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Is it Possible Americans Are Saving More Than We Think?
By JLP | June 5, 2007
First off, I’m NOT AN ECONOMIST, so I sometimes have a hard time wrapping my brain around these kinds of discussions.
The Great American Savings Myth (requires a subscription however you might be able to read it here for free) by Gene Epstein, is the cover story in the May 28 issue of Barron’s. The article is about how the personal savings numbers are a lot higher than what the government reports. The numbers are still down, but not nearly as much as the government’s reports would have us believe.
Why? Because the government is using an outdated formula for calculating savings. According to Epstein:
“personal saving” is defined in a way that sounds plausible. It is essentially whatever is left over after spending on consumption is subtracted from disposable personal income.
But to begin with, for reasons that may be defensible but are certainly controversial, DPI specifically excludes all income realized from capital gains that might otherwise go into saving. For example, say an investor takes a capital gain of $20,000 on the sale of IBM shares and pays $3,000 in taxes on it. The $20,000 does not get added to pre-tax personal income, but the $3,000 tax does get subtracted to arrive at DPI. The $17,000 difference might have been saved but it is not part of the calculation.
Long story short, after making some adjustments, Epstein figured out that real savings per household came in at $23,250 in 2006. He also says that the real net worth per household was at $486,000 at the end of 2006. WOW! Does this argument hold water? Not according to Paul Kasriel, Director of Economic Research for The Northern Trust Company. He wrote a rather lengthy and dense response to Epstein’s story. The main point that I can gather from Kasriel’s piece is if American households are so rich, why are they borrowing so much? Good question.
Personally, although I like Epstein, I have a hard time believing these numbers. Of course, I could have been conditioned into believing we are all going to hell in a hand basket by the media. I mean, this could be one of those cases where the general consensus is dead wrong and Epstein is right.
What do you guys think?
Topics: Miscellaneous |
June 5th, 2007 at 12:24 pm
I think this is one of the cases where average are heavily weighted by outlyers. I’d be curious to see where the median savings amount is. In my everyday life I think that for every one person that has a net worth of 1M, there are probably 9 that have a net worth of -50K. Same with the savings amount. Seriously doubt the average houshold saves 23,250 each year. What is the median income vs the average income. I know the average income for the US is MUCH higher than the average person makes because of that 1% who earn 500K/year.
June 5th, 2007 at 12:42 pm
There are 2 factors that interest me. 1) The article artical said that equity in businesses is not counted. So, if they are not counting that, my personal savings rate goes from about 35% to 0.5%. I save very little outside tax advantanged retirement and education accounts.
If this is the case, I definately agree that the savings rate is underestimated.
2) On the other hand, it is comparing against net worth which includes buying crap like cars and homes. I disagree with any argument that implies that this ammount of money should be considdered savings.
In my head, I have just thought of about 10 people I know in their 20s. The mean savings rate is probably about 10-15% while the median is more like 5%.
June 5th, 2007 at 12:47 pm
I think the personal savings rate number is pretty flawed if it doesn’t include capital gains on investments and increasing home equity. The fact is the number is an antiquated measure that doesn’t reflect how Americans save today. It doesn’t even count 401k withholdings as savings for heavens sake…
June 5th, 2007 at 12:57 pm
I’m not qualified to make comments on the statistical information, especially since I don’t have access to raw numbers. All I can offer is a view of those I know and speak with about money matters. From what I can tell, the mainstream articles touting the negative savings rate are basically correct. They may be histrionic, but many of the people I know defecit spend. They know they defecit spend, but they do it anyhow. Also, few people do any sort of serious retirement savings. So, I’d be inclined to side with Nick: if these new numbers are accurate, they’re probably skewed by those far outside the mean.
June 5th, 2007 at 1:01 pm
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June 5th, 2007 at 1:29 pm
I’m going to have to agree with Nick and J.D. in that I think the new numbers are skewed because of the more wealthy outliers. Just given the fact that they used an example of a $20,000 capital gain on stock is something that doesn’t apply to the vast majority of Americans.
How many people have any capital gains at all, let alone sizable amounts that could be added to their savings rate? While I do agree some of the things that are or aren’t included in the calculation may be a bit dated, given my line of work and from what I’ve seen I think the general numbers that are reported is fairly accurate.
I service an employee base of just over 3,000 people which ranges from part-time employees making just over minimum wage to the highly compensated employees bringing in up to $250,000 a year.
This is a fairly wide sample, and the overall retirement plan enrollment is under 70%. If you break the data down further and look at individuals who earn $80,000 or more the enrollment rate is around 90% with the bulk of these people max funding. Between $40,000-$80,000 the enrollment rate drops significantly to around 72% with the average deferral of 5% of their salary. Only 36% of those making under $40k a year enroll with the average deferral of about $20 per bi-weekly pay.
I know this is just a retirement savings number and doesn’t directly apply but this is a retirement plan that even has a company match. If these people aren’t able to or don’t want to save in this plan they clearly are probably unable to contribute any real savings elsewhere.
So from what I see, if only about half of the typical “average” American employees even enroll in a 401k plan with a company match and on average only contribute around 5% of their pay that definitely doesn’t appear that your typical American is saving enough or too much.
June 5th, 2007 at 1:29 pm
It should include 401k withholdings, but home equity? How is an appreciating house “savings”? It’s an asset they can’t tap into unless they actually sell the house and downgrade to a less expensive home.
