Saving and Investment

Measuring Americans' Savings Rate

It is often said that Americans aren't putting enough aside in savings. Well, it depends on how one defines "savings."

If one defines savings as the proportion of disposable personal income individuals set aside, then Americans are saving less now than they used to.

  • During the 1950s and 1960s, the savings rate was around 6.7 to 6.8 percent.

  • In the 1970s it rose to about 8 percent.

  • In the '80s the rate fell back to 5.4 percent and has stayed in a 4 to 5 percent range ever since.

But if one uses a broader gauge to define savings -- including net investment in owner-occupied housing, increases in financial assets such as stocks, purchases of consumer durables and net reduction in household debt -- then the numbers paint a somewhat less gloomy picture.

  • In this case, the savings rate was 12.6 percent in the 1950s, and 12.2 percent during the '60s.

  • For the '70s it went to 13.3 percent, then 11.8 percent during the 1980s.

  • Data for the 1990s are not yet available.

When one adds in "involuntary savings" -- personal and employer taxes paid to fund Social Security, Medicaid and Medicare, and employer contributions for health and pension benefits -- the numbers tell another story.

  • These show rates of 13.6 percent for the '50s, 17.5 percent for the '60s, and 24 percent in the '70s.

  • By the 1980s, the rate had increased to 24.4 percent.

The clear implication is that the growth of taxes has impeded the rate of personal savings. According to tax researchers, the federal tax system is almost designed to keep people from saving.

Their research shows that for most businesses and individuals, there has to be an incentive to postpone consumption, and that incentive comes from the after-tax return on capital:

  • A 10 percent increase in the after-tax rate of return on capital will increase the personal savings rate between 7 to 11 percent.

  • Similarly, a 10 percent decrease will cause personal savings to decline by 7 to 11 percent.

Punitive taxation placed on personal income -- through social insurance and higher income taxes, along with the capital gains tax -- are the source of the low savings rate. The prospect of higher taxes makes people simply spend their money or put it in unproductive tax shelters.

Source: Perspective, "Taxing and Saving," Investor's Business Daily, February 28, 1996.

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