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Does America Have a Negative Savings Rate?
By JLP | November 8, 2006
Not according to Ed Yardeni, cheif investment strategist of Oak Associates, in a short interview in the December issue of Kiplinger’s Personal Finance. When asked about his opinion about the “negative savings rate” in America, Yardeni said:
“The official savings rate as reported by the government is defined very simply: disposable income minus consumption. Some 70% of disposable income comes from wages, benefits and bonuses, but most of our wealth comes from capital gains, which are not included in disposable income. If you get a big gain and treat yourself to a new car, it will show up in your spending, but the gain won’t show up in your income. It makes us look like a bunch of spendthrifts and drunken sailors living beyond our means.”
Interesting… I have always wondered about this. What isn’t clear to me is the definition of disposable income, of which the standard definition is income that remains after tax payments. Does this include 401(k) contributions or not? In other words, are 401(k) contributions (or any retirement-type savings) counted as savings? Anybody know?
Topics: Basics, Budgeting, Financial Planning, Miscellaneous | 11 Comments »
November 8th, 2006 at 11:13 am
I have read this other places, but have to admit that I don’t understand all the details. Most people that I know are saving a lot in 401ks and so forth, so I wonder why the “official” savings rate is so low. My friends and relatives can’t be that atypical.
November 8th, 2006 at 11:14 am
Good post, great question. And here I thought that the “average” person was debt.
November 8th, 2006 at 11:48 am
I always find it surprising when I hear the media report how little we are saving and how high our average credit card balance is.
I figured that I must be unusual since I save my money and pay my credit card bill in full every month. Maybe I’m just not as special as I was led to believe…
November 8th, 2006 at 11:56 am
Something isn’t adding up right here. The average American doesn’t own enough stocks to get the capital gains to buy a car so I’m not sure that could really account for the negative savings rate. Pehaps people have been cashing out capital gains from their homes? But I’m still not sure that would account for it. I would definitely be interested in hearing if 401K savings is included in the calcuation. Sam, unfortunately, your friends and family aren’t a good indication of the population at large since people tend to surround themselves with people who share the same values and interests.
November 8th, 2006 at 12:12 pm
Well, whatever it means, it’s been dropping like a brick since the 90s, which indicates that we just keep spending more and more, which isn’t a good thing in my opinion.
November 8th, 2006 at 12:40 pm
Hmm, where does capital gains from real estate fit into this? Many people have unrealized “net worth” gains from perceived purchase vs sell price of property and they leverage this for consumption. Now, unfortunately there are the folks which live up to the edge of that perceived home value, but there are many of us which spend well within a reasonable amount. Where does that fit?
November 8th, 2006 at 1:20 pm
I’ve always wondered this as well, and have never gotten a straight answer, especially as to whether money saved into 401Ks/IRAs “counts”. I’ve heard at least one person say that it doesn’t count.
One thing is the savings rate has been dropping while the maximum for IRAs/401Ks has been increasing – it used to be $2K for IRAs and $10K (or something) for 401Ks, and is now up to $5K/$15k (or $20K if you’re older). If they don’t count, an individual could well have a lower savings rate simply because they’re maxing out their tax-advantaged accounts!
November 8th, 2006 at 1:26 pm
My understanding is that part of the concern is we have been funding purchases with the capital gains in our home; i.e. taking out home equity loans and buying fancy cars with the proceeds.
Also, at some level, capital gains result from international investment in the US. So we’re selling essentially selling off our country’s assets to buy disposable crap.
November 8th, 2006 at 5:41 pm
I did a fair bit of Googling, and it appears that the “personal savings rate” does NOT include 401K contributions or contributions to traditional IRAs, since it’s calculated based on after-tax income. Oddly, Roth IRAs are included, since they are funded with post-tax money.
While I agree that people don’t save enough, I do suspect that the drop in the “personal savings rate” in recent years is at least partially due to the increases in 401K and IRA maximums. My wife and I put almost $40K into our 401Ks for 2005 (self-employed 401Ks can be funded far more than company 401Ks), which we definitely count as savings, but which wouldn’t show up in our “personal savings rate”.
November 9th, 2006 at 4:46 pm
I can tell you that the Negative Savings Rate is very really. I am in the Finance Industry and for the last 4 months my company has been conducting an Economical Affordability Study in 3 Bay Area (S.F.) counties that is directly related to the Negative Savings Rate.
The Issue is SPENDING
The Problems:
Problem # 1 is that many of us do not have a “Bigger Carrot” or larger financial objective that they are chasing and therefore have no other use for the money we earn except to SPEND it on frivolous things that don’t make us more money, depreciate or is worthless to us in a short matter of time.
Problem # 2 is that many of us have no budget to let us know that we are spending more than we are making. Those that do have a budget are shocked to see the variance between their “perceived budget” and what they are really spending.
And just to clarify a budget isn’t what you spend each month, but rather what you anticipate your spending will be for the entire year, which can then be broken down on a monthly basis and then into categories of spending.
April 25th, 2007 at 12:13 pm
According to Dr. Webb of the Federal Reserve (whom I spoke to yesterday) told me that 401Ks ARE included in the savings rate. Although the dividens that you recieve are not included.