NCPA - National Center for Policy Analysis

HOW MUCH DO AMERICANS REALLY SAVE?

September 19, 2005

Anomalies in how savings and wealth are measured indicate that savings rates are not as low as they appear, according to economist Susan M. Sterne.

Since about 1990, the National Income and Product Accounts (NIPA) indicate that savings rates are declining. Reversing the trend would require consumption to grow about one-half percent less than disposable income.

But several factors are not included in savings rates, says Sterne:

  • Capital gains are not included in income and, therefore, do not flow into savings, however, the taxes from capital gains are included in personal taxes and reduce disposable income.
  • Personal income subtracts contributions made to pension plans, but benefits paid from such plans are not included in disposable income; in 2003, the difference between benefits paid -- $542 billion -- and contributions made -- $312 billion -- understated both income and saving.
  • Furthermore, since 1994, the Flow of Funds (FOF) measure of savings shows that the market value of pension funds and IRAs has risen to $4.4 trillion, well above the cumulative $1.8 trillion increase in savings calculated by NIPA.

Since 1984, mortgage debt as a percent of housing assets has risen about 50 percent, with non-mortgage debt rising as well. But the trend of rising housing values benefits younger and lower-income households, who derive more net worth from their homes than from stocks and mutual funds. Observers worry that declines in housing values would precipitate dramatic need to increase saving and decrease spending. However, this did not happen between 1999 and 2002, when the equities market lost almost $5 trillion, says Sterne.

Source: Susan M. Sterne, "It's All About Wealth," Business Economics, vol. 40, no. 3, July 2005.

 

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