New York Times
December 21, 1998
Economists Simply Shrug as Savings Rate Declines
By SYLVIA NASARAmericans should be saving like crazy. Baby boomers -- the oldest in the group of 78 million who were born between 1946 to 1964 are due to retire in a decade or so -- are now in their prime earning years. The after-tax return on investments has rarely been better and the proliferation of 401(k) plans, individual retirement accounts and other tax-favored saving plans has made thrift more painless than ever.
Instead, Americans are saving less than ever. Indeed, according to the latest government figures, consumers have recently been spending all of their incomes and then some. In September, the personal saving rate slipped below zero for the first time since the Great Depression. October was more of the same.
On the surface the reason seems perverse: Economists say the better people feel about their situation these days the less likely they are to put aside extra money for the future. The seemingly imperturbable stock market, strong confidence in the economy and the ease of borrowing all help make consumers feel richer and less inclined to postpone gratification.
Some experts warn of dire consequences, but the situation may not be as bad as it looks. Despite the drop in personal savings, the broadest measure of saving -- the national saving rate, which includes not just households but corporations and the government sector -- has rebounded from its low in the early 1990s.
"We have a lot of saving now compared to then," said Gary Burtless, an economist at the Brookings Institution. Investment in the nation's capital base certainly has not suffered. Foreigners have been more than happy to send America their extra savings and, given the risks abounding in the rest of the world, seem inclined to continue to do so. Besides, with Asia and Latin America mired in recessions that threaten to spread to Europe and the United States, Americans' grasshopper habits may -- at least for now -- be more boon than bane.
"This is not the time to tell people to stop spending," said Gregory Mankiw, an economics professor at Harvard.
Finally, the fear that consumers will react to the recent orgy of spending by slamming on the brakes and suddenly turning thrifty seems overblown. Consumers are not as stretched as the saving numbers make it look. Wage and salary income is going up faster than spending, and that is what most households rely on.
One reason the official savings rate is falling is that interest income, which goes mainly to the rich, has been shrinking, dragging down overall reported income gains. Most forecasters agree, however, that each individual's own income, job situation, wealth and confidence loom far larger in household spending decisions.
Of course, many Americans are passing up a chance to get back $2 in eight years for every $1 they save today. That seems a trifle irrational, even for well-off citizens of a very wealthy country. "The standard neoclassical view that people make rational trade-offs between present and future and that we're saving the amount that best suits our purpose is obviously wrong," said Robert Frank, an economist at Cornell who argues in his new book, "Luxury Fever," that Americans ought to be saving 20 percent of their incomes.
Moreover, what is good (or at least acceptable) for the nation is not necessarily what is best for the Joneses. Even optimists concede that one- to two-thirds of baby-boomer households are not saving enough to maintain in retirement the lifestyles to which they have become accustomed.
Still, many economists say that focusing on the plunge in personal savings is a bit misleading.
For one thing, the personal saving rate is one of the government's least reliable statistics. That is not because the government does not count 401(k)s and pensions or subtract loans. It is because saving is the difference between two very large quantities, overall personal income and overall personal spending. Minuscule changes in either reported income or spending can produce huge changes in the savings rate.
Moreover, revisions based on more complete data sometimes paint a different picture than the initial impression left by the published statistics. For example, a rigorously researched 1987 paper, written with another economist by Lawrence Summers, now deputy Treasury secretary, who was then teaching at Harvard, attributed half of the drop in national saving at that point to a decline in household savings. But subsequent revisions of the national income accounts showed that the decline they cited had not actually occurred.
It is even harder to interpret the data in a period when households, especially wealthy ones, are reporting lots of profits from investments in the form of capital gains. Last summer, government statisticians started subtracting capital gains, which are not part of the nation's gross domestic product, from personal income. That change, which reflects a shift in accounting practices rather than any real change in household behavior, sliced two percentage points off the published saving rate.
None of this is to deny that there have been real changes in savings as well.
As stock prices have risen, pushing up the value of assets held by pension funds, corporations have cut back contributions to defined benefit pension funds, which pay a set amount based on previous salary and years of service. With more profit on their investments, corporations do not need to set as much aside to meet their obligations.
Pensions are counted as household saving. John Sabelhouse, an economist at the Congressional Budget Office, figures that nearly half the decline in the personal saving rate is a result of the slowdown in pension contributions.
Then, too, consumers have been spending part of their capital gains, especially on big-ticket items like houses, furniture, appliances and cars (although, interestingly, not as large a part as historical experience would suggest). More of them have been borrowing, too.
Tom Wolfe's down-and-out banker, Ray Peepgas, in his recent best seller, "A Man in Full," is maxed out on 18 credit cards and does not know how he will make it through the weekend unless another one arrives in the morning mail. He is a perfect symbol of the credit revolution of the last five years that has allowed borrowers who previously might have been forced to stop running up debt to keep on spending. And companies that provide credit have been able to discriminate better between different credit risks, tailoring interest charges accordingly. Worse risks may have to pay higher rates, but they can still usually get credit.
The big fear is that the majority of baby boomers will wind up working a lot longer than they expected because they have not saved enough for their retirement. Although experts cannot agree on what fraction of baby boomers is headed for trouble, the best estimates range from one- to two-thirds. And everyone agrees that middle-class, middle-aged Americans ought to be more worried about their futures than they appear to be.
For all the concerns, however, Americans seem better prepared for retirement than the citizens of most other countries. Thanks to the high-flying stock market, household wealth has swelled by a record $8 trillion in just four years. The net financial worth of American households equals nearly four times their income. German households, by contrast, have a net financial worth of just twice their incomes.