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softwareNerd

U.S. Saving Rate

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Split from earlier thread on "Debtor's prison". - sn
I don't have any hard facts that tell me that these people are spending more money than they are making....
It is something I wonder about, and haven't been able to find a good answer. Clearly, some people spend more than any decent long-term plan would allow for; but, it's hard to tell if this is a common problem. Government stats would have one believe that the savings rate is negative, but there are problems with the government's numbers, so it's hard to tell much detail. Anecdotal evidence is difficult to trust too; for instance, colleagues at work -- who earn decent middle-class salaries -- will often make comments about how they have no money and so on, but within months they're buying something really expensive; in most cases, I suspect it's not irrationality in the purchase, but more that they "talk up" their presumed poverty more than it's warranted. Edited by softwareNerd

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Government stats would have one believe that the savings rate is negative, but there are problems with the government's numbers, so it's hard to tell much detail.
I was sniffing around trying to find out about this putative "fact" of zero or negative savings rates, and found a CNN page that informs us that "The Commerce Department calculates the savings rate by taking the difference between after-tax income and all expenditures, including housing, food and clothing". Well gosh, that means the pre-tax money that I'm saving for retirement isn't "savings". A percentage of money that I actually spend but can deduct from my taxes increases expenditures and decreases income, possibly leading to the erroneous conclusion that I'm spending more than I'm making. This is a really clever way to compute savings, rather than look at actual savings.

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I don't think IRA-type of stuff is excluded. As far as I know, the term "after tax income" is used to mean "pre-tax Income LESS all taxes", rather than "taxable income LESS all taxes".

One problem with the way savings are calculated from GDP-related figures is that increases in assets are not accounted for. If one buys stock in SP500 for $1000, one has saved $1000. If that stock is worth $5,000 20 years later, then one saved nothing additional, according to the National Income and Product Accounting (NIPA) methodology. However, one's wealth has increased. This explains the paradox where the reports show a steady increase in household "net worth" while simultaneously showing a zero to negative savings rate.

The NIPA idea of what constitutes income is different from the way some individuals think of it. As a variation on the previous example, if a company puts away $1000 in a pension plan then that's treated as income for the worker (and in a sense it is). If, 20 years later, that amount has grown to $5,000, then there is no additional saving, according to NIPA figures. Further, when the pensioner receives that money, it is not treated as income, even though he might think of it as such. So, when he spends it, what happens? I'm not sure, but I suspect the accounting shows it as $5,000 of expenditure not backed by income. (I need to check into this; there may be some other way they account for the $4000 increase. Nevertheless, the point is that the NIPA figures do not reflect things in quite the same way as individuals look at things.)

The Federal Reserve publishes a survey on consumer finances which uses a household survey, rather than the NIPA figures. The latest one is for 2001-2004.

As part of their survey, they ask families whether they saved in the previous year. They don't ask for amounts of saving. In the 2001-04 survey, about 56% of families said they had saved. This compares to 59% who answered that way in the 1998-2001 survey. However, the context is that this survey period saw an extremely low growth in average income, compared to the previous two survey periods. ("Dot.com bust" took it's toll on wage and investment income.) So, it's possible that this drop is nothing but a temporary adjustment by rational families who did take out more loans on their homes, and did save less, but with the expectation that they will save when times are better. (It'll be interesting to see the 2007 survey.)

[being a survey, this approach has its own problems: every family uses whatever notion of income and savings it thinks fit,... plus all the other problems that come with asking people something in a survey rather than actually looking at their accounts.]

A second question in the survey, asks not about the previous year, but about how much they typically save.

  • 41% of households said they "saved regularly"
  • 36% said they saved "whatever was left over at the end of the year"
  • 16% said they end up saving almost nothing
  • 7% said they spend more than they save

On the face of it, those figures seem pretty good. After all, one would expect quite a chunk of households -- students, new households and retirees -- to be in a phase of their life where they aren't saving all that much, or even living a bit on borrowed money. Further, the responses to this question have been pretty consistent across the previous 3 surveys.

Another measure , called the "Financial Obligation Ratio" (FOR), from the Federal Reserve attempts to look at consumer debt by comparing the amount households are obligated to pay each month (on that debt) to their personal disposable incomes. In the 1980's the FOR was about 15%-16%, today it is about 19%. A good chunk of the increase is explained by mortgage payments that are higher (as a % of income) than they used to be. Still, this does not tell me that consumers are being profligate, only that they are spending a higher % of their income on housing.

In summary, it's a murky picture, and I wish I could get more clarity on it.

Edited by softwareNerd
Grammar

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The most important problem with the government's numbers is that many of them are meaningless. In particular, the "National Savings Rate" is not the national savings rate, not even close, not by any stretch of the imagination.

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The May issue of The Atlantic Magazine has an article "The Secret Shame of Middle-Class Americans" in which the author provides some data on savings in the U.S. and also narrates how he finds himself (old enough to be past his daughter's wedding) with little or no savings. It's intriguing to me because the author is not a burger-flipper or anything like that. My guess is that by income-stats (not wealth) he's reasonably over the median household income. 

The Atlantic has also published some readers' responses to the article. I have not read these yet, but thought I'd link anyway.

Thoughts?

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Quote

(Don't know why the page will only let me reply in a second-level quote or why it offers no Review option.)

A web search shows that the article has generated a lot of controversy. Scott Winship, a think tank scholar writing in NR, finds Gabler's article full of holes.

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What is conspicuously absent from the rather lengthy article "The Secret Shame of Middle-Class Americans" are the details that might lend more credibility to me.

How much is being produced, income wise. How much is being spent, and on what is it being spent, that leaves individuals where $400 cannot be summoned for an undefined emergency.

[A] study by Lusardi, Tufano, and Schneider found that nearly one-quarter of households making $100,000 to $150,000 a year claim not to be able to raise $2,000 in a month.

I know someone who has qualified for the EIC on their taxes for as long as it has been offered (and in this specific case, a burger flipper). They have still chosen a lifestyle which has still allowed a savings account to accrue to nearly a year's salary over the course of their employment (well over a decade).

I know someone else who plays the union game, opting for layoffs, turning down short-term jobs to wait to be called in on the rotation. After listening to how broke they were, and how many corners had to be cut, the next thing to come out was how much just got spent on a new large screen plasma television because the old vacuum tube model had finally given out. Hello???

In a 2014 Pew survey revealing that 55 percent of Americans spend as much as they make each month, or more, . . .

I've met the father who had to keep up with the Jones', purchasing a new automobile when the Jones' of the month or year acquired one, or chose to go out to eat, because they didn't want to eat what the daughter who managed their pills and doctors appointments for them cooked for dinner that night.

I know there are legitimate cases of hard luck, but as it is being sold in this article, it comes across as being the norm. If it is the norm, I would have to fear that the house of cards being built is being undersold rather than oversold. The cause, in such a case though, is not often enough identified as clearly as Brad Klontz puts it here.

So who is at fault? Some economists say that although banks may have been pushing credit, people nonetheless chose to run up debt; to save too little; to leave no cushion for emergencies, much less retirement. “If you want to have financial security,” says Brad Klontz, “it is 100 percent on you.”

Edited by dream_weaver
Added link to article

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