NEW YORK — The negative savings rate in the United States has been a cause for concern to some economists — who contend that Americans are spending away their futures.
NEW YORK — The negative savings rate in the United States has been a cause for concern to some economists — who contend that Americans are spending away their futures.
Yet, another faction argues that the rate is in line with the rest of the world. Moreover, the way it is calculated may be as outdated as the piggy bank. The Department of Commerce’s Bureau of Economic Analysis calculates personal savings as a percentage of disposable personal income by subtraction.
To determine the savings rate, the bureau begins with income for a single period. Then it subtracts taxes and an estimate of all outlays, such as consumer purchases and credit card payments, for that period. What remains is defined as savings.
Since April 2005, the rate has been negative — a phenomenon that hasn’t occurred since 1932 and 1933, during the Great Depression. The newest figures released Jan. 31 show a rate of –1% for 2006, compared with –0.4% in 2005.
The number doesn’t necessarily mean that people have zero dollars in their savings accounts but that they spent more than they earned over a specific period of time.
Although the purchase of stocks and bonds is considered savings, used for investment pur- poses, the bureau doesn’t survey those holdings or measure those investments. Also, the personal-savings assessment does not include capital gains, realized or unrealized.
The failure to account for those factors is criticized by some economists.
“I think the definitions we have of household savings are a little out of date,” said Nariman Behravesh, Lexington, Mass.-based chief economist and executive vice president with Global Insight Inc. of Waltham, Mass.
“A lot of people essentially save in their homes. They think of their home as an investment, whereas payments for their mortgage are, in fact, an expense,” he continued. “Some of that payment should be seen as a form of savings.” Many people feel angst over the negative savings rate, though the true savings rate may be positive, Mr. Behravesh said.
“What you really should be looking at is net worth,” he said. “Here the news is good. If you look over the past 25 years, household net worth as a ratio of after-tax income has actually been rising.”
More people are looking to different types of investment choices, though he concedes that a large number of people have not put away enough money for retirement. But “by ‘put away,’ I mean mutual funds or a well-diversified portfolio,” Mr. Behravesh said.
“The idea of a piggy bank or money under a mattress is pretty outdated,” he said.
The savings rate is a fairly narrow measure of household finances, Mr. Behravesh said. During the past 20 years, savings rates have fallen in many countries, but households in industrialized economies today are wealthier than in the past, mostly due to stock market and housing appreciation, he said.
“Clearly, a negative savings rate is a little bit of a worry, but there’s this impression that the United States is the only one that has this problem,” Mr. Behravesh said.
Finland, Denmark and Australia all have had negative rates, he said.
“It is unlikely that treatment of capital gains will be changed,” said an analyst at the Bureau of Economic Analysis, who asked not to be identified.
“Capital gains, if you think about it, do not provide additional funds for investment, because it’s the sale of an existing asset.”
‘A very logical thing’
Given the data on which the BEA bases savings — income position, not wealth position — a negative savings rate can be “a very logical thing” for an individual, according to the analyst. This is especially true for older people, because they are spending their assets.
“The concern [over the savings rate] is that people are mortgaging their future for today’s consumption,” like in home refinancing, said Roberton Williams, principal research associate at the Tax Policy Center, a joint venture of the Urban Institute and The Brookings Institution. All three are in Washington.
“Although it looks like people are getting richer … in fact, they’re not saving as much as they should for future needs,” Mr. Williams said.
“[The] global trend is an obvious result of the housing bubble,” which has provided a false sense of security, said Dean Baker, co-
director of the Center for Economic and Policy Research in Washington.
“I haven’t heard any good stories as to why we should expect that run-up to last,” Mr. Baker added.
