Measuring Personal Saving: A Tale of American Profligacy

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Abstract

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.

Introduction

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 off.

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.

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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.

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