US Personal Savings Haven't Gone to Ruin

IT would be no surprise if many Americans were suffering from a mild guilt complex because they don't have much money stowed away in bank accounts, certificates of deposit, pension funds, and so on. Economists and politicians have been accusing them for a decade of not saving enough. Tch, tch!

The Bush administration's forthcoming budget reportedly will propose a new "Family Savings Account," giving tax advantages to those who put some money aside for a rainy day. In Congress, various Democrats have been calling for an enlargement of the tax breaks in Individual Retirement Accounts (IRAs).

Now along come two economists, Alicia Munnell and Leah Cook of the Federal Reserve Bank of Boston, saying (1) the personal savings rate "per se is not a very interesting notion; rather, the crucial issue is investment - that is, the share of current output put aside today to enhance living standards tomorrow;" and (2) this savings rate was understated during the 1980s. A more appropriate measure of saving shows the personal savings rate declining from a high point in the 1970s back to levels experienced in the 1950s and 1960s, not to all-time lows.

"It does not appear as if any fundamental shift has occurred in the nation's attitude toward thrift," they write in their bank's New England Economic Review.

What prompts concern is a drop in personal saving as a percentage of disposable income from nearly 10 percent in the early 1970s to a low of 2.7 percent in 1987. In 1990 saving equaled 4.6 percent of disposable income; it was running around 4.1 percent in the first three quarters of last year.

"We have got to get our savings rate up," a former commissioner of the Social Security administration, Dorcas Hardy, commented typically last week. "Four percent is rather dismal."

On top of the drop in personal saving was an even more dramatic decline in government and business saving. From the 1950s through the 1970s, government saving hovered around minus 0.5 percent of national income, business saving averaged plus 3.5 percent of national income. Then in the 1980s, the federal deficit rose from 1 percent to 3 percent of national income after the massive tax cuts and jump in defense spending under President Reagan. Business savings fell to 1 percent.

"Where would businesses get the investment funds necessary to increase productivity?" economists asked.

Some of the money came from abroad. Foreign direct investment in the United States soared in the 1980s. But that flow turned negative last year, with money rushing out of the country.

Somehow business has found the money to keep up its investment activity. Between 1984 and 1988, gross fixed private nonresidential investment ran around $450 billion a year in constant 1982 dollars. That stepped up to a $500 billion annual rate in 1989, 1990, and the first three quarters of 1991.

Curiously, several factors could have boosted the personal savings rate in the 1980s, Ms. Munnell and Ms. Cook note. These include the spread of savings incentives such as IRAs and 401(k) and 403(b) plans, lower inflation, and demographics.

Then why did the savings rate nose dive?

The Fed economists offer two explanations. One was the boom in housing prices nationwide in the last half of the 1970s when real capital gains (after inflation) amounted to 21 percent, compared to 13 percent in the early 1970s. "Such a dramatic swing in the value of an asset that accounts for 28 percent of the nation's net worth and that is widely held by all income groups in the population is bound to have a direct and important effect on personal saving," the two write.

Methods used to capture that gain in the national income accounts are not accurate, they argue. If properly accounted, personal saving surged during the late 1970s before falling back to more normal (but not depressed) levels.

A real factor in this decline in the savings rate was a drop in corporate contributions to private pension plans. The run-up in stock and bond prices left these plans overfunded. To avoid charges under the Internal Revenue Code, many companies reduced or stopped making contributions to their pension plans - payments that are counted as personal savings.

So Americans are just as good savers now as they have been.

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