EconSouth (First Quarter 2002)
Drop in Personal Savings Rate
he personal savings rate in the United States declined substantially over the last decade. During the portions of 1990 and 1991 when the last recession took place, annual personal saving as a percentage of disposable income was 7.8 percent and 8.3 percent, respectively. In 2000 and 2001, by contrast, it was 1.0 percent and 1.6 percent, respectively (and many economists believe that tax refunds temporarily boosted last year’s rate).
Apart from the very long-term repercussions for retirement, personal savings are thought to have two important implications. First, along with income growth, personal savings are believed to be the means for supporting new spending. Second, personal savings are considered an important capital source for business investment.
Using savings as a crystal ball
But it would be a mistake to infer too much from the current savings rate. For one thing, the role of pent-up demand may be more limited in this recovery because consumption has remained strong throughout the downturn, and there are many sources of business capital in addition to individual savings, including especially foreign capital. For another, the particular way in which the savings rate is calculated — although entirely consistent with accounting conventions — makes consumers appear to be in worse financial shape than they’re actually in.
Quirks in the calculation
First, because capital gains are generated by asset appreciation and not by so-called current production, they’re not counted as income; however, since capital gains taxes must be paid, they are counted as an expense. Thus the official savings rate is squeezed from both sides of the equation.
Likewise with pensions: Because pension benefits are considered to be transfer payments — since they also aren’t generated by current production — they’re not counted as income. If they were counted, income and therefore savings would be higher.
Finally, the argument is often made that durable goods such as automobiles should be counted as investment rather than consumption because they are long-lived assets. In this way, too, the savings rate would be higher because only that portion of the asset that depreciated in a year would be treated as consumption.
Not clear that lower savings rate is a problem
By Bobbie McCrackin, vice president and public affairs officer of the Federal Reserve Bank of Atlanta