What National Savings Crisis?
By William B. Conerly, Ph.D.
October 7, 2005
(Dr. Conerly is an economic consultant and a senior fellow at the National Center for Policy Analysis. )
There is no national savings crisis in America. You may not be saving enough, and I worry that I’m not saving enough, but our fellow citizens, on average, are saving enough.
The official statistics are frightening: the savings rate has averaged less than one percent this year, with negative number for the last three months. No one can save a mere one percent of income over a lifetime and hope to have much of a nest egg for retirement. However, the official statistics are incredibly misleading.
The government does not count savings. The statisticians count income earned, and then they compute savings as whatever is left over after taxes and consumer spending. The theory is excellent, so long as income is accurately measured. In practice, however, income is woefully underestimated. We actually have more income than the official statistics show, so we have more savings as well.
The first omission from the official personal income statistics is capital gains: they are not counted as all. For an individual, capital gains may show up one year but not the next. For the country as a whole, however, there are always people selling assets at a profit. Even in 2002, the worst year for capital gains after the stock market decline, gains amounted to three percent of personal income. They need to be counted if we are to get an accurate picture of savings.
The second omission relates to retirement accounts. When an employer makes a contribution to a pension fund or a 401(k), that counts as income in the year the contribution is made. Years later, when the retiree pulls money out of the account, the government does not count the pension or 401(k) as income. Their logic: the money was already counted, and they don’t want to double-count. That’s reasonable, but the money that comes out of retirement accounts is far greater than the money that goes in, because of the investment gains earned over the life of the funds. The result is that income is seriously understated.
This second problem is compounded by taxes paid on retirement distributions. The distributions are not counted as income, but the taxes on them are subtracted from income when calculating savings.
What’s the truth about the savings rate? Susan Sterne of Economic Analysis Associates has run the numbers. Correcting for capital gains and retirement accounts, she figures that last year’s savings rate was 12 percent, more than six times higher than the official figures. And Sterne’s figures are conservative. She includes realized capital gains, because the data are available from the IRS, but not unrealized gains, which are unknown.
There are lessons in this analysis for executives, policymakers and consumers. Businesses that are worried about consumers suddenly dialing back on their spending should relax. It is certainly possible that consumer spending will decline, but it won’t be because millions of people suddenly start saving for their retirement.
Policymakers should stop polluting the tax code in response to the supposed savings crisis. Federal laws designed to increase savings have created an incomprehensible mass of laws relating to retirement and educational accounts. There is probably not a single person in the country, other than those who work in the field, who understands the advantages and disadvantages of all the tax-favored savings options open to us.
For the rest of us, though, it’s worth remembering that the figures are just averages. Although we as a nation do not have a savings crisis, you as an individual may. Do your own planning and save as you see fit.