May 29, 2007


The Great American Savings Myth (GENE EPSTEIN, 5/28/07, Barron's)

IF YOU BELIEVE THE OFFICIAL NUMBERS, personal saving in the U.S. has collapsed: It fell in the late 1990s, tumbled all the way to a 70-year low by 2001, then cascaded off that cliff into minus territory in 2005 and has languished there ever since. It seems like an impending catastrophe. If Americans live beyond their means they can't accumulate the wealth to provide for their retirement, much less create a nest egg big enough to see them through rainy days.

But a look at that nest egg calls into question the whole personal savings story. Household net worth -- assets minus debt -- has never been higher, having grown rapidly even as the personal savings rate nose-dived (see chart below). How can we be getting richer without saving? It's more likely that the existing definition of personal savings will no longer do. In fact, a broader measure, far from running negative, reached a 50-year peak in 2004 and was still near it by 2006 (lower chart). [...]

PEOPLE OFTEN ASSOCIATE "SAVINGS" WITH THE quaint picture of a hard-working employee dutifully depositing part of a paycheck in a passbook bank account. Such venues are hardly extinct. Of the $55.6 trillion in household net worth by year-end 2006, $6.7 trillion was in checking accounts, time deposits and money-market funds. But in a modern economy, most saving is money put at risk, often with the hope of large returns and the chance of substantial losses.

When politicians, ecxonomists and pundits start going on about the crisis we face because we don't put our savings into such unproductive venues you can safely tune them out.

Posted by Orrin Judd at May 29, 2007 12:07 PM

I hate to be a party pooper, but the graph in the articles says it all. In 2000 downturn the HHNW tumbled dramatically.

Look at the HHNW during the previous (much worse) downturns, and you see a volitility that should be setting off warning bells.

Though the article is mostly on track with their point that the "passbook" is nonsense as "savings," the fact is that piles of our "networth" are far less valuable than the networth of yesteryear.

A concordant drop in real estate, the dollar, and stocks will hollow out the networth figure, but it won't pay off the credit card bills.

Add to the Social Security and Medicare debaclesthe obscene corruption and profligacy of state and local governments, and a bill is going to come due some day. We may be able to pay that bill with devalued dollars, but the that won't change the loss of it's buying power.

There aren't enough future tax dollars to pay for the promises made over the last 20 years, much less the last 70, and a tax system skewed to the top 30% paying about 80+% of the freight isn't going stand up to a downturn either.

Somebody is in for a rude awakening.

Posted by: Bruno at May 29, 2007 1:10 PM

The whole savings rate discussion is just misunderstanding of a statistic. The "savings rate" that everyone's upset about comes from the National Income and Product Accounts and is part of figuring out GDP. Because, by definition, capital gains are not part of income even when realized (they're part of wealth), they are ignored in figuring out GDP and thus ignored in the savings rate. Interest, on the other hand, is income.

At the same time, the government has been urging us to save in tax preferenced accounts (e.g., 401Ks, HSAs, IRAs, etc.). As a result, the savings component of GDP has gone down. Worse, when retirees spend down their IRAs, for example, all of their spending counts is considered consumption but, for savings rate purposes, they have no income because even realized capital gains are not income.

Consider an economy of 11 people, one retired and the other ten working. If each of the ten workers saves $2000 in their IRA annually but the one retiree spends $20,000 out of his IRA, the net savings rate is 0 even if the ten workers have million dollar balances in their retirement accounts.

Posted by: Ibid at May 29, 2007 5:28 PM

Bruno has a legitimate point about the profligate spending by local and state governments, but seniors can pick up and move to locations that don't have serious problems of that sort. That's why so many Bay Area retirees are living in northern Nevada, just as I will when I've saved enough working here in Seattle.

Posted by: Patrick H at May 29, 2007 6:13 PM