NCPA - National Center for Policy Analysis

Savings Rate Declines To Lowest Level Ever

June 29, 1999

The Commerce Department says the official household savings rate in May fell to the lowest level recorded in history -- as well as the sixth consecutive month that it was negative. In other words, Americans are supposedly spending more than they are earning.

But there is an important caveat. The official rate does not include earnings achieved in the stock market. Many Americans consider the current dramatic gains in the value of their equity investments as savings for retirement.

  • The savings rate -- after-tax income minus outlays -- hit minus 1.2 percent in May.
  • Personal spending rose 0.6 percent in May, compared with the April figure previously estimated at 0.4 percent -- but now revised upward to 0.5 percent.
  • Meanwhile, personal income -- before adjusting for inflation -- grew 0.4 percent in May, following a 0.5 percent rise in April.
  • In 1974, the year Congress created the Individual Retirement Account to boost the incentive to save, Americans saved 9.5 percent of their paychecks.

So even as government incentives to save have multiplied, the amount of household income not consumed has declined.

Yet Washington keeps trying.

President Clinton wants to create "universal savings accounts" through which the government would match middle-class families' savings. The Republican chairman of the Senate Finance Committee favors sweetening tax breaks for IRAs and employer-sponsored 401(k) plans. And Congress has begun debating whether to privatize some portion of the Social Security system by allowing Americans to invest and control some of the taxes now being withheld by the government.

Sources: Jacob M. Schlesinger, "Few Americans Heed Washington's Urging for Bigger Nest Eggs," and Alejandro Bodipo-Memba, "Consumer Spending Jumped 0.6 Percent in May," both in the Wall Street Journal, June 29, 1999.

 

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