Savings, Schmavings

[sweeps]

Another economist who says the negative savings rate is nothing to be concerned about.

Savings, Schmavings

[DebbieL]

Remind me not to trust this idiot with my savings.

[jIM_Ohio]

The rate is calculated by taking after-tax disposable income and subtracting spending. Actual savings, like contributions to 401(k) and IRA retirements accounts, aren't counted as savings. Nor are housing expenses, no matter how much they may increase the value of a home. Capital gains aren't included in the figure either. So say you bought a share of a stock for $10, and 20 years later you sell it at $50 and spend the proceeds on a pair of (very reasonably priced) shoes. The Bureau of Economic Analysis ignores the $40 you gained on the sale but counts it as spending, and deducts it from income.

It's misleading. The 15% I saved in my 401k+IRA is not considered savings.

[disneysteve]

There are definitely flaws in the way they calculate the savings rate. The 401K thing is the most glaring problem. If I earn 100K, put 10K in my 401K and my employer adds another 3K, 13K has been added to my savings, but as far as the "savings rate" is concerned, I've saved nothing.

"buying a car so you can get to work is not considered an investment"
I have no idea why buying a car should count as an investment.

[PauletteGoddard]

SM: But isn't there a problem of ever-spiraling consumer debt in this country?

JS: We don't have more and more debt. We have some more debt, but not very much. And we have a much more rapid increase in our net worth, with our biggest single asset being our houses.... The investment in your house is considered savings, but an investment in repairing your house or adding to your house or buying a car so you can get to work is not considered an investment. In other countries, it is counted as investment.... The personal savings rate doesn't mean much.

Should we be concerned about the negative savings rate when the Federal Reserve's monthly Consumer Credit bulletin shows consumer credit on the rise? Negative savings isn't that bad if people are both socking away in their tax-deferred plans AND paying off their consumer debt, right?

[kv968]

Originally Posted by disneysteve

There are definitely flaws in the way they calculate the savings rate. The 401K thing is the most glaring problem. If I earn 100K, put 10K in my 401K and my employer adds another 3K, 13K has been added to my savings, but as far as the "savings rate" is concerned, I've saved nothing.

There definitely are flaws with the way they calculate the savings rate and that example proves it. I tend to agree with the economists that say the savings rate isn't as bad as it's perceived. Granted, I'm sure it's not where it should be but it's not as if everyone is spending every dime they earn. You have to take into consideration also how people view investing now as compared to the past. More people invest more of their money now in stocks and mutual funds (where money isn't considered "saving" by this calculation); whereas in the past it was more in banks and CDs (where this is considered "saving").

[disneysteve]

Originally Posted by kv968

More people invest more of their money now in stocks and mutual funds (where money isn't considered "saving" by this calculation); whereas in the past it was more in banks and CDs (where this is considered "saving").

Another big thing - home ownership is at a record high. In 1900, home ownership in this country was at about 20%. By 2002, it was nearly 70%. So not including increases in home equity greatly skews the savings rate when compared to the 1930s or 1940s or even later data. People have a lot more of their personal wealth invested in their homes than ever before.

[jIM_Ohio]

A house is not savings and I'd prefer it not be used in savings rate. It is part of net worth, but it's not savings (IMO)

The government uses these stats to make decisions... and it appears have a low savings rate is better to the government than having a higher savings rate.

The same way government has "adjusted" CPI so it appears inflation is low and therefore SS benefit increases and medicare benefit increases are held in check.

[disneysteve]

Originally Posted by jIM_Ohio

A house is not savings and I'd prefer it not be used in savings rate. It is part of net worth, but it's not savings (IMO)

I agree in a sense, but how about this.

Last year, I made a couple thousand dollars of extra principal payments on my home equity loan. Had I put that money in the bank earning 1% interest, it would count as savings. Since I used it to reduce debt, saving me 6%, it doesn't count as savings. That's where home value becomes fuzzy as far as savings is concerned. Also if you look at purchases of 2nd homes or investment properties.

[jIM_Ohio]

Originally Posted by disneysteve

I agree in a sense, but how about this.

Last year, I made a couple thousand dollars of extra principal payments on my home equity loan. Had I put that money in the bank earning 1% interest, it would count as savings. Since I used it to reduce debt, saving me 6%, it doesn't count as savings. That's where home value becomes fuzzy as far as savings is concerned. Also if you look at purchases of 2nd homes or investment properties.

A low savings rate allows the large financial lobby to scare the uninformed into buying financial products.

Mutual funds
annuities
bank products
accounting assistance
financial planning industry

take all government studies with a grain of salt.

if 50% of the country works for the government, 50% of the population needs something to do, so studies like the one linked come out.

I'm not that concerned with the absence of retirement accounts from the numbers. You could theoretically differentiate between "retirement" and "savings."


Yes I realize in most cases people can get at their retirement for current needs by various means, but that's not their purpose.


I think these studies are more concerned with current cash flow (i.e. is our basic finanicial nature to spend everything we get and if so why are we like that?)


Yes that does have the unusual side effect of showing you as a non saver when you put so much towards retirement that there's nothing left each month.


On the other side, however, you don't have to go too far back to a time when saving for retirement wasn't much of a concern on the monthly budget for many people. Maybe that's a reality they need to factor in to all this.


Not defending their findings, just trying to understand them better.

[jIM_Ohio]

Do we think if rates were raised, people would save more?

I don't see much reason to keep cash in a savings account at 2% when I could beat that return

investing in stocks
paying down my mortgage
spending it now

2% is not worth parking money in a savings account.

[Scanner]

JimOhio/DisneySteve,

I read another gov't report noting our collective net worth somewhere averages around 40K though, when 65. . .seems low if the average house is worth 200K in the country.

Confusing, I agree. Because I know home ownership has been a priniciple strategy of the gov't to raise the populace from poverty and it has appeared to work by most accounts.

Now, there appears to be a "a rising tide does not lift all boats" happening as CEO salaries soar but the average wage earner is stagnant.

[Scanner]

The American Dream probably deserves a seperate thread but here's an interesting article:

Study Finds U.S. Manufactured-Home Owners Face 'Quasi-Homelessness' - Population Reference Bureau

[Ima saver]

Well, I find that an interesting article on manufactured homes. I had no idea that they lost 1/2 their value in 3 years.
Since I paid my house off so early (and rebuilt several times with no mortgage) I do consider my house a form of savings. I have been able to save more since I have had no house payment. also, the home and land has more than doubled in value in 10 years.

[tinapbeana]

just personal observation: land value is where much a traditional home's 'income potential' lies, not the structure itself. the structure will require investment to maintain or increase it's value, whereas the land will simply grow in value without any aid.

since the the people discussed in the news article don't own the land they're on, they get all the downsides of owning a home (i.e. maintenance costs) without the upside of increasing land value to make it all worthwhile.

[disneysteve]

Originally Posted by Scanner

I read another gov't report noting our collective net worth somewhere averages around 40K though, when 65. . .seems low if the average house is worth 200K in the country.

This article shows a median net worth of $176,300 for folks age 65-74. That sounds a lot more reasonable.
Wealth survey: How do you stack up? - Jan. 23, 2003