The financial schlamozzle has forced me learn more about a whole host of financial terms than, frankly, I cared to know. In the process, it became clear that either I am completely ineducable -- full disclosure: this is my default option -- or that people who are paid to know better have little more insight into their professional area of expertise than a dog does of logarithms.
To wit: the US household savings rate.
Revving the WayBack machine nearly to the redline, what I remember from Econ 101 is that savings is the difference between income and the consumption of goods and services. According to the Bureau of Economic Analysis
, I'm not too far off the mark: Personal saving.
Personal income less the sum of personal outlays and personal current taxes.
Fine. That seems simple enough. If I spend every bit of what I earn, then my savings rate is zero.
According to, well, just about every expert who has rustled his vocal cords or pestered his keyboard on the subject, the US household savings rate has been in a nearly linear decline from around 8% through 1980, to an excellent approximation of zero today.
Looks like the whole country has taken a pass on that whole rainy day thing.
Or has it?
As simple as the BEA's definition of personal saving is, nearly every term is undefined. Personal income: is that pre- or post-tax? Which taxes; income only, or the whole panoply? Outlays: what counts as an outlay?
One consequence of this definitional quicksand is deciding whether 401(k) and IRA contributions are included in the national savings rate.
According to the Federal Reserve Bank of San Francisco
Since IRA and 401(k) contributions are not part of personal outlays (and, therefore, must be included in the difference between personal income and personal outlays), these contributions are included in national saving computations.
According to Stephen G. Peasley, president of KPP Financial
The BEA definition is the amount left over from disposable personal income after expenditures on personal consumption, interest payments and net current transfer payments. In other words, how much of your after-tax income, minus all expenses, is available for you to spend.
Which completely excludes 401(k) and IRA contributions.
For Pete's sake, I'm not asking for the origin of the universe here.
On the face of it, the FRB o' SF should win on authority points. However, extensive Googling -- about two hours worth, to be exact -- yielded a pronounced split on the question. Nearly the same number of hits said no as yes, and the disagreement centered on whether personal income was disposable income after taxes, or gross income.
There are several tie-breakers. The first is contained in a paper written for the BEA
(FRB o' SF, sit up and pay attention here), the point of which was to list the ways the BEA could improve its statistical methodology. One of its conclusions was that the narrow National Income Production Account (NIPA) differs from a comprehensive measure "that includes savings in pensions and capital gains on equities."
The narrow measure showed a low rate, which declined from the 1980s to the 1990s. The comprehensive measure showed a very healthy savings rate of 25 percent for the 1990s. The latter measure better corresponds to the flush of wealth that households actually experienced, and indeed it probably explains the decline in the narrowly defined savings rate.
The second tie breaker is the chart above. The NIPA savings rate had been fairly stable from 1960 through 1980, at 9%, give or take 1%, then declined linearly to around 0% today.
At the risk of falling prey to post hoc reasoning, it is worth asking: What happened in 1980? Section 401(k) was added to the IRS code on Jan 1 of that year.
Finally, according to a recent Wall Street Journal
(about how some Democritters want to appropriate 401(k) assets), 60% of Americans have 401(k) accounts, worth $3 trillion.
The ROBA (risk of blowing an aneurysm) meter is shooting into the red here. For Pete's sake, again, people define your frickin terms
. Perhaps it is my software engineering background, or the precision that being a pilot requires, but somehow I don't think it asking to much to properly label things. Working age people account for 63% of all Americans. So, does the WSJ article mean that 95% of all working age Americans have 401(k) accounts? Well, that obviously can't be true, since not all working age Americans work. Perhaps the article means 60% of the 66.2% of the labor force with a job
, or about 40% of all Americans, have made 401(k) contributions.
I'll go with that, if for no other reason than the result at least wanders within hailing distance of the plausible; 120 million Americans have 401(k)s worth 3 trillion as of this week. (Note, as of this year, there are roughly 75 million households in the US, at about 2.5 persons per household
And, no, now that you mention it, I am not about to hunt down what the heck a household is, or what bin the other 113 million people in the US are pitched into.)
Squeezing the numbers through a calculator, from a starting point of zero in 1980, 120 million American wage earners accumulated an average $25,000 each in 401(k) accounts.
Is this consistent with a declining savings rate? I think not. And what about IRAs?
Sheesh. Four hours of research, and I don't even have a handle on personal income.
What the heck is a personal outlay? Well, according to the BEA: Personal outlays.
The sum of personal consumption expenditures (PCE), personal interest payments, and personal current transfer payments.
Okay, what the heck is PCE? Personal consumption expenditures (PCE).
The goods and services purchased by persons.
Okay, what the heck are goods? The combination of Durable (tangible products that have an average lifetime of at least three years) and Nondurable goods, aka Cheap Junk.
Products that cannot be stored and are consumed at the place and time of their purchase.
That pretty much sums it up, right? Right? Heck, I dunno. If I buy stock, where does that fit? How about contributing to a 529 (education savings scheme)?
What about the houses we live in? Assuming a 2500 square foot house, and $125 per square foot to throw it all together, that comes to $313,000. I'm going to ignore the dirt it sits on, since that is neither a good, nor a service. That amount, absent interest, will be covered in less than 18 years at $1500 per month. The median age of owner occupied homes in the US was 30 yrs in 2001
Just guessing here, but that probably means roughly 3/4 of all mortgage payments in the US go for neither goods nor services.
In the absence of hard data, I am going to extrapolate from personal experience. According to the NIPA notion (assuming that notion excludes 401(k)-ish stuff), my savings rate in 2008 was 6%. Include 401(k) contributions, and it goes to 20%. I have increased the payments on my 30-yr fixed rate mortgage to yield a 15-yr payoff. That makes my savings rate something like 30%. Unless, of course, increasing the payoff rate is counted as increased spending -- which it appears to be -- meaning paying off my house sooner means a lower saving rate, down to 10%. Toss in 529 contributions, and it goes to 33%. Unless it is 13%.
I have no earthly idea which of these numbers is "correct"; however, I strongly suspect that the NIPA number we all read about is way at the lower end of that range.
Which means it has heck all to do with reality.
Why am I ranting? A whole host of reasons.
- Depending upon the real answers, there could be a serious disconnect between the objective reality of the national savings rate.
- The MSM's reporting (and deriding) of it could well reveal professional malfeasance, or negligence, of the very first order.
- The consequence of this reporting could be too encourage people to save more when, in general, they are saving plenty already.
- Additionally, the credit crunch could be very short lived. Mortgage payments and 401(k) contributions continue to inject a heck of a lot of liquidity into the system. (As it turns out, I saw on a news crawl yesterday that bank reserves are now well above required levels).
- Finally, it raises the question How the heck much do we need to save, anyway? Near as I can tell, there are three reasons to save: to cover emergency expenditures, including interruption of the primary income stream; anticipatory saving for replacing medium cost durable goods (major appliances, say); and to provide post-retirement resources.
Well, based on that, how the heck much do
we need to save? The emergency reserve amount is relatively fixed, whatever it may be. Having achieved it, there is no point saving any further. Anticipatory saving, by definition, nets to zero.
Which leaves retirement saving, about which the headline savings rate seems to say nothing.
Unless it does.
After over five hours of research and writing, I still have no idea.
Maybe I am
a completely ineducable glorified heavy equipment operator.