A nation of spendthrifts?
Last week's report that Americans' savings rate had dipped into negative territory for the first time since 1933 triggered a spike in the head-shaking index, as commentators deplored Americans' spendthrift ways. Ben Franklin, Alan Greenspan and your rich uncle agree that saving is a virtue - so Americans should be glad to hear that they're saving much more than the savings rate statistic suggests.
The U.S. Commerce Department calculates the savings rate as the ratio of personal savings to after-tax disposable income. In 2005 Americans spent $46 billion more than they received in wages, salaries, Social Security benefits, rent, interest and dividends. That, according to the department, produced a minus 0.5 percent savings rate in 2005.
Calculated in this fashion, it's surprising the savings rate remained positive for more than 50 years. A lot of what Americans rightly regard as savings isn't counted by the Commerce Department. And some things the Commerce Department classes as spending could be regarded as forms of saving.
By counting only after-tax income, the Commerce Department excludes money invested in 401(k) plans, Individual Retirement Accounts and other tax-advantaged savings vehicles. These are powerful means of building wealth. Americans had $11.4 trillion in retirement savings at the end of 2003, according to the Employee Benefit Research Institute, and about half of it was in IRAs, 401(k) plans and similar self-funded accounts. The 43 million people who hold these accounts believe they're saving, and they're right.
On the other side of the ledger, mortgage payments are counted as spending. From the Commerce Department's point of view, paying down a mortgage is the same as buying a flat-screen TV.
Yet mortgage payments are also a means of accumulating wealth, allowing homeowners to increase their equity in what is many people's single largest asset. Similarly, capital gains in real estate, stocks or other investments is not counted in the savings rate.
A person with rising equity in a home, investments that have appreciated in value and a regularly funded retirement account has reason to feel financially secure. That's known as the "wealth effect" - those who have accumulated assets become more willing to spend current income. When that occurs, the savings rate declines.
Home ownership, capital gains on investments and retirement accounts are all given favorable tax treatment by the federal government. Yet the same government that encourages these types of savings doesn't count them as such. Most people would be well-advised to save more - but the Commerce Department's warning that Americans are spending themselves into the hole brings to mind Mark Twain's observation about there being three kinds of lies: Lies, damned lies and statistics.
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|Title Annotation:||Editorials; Savings rate not as bad as it sounds|
|Publication:||The Register-Guard (Eugene, OR)|
|Date:||Feb 9, 2006|
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