The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
The text below is an excerpt from the complete document. Read the full paper in PDF format.
Official measures suggest that personal saving has been declining for the past 20 years, and even became negative in 2005. Inadequate saving threatens retirement preparations and reduces investment, which helps boost worker productivity and ultimately wages and living standards. However, neither of the two prominent measures of the saving rate, one based on the National Income and Products Account and the other on the Flow of Funds, exactly conforms to what most people think of as saving. This brief explains the measures and describes how they differ.
The United States appears to be a nation of
spendthrifts. Official measures suggest that personal
saving has been declining and some believe
that we’re not saving enough for our own retirements,
given longer life expectancy and rapidly
growing out-of-pocket medical costs (Bernheim
1992; Skinner 2007). And because we’re not saving
as much, we’re not doing as much to provide
resources for investment, which is financed by
personal, government, and business savings and
borrowing from abroad. Investment adds to our
capital stock, which helps increase worker productivity
and, ultimately, the wages and living
standards of current and future generations.
Relative to our incomes, we are not leaving as
much to our children as our parents left to us.
Just how little are we saving? The answer is
not obvious. There are two different prominent
measures of the saving rate—the National Income
and Products Account (NIPA) measure and the
Flow of Funds (FOF) measure. Both suggest a
rapid decline in saving over the past 20 years,
but neither exactly conforms to what most households
probably think of as saving. Moreover,
other, less prominent ways of looking at saving
imply Americans are less profligate.
National Income and Products Account Measure
The measure of saving receiving the most publicity
comes from the National Income and Product
Accounts (NIPA), which defines the personal saving
rate as personal saving divided by personal
disposable income. Personal saving is defined as what’s left out of personal disposable income
after spending on consumption, non-mortgage
interest, and donations to charities, nonprofits,
and other entities. Disposable personal income is
defined as personal income after all taxes are
paid. But, at a closer look, what the NIPA considers
personal income is different from what an
ordinary household might consider income.
For one thing, the NIPA measure of saving
does not include capital gains on assets, such as
stocks and bonds or housing. Certainly a household
that enjoys a capital gain would think of
it as income and, if the money isn’t spent, the
household would think of it as savings. The experts
who compile the NIPA do not count capital
gains because they are interested in the resources
available for investment. If you sell a stock that
has appreciated $100, the person buying it has to
dip into his or her savings $100 more than if the
capital gain had not occurred. Therefore, the capital
gain brings no net increase in national saving
and no extra resources for investment. However,
the capital gain has certainly made the seller better
Although capital gains are not included in
personal income, taxes paid on realized capital
gains are deducted from before-tax income to get
disposable personal income. This seems odd to
say the least.
The treatment of pensions is also controversial.
Employer contributions to defined contribution
and defined benefit plans are considered
compensation. The contributions are, therefore,
included in personal income, as are the interest
and dividends earned on pension accounts.3
Pension accounts, however, cannot be accessed
until age 59 or older without paying a tax penalty.
Thus, households may not regard pension contributions
and earnings as personal income until
then because that money is not as accessible.
Households may be more likely to consider pension
account withdrawals as income, and would
likely regard any money that is not spent as saving.
Even though withdrawals are not considered
income by the NIPA, taxes paid on withdrawals
do reduce disposable personal income.
(End of excerpt. The entire paper is available in PDF format.)