Saving and Investment

Americans Are Wealthier -- And Saving More Or Less

It is very common to read that Americans do not save enough. According to the Commerce Department, the saving rate fell to just 3.9 percent last year, its lowest level since 1950.

However, the Commerce Department defines saving very narrowly as the difference between income and consumption. Thus it does not, for example, include the rise in the value of investments in individual retirement accounts or 401(k) plans, or the rise in value of mutual funds or corporate stock. Nor does it count the implicit wealth people accumulate in defined benefit pension plans. Yet, quite rightly, people view these assets as savings, even if they don't set aside anything from their current income for "saving."

By contrast, the Federal Reserve measures saving directly by looking at flows of funds into savings accounts, mutual funds, insurance policies, stocks and bonds. By this measure, in 1997 Americans saved 7.1 percent of their disposable income.

In addition, the Federal Reserve also measures the increase in net worth of households resulting from rises in the value of investments. In recent years increases in net worth have been many times larger than the rise in saving as conventionally measured (see figure).

  • In 1997, the net worth of households and nonprofit organizations rose by an astounding $3.6 trillion, while "saving" was just $227 billion.

  • Most of this rise in net worth resulted from a $1.5 trillion increase in the value of corporate equities.

  • Thus the rising stock market lifted the total net worth of households and nonprofit organizations to almost $40 trillion.

Saving is important, both for the economy and for families. But there is no need to exaggerate the need for saving by ignoring much of the savings people actually have.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, June 15, 1998.

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