June 5th, 2007 at 1:33 pm
Chris,
For me personally, the jury is still out on home equity. In some ways I think it should be counted because it is an asset. The problem is what if it is an inflated asset? However, the same could be said for a 401(k) that was heavily invested in tech in the late 90s. It would have “looked” good but would have been inflated.
June 5th, 2007 at 2:13 pm
I am an economist.
“if American households are so rich, why are they borrowing so much?”
The answer is simple: the cost of debt is lower than the cost of capital.
June 5th, 2007 at 2:26 pm
As with any atttempt to measure the financial health of a society, a company, or an individual, there is no one tell-all statistic or metric. In general, I agree with those who take issue with the govt statistics, but also believe that they do reveal some disturbing trends.
Looking at my extended family and friends, I am fairly well convinced that the vast majority of Americans are not taking any near the appropriate steps to secure their financial futures.
Even my accountant brother-in-law, who makes around $100K does not contribute the max to his 401K or save any amount outside his 401K. He is pretty much banking on inheritance for retirement - and that is a pretty questionable strategy - not so much a strategy as cop-out. But, he’s convinced that to provide the white picket fence, two-car suburban lifestyle for his SAHM & kids, that he has to spend today rather than prepare for tomorrow. And he’s a fairly conservative, financially literate member of the top half of the income spectrum.
Most of our friends and family are simply ignoring the whole idea of retirement savings. It’s as I’ve been saying - most people knowingly or not are making the cost of the later part of their lives, a burden of their children. And if not their children, then the govt. It definately seems to be the norm rather than the exception.
June 5th, 2007 at 3:04 pm
Saving is great from an individual, personal perspective, but it is consumption that drives the economy and creates innovation and progress. Excess saving in a society can even be detrimental and lead to bubbles, like what is happening in China today. Everyone is saving there but there is no place to put the money, and not much to buy because people aren’t spending and creating incentive to bring products to market. As always, balance and moderation are the key.
June 5th, 2007 at 3:29 pm
Ken Fisher, the money manager and Forbes columnist, took on this question in a recent column. Fisher is of the same opinion as Gene Epstein that the government’s measure of savings is flawed. For instance, Fisher says that contributions to a 401k are not counted as savings, however, withdrawals from a 401k are counted as consumption.
I put over 17k a year into my 401k (including catch up contributions), but the gov’t would say that I am saving very little because the amount going into my savings account at the credit union is relatively small.
As for the statement “if American households are so rich, why are they borrowing so much?”, a previous commenter has it exactly right. JLP, you and others here have spent much time arguing against paying down your mortgage, but rather using the money to invest. That is in effect borrowing money to invest, and increasing your debt load. If you can do that successfully, and you have argued that you can, then why not borrow? You would have to be a chump to do otherwise?
June 5th, 2007 at 8:17 pm
Sam,
My point with that question was that although that strategy can be done, I doubt the vast majority of people actually do it. Some of them do, but I’m betting that a lot of people are borrowing against their house to buy cars or other things like that. That’s just my guess.
June 5th, 2007 at 10:19 pm
JLP,
Many people aren’t using mortgages to directly fund investment, but many do carry mortgages while they invest, or carry student loans while they fund 401Ks. From an economic and accounting point of view, this is identical to funding their 401K or investment with debt against the house, even if it isn’t intended this way.
And there _are_ many people who use RE to directly fund investments, especially in other real-estate or to launch small businesses. This is especially true for little businesses, which are often bought or started with SBA loans that are collateralized with real-estate.
June 6th, 2007 at 12:22 am
How can I save when I need so much to buy and it’s impossible to wait saving money? I don’t know (you know better, anyway), if I’m saving or not, but I borrow money with a credit card (0% thanks to my good credit) and transfer the balance each time the 0% period ends. Can this be called debt or am I saving - maybe you can help me to understand it?
June 6th, 2007 at 12:33 am
testing 1… 2… 3…
June 6th, 2007 at 7:55 am
I think there’s a little truth on both sides of this issue.
The federal government demonstrably uses outdated methods to calculate economic measures.
That said, the capital gains exclusion makes sense to me for the reason others have pointed out - the wealthy are the overwhelming beneficiaries of capital gains. Excluding capital gains from the calculation omits those ‘outliers.’
Finally, I think it’s important to point out that debt in America today largely isn’t being used for investment, but for CONSUMPTION. It doesn’t matter how cheap borrowing is if you’re essentially destroying the money.
June 6th, 2007 at 8:09 am
Credit Card Holder makes an interesting point. Is this calculation counting net savings after debt. Like 5% interest on 0% credit cards or investing while still having mortgage debt.
JT also makes the point that the cost of debt is less than the cost of capital. For someone, or some entity, with good credit and thus good interest rates on debt, it is much more profitable to borrow and invest. This won’t continue forever. According to the efficient market theory, they should even out over time. The 0% credit card trick is already starting to move away as they are begining to charge an interest rate on balance transfers but not purchases.
June 8th, 2007 at 5:20 am
Star Money Articles for the Week of June 4
Here are interesting posts and news this week from the MoneyBlogNetwork and beyond: AllFinancialMatters thinks we may be saving more than we think. MightyBargainHunter got a great deal at a yard sale. Five Cent Nickel tells us that Honda is