How is the U.S. Savings Rate Determined?

BY busadmin  July 16, 2009 at 10:00 AM EDT

abacus; via Flickr

Question: How is the U.S. savings rate, which has gone from near zero percent in the past to 6.9 percent recently, determined?

And a more elaborate question: Is it truly the difference between what is earned and what is spent or something else? I heard at one time that it was only money associated with certain types of accounts (bank savings, CDs) and that other money put into IRAs, 401Ks, or other stock funds was not savings, but investing. If that was true, could the recent increase in the savings rate be simply that the U.S. is still spending as much as it has been, but that people are not investing in the stock market right now and seeking cash as the safer route? Please help to remove uncertainty about this often quoted statistic.

Paul Solman: I believe what you heard was that CAPITAL GAINS from stocks and other investments were not included in the savings rate. That’s true. Neither is the appreciation of other assets, like housing. While these assets were rising in value, the savings rate could said to have been understated. But now that they’ve plummeted to earth, the statistical damage is undone. Or, you might say, the current savings rate is UNDERstated.

You see why? Say I earned a gigillion dollars back in 1999 and saved none of it: a zero savings rate. But in the same year, the value of my home increased by half a gigillion, as did my 401k account. So in reality, my net worth increased by a gigillion, even as I spent all my income. You could say I saved at a 100 percent clip. But then look at 2008. I made a gigillion. Terrified by the economy, I saved half of it. A 50 percent savings rate. But my house lost a quarter-gigillion; so too my 401k. Net result: zero actual increase in net worth during the year.

Another historical problem with the savings rate is what gets counted as “spending.” Suppose you go for an advanced degree, at considerable cost, investing in your “human capital” to advance your career and career earnings. The money you spend is considered “consumption,” not savings/investment.

As to the overall national savings rate, you might want to include government. If you do, then while personal savings has zoomed to nearly 7 percent of income, government DISsaving has soared as well, due to all the extra debt we’re taking on.

But of course, that’s the idea at the moment. In normal times, our personal saving would be channeled, mainly by banks, into business investment. But right now, the money goes into banks, which are just sitting on it. That’s the “hoarding” that gets misrepresented as “putting money under the mattress.”

If we all save more and the banks sit on the money, the economy can’t get cranking. Thus the government DISsaves by spending — to try to get things up and running, or at least, to ease the transition to a period of slower economic activity.