Saving Grace

This is a useful perspective on the US savings rate. Telling us we have a negative savings rate sells newspapers but it doesn’t tell the whole story of what’s going on. I had a conversation about this with a very famous economist last year and his comment to me was not to worry about the national savings rate but to only worry about my personal savings rate. Seems like good advice to me.

Saving Grace
Robert Stein, Senior Economist
Date: 2/20/2007

The personal saving rate was negative 1% in 2006 (equal to negative $92 billion), the second straight negative year and the lowest since at least 1947. What this means is that for every $100 in after-tax “income,” US consumers spent $101. To some, this proves that Americans are living beyond their means and that calamity is virtually assured unless something changes. We could not disagree more. The so-called personal saving rate is a highly misleading indicator of the consumer balance sheet. Other, much better measures show that the American consumer is in excellent financial health. To calculate the personal saving rate, government statisticians subtract taxes and spending from personal income. Income includes wages, salaries, interest, dividends, rent received, small-business profits, and some government benefits. Excluded are withdrawals from IRAs and 401ks, as well as capital gains. This is inconsistent with how most people measure their private fiscal health. For example, a retiree with no wage (or other) income, who withdraws $40,000 each year from her IRA to spend on living expenses, would drag down the savings rate. (more…)