not factor into government calculations of money saved over outlays.

The "savings built up" (as in unrealized capital gains) aren't factored in, but the original contributions are. If Tamny is saying otherwise, then he is wrong. Got anything else?

[irishjuggler]

BEA’s regional economics staff estimated personal income on a pension disbursement basis for the mid-1990s. This involved removing from personal income several pension- related items and adding back an estimate of pension disbursements. The items that were removed from personal income included employee contributions to pension plans (such as 401(k) contributions) that are now included in wages and salaries, employer contributions that are now included in the category “employer contributions for employee pension and insurance funds,” and investment earnings on pension accounts (dividends,interest, and rent) that are currently included in property income.
http://www.bea.gov/bea/about/fesac/AlternativemeasuresHHincomeFESAC121404.pdf

[varon]

My first thought as well; home equity is way up.

I don't know how true that is after the Refi w/cash out & HELOC craze of the past few years.

[Toddsterpatriot]

The "savings built up" (as in unrealized capital gains) aren't factored in, but the original contributions are.

He said the savings built up (as in contributions) not the earnings built up (as in unrealized capital gains).

[Toddsterpatriot]

BEA’s regional economics staff estimated personal income on a pension disbursement basis for the mid-1990s.

Sounds like they're estimating personal income to better take into account pension payouts.

The items that were removed from personal income included employee contributions to pension plans (such as 401(k) contributions) that are now included in wages and salaries,

LOL!! Looks like you just proved my point. Thanks. Got anything else?

Maybe try here, EBRI, no mention of IRAs or 401Ks.

Maybe here? Table 10, 10(2) and 10(3). No mention of IRAs or 401Ks. You'd think if the BEA was adding these back in, they'd at least use a footnote.

Maybe here? Federal Reserve, PDF page 24 of 124. No mention of those accounts here either. It's not impossible that you are correct, just haven't seen any legitimate, reputable sources yet.

[irishjuggler]

LOL!! Looks like you just proved my point. Thanks. Got anything else?

Please do everyone a favor and enroll in a remedial reading class. Employee contributions are now included in "wages and salaries." Employer contributions are included in “employer contributions for employee pension and insurance funds." What is so difficult to understand about that?

Look at their data:
http://www.bea.gov/bea/newsrel/pinewsrelease.htm

I know the information presented is probably difficult for you to comprehend, but please stop and do your best to think for a second. If employee contributions are included in "wages and salaries" and employer contributions are included in “employer contributions for employee pension and insurance funds," and NEITHER are subtracted out in taxes or personal outlays, they MUST still be included in personal savings.

[americanbychoice2]

Sorry to have to disagree with you.
Employee contributions are excluded from wages or salaries. They in fact are decreasing your reportable income.
The fiduciary responsibilty and ownwership rests with the employer, a key factor for making sure that the employee's contributions are tax free/ reducing income.

[irishjuggler]

Employee contributions are excluded from wages or salaries. They in fact are decreasing your reportable income.

Wrong, but you've hit on the source of all the confusion: the BEA's methodology isn't the same as the IRS's. The IRS excludes some things from adjusted gross income (AGI) that the BEA includes in income.

This is explained in "Comparison of BEA Estimates of Personal Income and IRS Estimates of Adjusted Gross Income":

Employee contributions to thrift savings plans, primarily 401(k) plans, are included in personal income as wage and salary disbursements but are excluded from AGI.
"http://www.bea.gov/bea/articles/national/NIPAREL/2000/0200agi.pdf

[americanbychoice2]

You are talking to a now retired financial executive who had expertise in establishing pension plans.
Don't get so wrapped up in the minutae of BEA vs AGI.
If you are covered by a 401K plan, just look at your paycheck.
Your contributions are not included in your earnigs.
Sample: A worker makes $50 000 per annum and contributes $ 5000 into a 401K, his W2 will show earnings of $ 45 000.
It's actually very simple.

[irishjuggler]

Don't get so wrapped up in the minutae of BEA vs AGI...Your contributions are not included in your earnigs.

Again, that's for tax purposes. It's not relevant here. For their purposes, the BEA includes your 401(k) contributions in "wages and salaries." Yes, they add it in. The differences between BEA vs AGI may seem like "minutae" to you, but they're absolutely critical here because we're discussing the BEA's calculation of the savings rate, not the IRS's.

[Toddsterpatriot]

Employee contributions are now included in "wages and salaries."

Well of course they're included in wages and salaries.

What is so difficult to understand about that?

The difficult part was including them in "disposable income". My 401k isn't disposable income (BEA definition: Total after-tax income received by persons; it is the income available to persons for spending or saving). If your source had said "401(k) contributions that are now included in disposable income" or "401(k) contributions that are now included in savings" it would have been more obvious.

So including thinking Pat Buchanan would be a serious presidential candidate in 1996, now I've been wrong twice :^)

[investigateworld]

To: Juan Medén Home ownership is the best form of savings available. Average return on investment averages 17% per annnum. What bank will give you that?

Hmm, and what if the prices of homes go down?

11 posted on Wednesday, February 01, 2006 6:15:10 AM by A. Pole (The freemarketeers are economic men, greedy, rational and controlled by the invisible hand market.)

To: A.Pole

IW Raises hand:

"It took a while, but know! I know!!"