WILLisms.com: Trivia Tidbit Of The Day: Part 411 -- America's Savings Rate.

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Trivia Tidbit Of The Day: Part 411 -- America's Savings Rate.

Policies Have Consequences-

"Savings rate at level similar to Depression"

"2006 Personal Savings Fall to 74-Yr. Low"

Really?

Or maybe not:

Net wealth — the total value of all assets, including stocks, bonds, bank accounts, houses and retirement funds, after subtracting debt — is about $54 trillion, up a hefty $16 trillion since President Bush cut taxes in mid-2003. If you divide that $54 trillion by America's 114 million or so households, you get an average net worth of roughly $474,000.

So, the savings rate doesn't really measure savings?

Correct:

Most working Americans sock away a portion of their paycheck each month into a 401(k). This comes out of pretax income. But since the savings rate is derived by subtracting personal consumption from disposable income — that is, after-tax income — the money built up in these accounts isn't counted. Yet, 401(k) and similar savings plans totaled about $3.2 trillion at the end of 2005.
How about housing? To many — if not most — people, a house isn't just a place to live. It's a form of long-term saving, an investment we can either pass on to our children or cash in after we retire.

For the purpose of calculating savings, the money we put out for our mortgages each month is treated as consumption. In other words, your home may be savings to you, but you're treated by the government's accounting as if you were a renter.

Worse, the savings rate doesn't include a lot of things that should, by logic, be counted in any meaningful measure of savings. Like capital gains on stocks and houses, equity in private businesses, and the gains from mortgage refinancings, which often end up invested.

So, theoretically, we could all have nearly paid off mortgages on John Edwardsesque mansions and burstingly humongous 401(k)s, but Americans still wouldn't be saving any money according to this formula.

Why measure the savings rate this way?

What costly government program might derive legitimacy from an erroneously low savings rate?

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Posted by Will Franklin · 2 February 2007 07:25 PM

Comments

The reason why they measure it is that rates are independent of inflation. Looking at asset values themselves means that you have to do other adjustments. Ability to save per period of time is a way different indicator than current asset-prices.

(I agree with the author that 401(k) money, adjusted for tax rates, should be figured in, but since we all end up paying slightly different tax rates, that would be rather arduous to compute.)

Posted by: jimdesu at February 2, 2007 10:38 PM

What costly government program might derive legitimacy from an erroneously low savings rate?

The Democrat Party. It's all about the media painting the picture of soup line America to bash Republicans with.

Posted by: bill at February 3, 2007 04:54 AM

I really believe most Americans love to give generously to people in need. I think that what many of us don't appreciate are Politicians trying to enforce their own gift giving ideas on us??? I personally don't want my tax dollars going to pay for abortions...

Posted by: zsa zsa at February 3, 2007 06:13 AM

I wondered why my bank offered me a CD with "nopenalty for early withdrawal" last week.

Posted by: Chief RZ at February 3, 2007 04:29 PM

The very tax laws that we have are why our savings rates have dropped. Let's compare the advantages of a 401k versus a Roth IRA. First, there is the initial limit. A 401k offers what, $15k per year pre tax versus a Roth that offers $4,000 post tax. Second, a 401k saves initial tax payments. So does homeownership. Again, mortgage interest deduction.

In my case, we make around $110k and by my wife and I maxing out our 401k's and then if need be, taking a loan in an emergency, we are actually saving ($30k x 29-33% marginal tax rate) about $10k in income tax. Next, we own an investment property plus our current home that we get to take the mortgage interest deduction on. Between the two, we take another $30k in interest deductions.

Net savings of our home interest and 401k contributions are over $20k in taxes. That $20k goes directly into other investments and at the end of the day, our pretax or non-counted investments THAT DON'T COUNT AS SAVINGS are yielding an immediate return of $20,000 that we get to keep. Sticking money into savings is retarded unless and until you have maxed out your 401k contribution, paid your mortgage interest, and maxed out your Roth IRA, in that order.

If you are putting money into your savings account that earns 2% or into a CD that may earn 3-4% and you haven't maximized your pretax 401k contributions or don't hold a real estate property that you can deduct, you are retarded. And you need to find a financial planner immediately.

Posted by: Justin B at February 5, 2007 12:15 AM