Replies

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

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?

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