Facts from EBRI
The Savings Paradox?
If more and more people are saving for retirement, how can the
personal saving rate be near zero in the United States today?
First it's necessary to understand how the personal
saving rate is measured. The most frequently cited
definition comes from the Bureau of Economic Analysis of the U.S.
Department of Commerce, based on the National Income and Product
Accounts (NIPA). As measured by NIPA, the U.S. savings rate for
1998 was 0.5 percent of disposable personal income (see
Under NIPA, personal savings is a residual. This means
that personal savings is what is left over from personal
income after subtracting payments for personal taxes, individual
contributions to social insurance (i.e., payroll taxes for Social
Security and Medicare), and personal outlays such as food,
housing, and clothing.
Personal income includes the following:
- Wages and salaries.
- Other labor income (i.e., employer contributions to
pensions and profit-sharing plans and group insurance,
such as health, workers' compensation, and supplemental
- Rental income.
- Personal dividend income.
- Personal interest income.
- Transfer payments to persons (i.e., Social Security,
government unemployment and insurance payments, veterans
benefits, government employees retirement benefits, and
Personal taxes include the following:
- Federal income tax payments.
- State and local income tax payments.
- Any penalties, fines, or interest payments made on income
Personal outlays include the following:
- Personal consumption expenditures (i.e., spending on
food, housing, clothing, household operations such as
utility bills, transportation, and medical care).
- Consumer interest payments (i.e., payments of credit card
- Personal transfer payments to foreigners.
Personal savings is what is left over from personal income
after deducting the above outlays, contributions to social
insurance, and taxes. Personal savings divided by disposable
personal income is the personal savings rate. Disposable
personal income equals personal income after deducting
personal taxes and individual contributions to social insurance,
but before personal outlays are deducted. So on the
surface, a zero personal saving rate on the national level would appear
to mean that individuals are consuming all of their income in a
given time period, but....
Income, as measured by NIPA, only includes wages,
dividends, interest, and rental income; it does NOT
include capital gains on stocks and other assets.
So what does that mean? Individuals who own equities have
generally experienced tremendous increases in the value of those
financial assets over recent years; i.e., they are wealthier.
According to federal data, the net worth of U.S.
households(2) increased from $16.8 trillion at year-end
1987 to $33.2 trillion at year-end 1997, as assets increased by
$19.4 trillion and liabilities increased by $2.9 trillion. Of
this asset increase, $15.0 trillion came from financial assets
and $4.4 trillion from tangible assets (such as real estate). In
other words, 77 percent of the increase in net worth over the
past 10 years was due to the stock market rise.(3)
If individuals choose to spend more as a result of this
increased wealth, such behavior would drive down traditional
measures of personal savings. This is so because under NIPA, the
increase in wealth does not show up as income, but the increased
consumption that some of it finances does figure into the savings
So it is quite possible to have households saving money for
retirementsay through a 401(k) plan or an individual
retirement account (IRA)while simultaneously tapping into
recent wealth gains to fund additional consumption.
One could argue that a more complete measure of saving would
include increased wealth through capital gains as part of
personal income. According to one estimate,(4) if the value
of capital gains were included in income when measuring savings,
the 1997 savings rate would have been 8 percent, as opposed to
the NIPA estimate of 0.8 percent.
(1) A less-quoted measurement of personal savings is the Flow
of Funds Accounts (FFA) produced by the Federal Reserve System,
which differs from NIPA in its definition of personal income and
consumer durables. For instance, the FFA treats the acquisition
of consumer durables (i.e., automobiles, major household
appliances, etc.) as a form of saving, whereas NIPA treats
consumer durables expenditures as personal consumption. FFA
consistently shows a higher national savings rate than NIPA, but
receives less attention in the news media.
(2) Including nonprofit organizations, which cannot be
segregated from the data.
(3) Richard D. Rippe, Rita J. Lavin, and Philip Laverson,
There Is No Saving Crisis, Prudential Securities
Economic Outlook Monthly (January 1999).
(4) Klaus Friedrich, The Real American Savings
Rate, New York Times, May 4, 1999.