The Savings-Rate Myth (Bogus assumptions based on a bogus government statistic)

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.

As for home ownership, mortgage payments are not deducted from pre-tax income, and often are paid out of disposable income. While no one would deny that home ownership is a form of saving, Commerce Department math would put money used to pay down a mortgage into the same basket as money used for everyday consumption.

Even if we didn’t know how savings were calculated, it would still be obvious that a savings rate of 0.2 percent is wildly inaccurate. To see why, consider a variety of statistics about wealth in the U.S.

For starters, the members of the latest Forbes 400 have a combined net worth of $1 trillion, up $45 billion in twelve months. In Merrill Lynch’s 2004 World Wealth Report, the U.S. experienced the biggest jump of any country in terms of high-net-worth individuals, with the number rising 14 percent to 2.27 million. If American’s weren’t savers, the wealth statistics in each case would have fallen.

Someone might reply that the above statistics describe rich people, and that non-millionaires don’t have the means to save like the rich do. Unfortunately, a host of other statistics would also prove an assumption like that wrong.

Indeed, the Securities Industry Association reports that individual participation in the stock market has jumped from 30.2 million in 1980 to 84.3 million in 2002. As the number of investors has grown, so too have stock market returns, with the Dow Jones Industrial average trading at roughly 14 times its low of 743 in 1982.

Home ownership? The rise in home prices is increasingly on the minds of many Americans. That this is so has a lot to do with the fact that at 69 percent, the supposedly “spendthrift” United States has the highest rate of home ownership in its history.

Despite all of the above evidence suggesting a strong culture of saving in the U.S., it can be expected that the “Americans as bad savers” canard will continue to be thrown out by the major media to explain “good” (consumption) and “bad” (trade deficits) economic news.

An optimist would say the mainstream media’s obsession with saving might be a happy signal that its members intend to write more positively about private Social Security accounts, stock options, and other opportunities to save. Sadly, they’ve already demonized stock options, and presumably have only just begun to start scaring readers about the perils of investing their own payroll taxes. Here’s hoping readers start to notice these paradoxical stances, and tune them out altogether.

I see that you have managed to disenfranchise all the people saving for retirement in their 401ks by mischaracterizing them as NOT saving at all.

"Calling these non protected investments savings is naive, and the government calling them such is deceptive. "

I guess that means everyone is calling them savings but you.

While the dictionary definition of wealth is connected with affluence—having an abundance of money, Schuchardt says wealth is “about having enough money to be financially secure. The concept of financial security means you are first, financially independent, or out on your own; then financially stable, or able to meet day-to-day expenses; and finally, able to save, invest, and control debt in order to reach future goals that take money to buy, such as a home, a college education and a comfortable retirement.” Schuchardt, a former senior fellow with the National Endowment for Financial Education, suggests these simple tactics:

http://www.utah.edu/unews/releases/04/mar/wealth.html

"Thus when all the babyboomers with 401ks hit that age (I believe its 70) an enormous class of folks MUST begin liquidating their market holdings.Does that sound good for the market to you?"

At age 70 1/2, people must begin paying taxes on the money that has been deferred, yes. That year they must withdraw 1/27 of their money which may be less than they were withdrawing to live on anyway. And they can easily be taking it from their MM accounts which has no little if any effect on market prices.

At the same time money will still be pouring into the markets from their children, so the net effect is not predicable but it certainly doesn't portend disaster either. If their children pour more money in, we have some inflation and the economy grows, prices will still be going up not down.

I don't think when discussing saving that the definition of wealth should be structured so that it can hide debt in excess of assets held.

You and the Fed have something in common. The Fed's Flow of Funds Report that we're all harping about, actually doesn't even mention "wealth". They use "Net Worth" --defined as "Assets" less "Liabilities". That's really what a lot of us were talking about all along.

" Schuchardt says wealth "

Yeah well Jane's principals are good alright but they are only one view. Jane also does not have a monopoly on getting to the finish line.

The problem with a cash based life is a low standard of living. Judicious use of credit, both by the individual and the govt, results in a better standard of living for all.

There is a reason why living standards exploded with the explosion of credit. One can argue that credit is seductive but to argue one should avoid it is a limited view in my opinion.

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