Americans' Saving Rate = Zero Percent

There are many important economic indicators that can be a gauge about the health of a nation's economy, or a barometer about its citizen's finances, but one that never ceases to amaze, and concern me, is the U.S. personal saving rate.

According to the Bureau of Economic Analysis Personal Income and Outlays report, Personal saving as a percentage of disposable personal income was 0.0 percent in June, compared with 0.4 percent in May.

0.0 percent!

It has been below 1.0 percent every month this year.

A number of papers have asked the question whether we should be concerned about this fact. The San Francisco Chronicle, for instance, notes that economists can't quite agree:

Should we worry?

Some economists say not really. Others answer emphatically yes.

The optimists say the bureau's number underestimates saving because it excludes realized and unrealized capital gains from stocks, homes and other investments. These assets, despite some ups and downs, have generally been appreciating in recent years.

The net worth of households and nonprofits -- which is the value of their assets minus their debts -- has risen about 24 percent since 2002 (near the end of the bear market) and 15 percent since 1999 (near the end of the bull market), according to Federal Reserve data. These numbers are not adjusted for inflation.

"I'm just not terribly concerned because wealth is so great," says John Lonski, chief economist at Moody's Investors Service. People figure they can afford to save nothing because if worse comes to worst, they can sell their house or investments, he adds.

Other economists say the lack of savings is a big worry.

Why it matters

If Americans are not saving their hard-earned money, how will they buy stocks, houses and other assets that are likely to produce these pain-free gains?

And what if the Baby Boomers sell their houses and stocks around the same time? Will they drive down prices?

On a broader scale, savings provide the capital companies need to build plants, buy equipment and employ people. U.S. companies have been able to finance some, but not all, of their investment needs with their own earnings. To get the rest, they've had to go overseas, where saving rates are generally positive and in some Asian countries, very high.

"It's almost disturbing that the richest country is borrowing from the rest of the world," says John Shoven, director of the Stanford Institute for Economic Policy Research.

"As that happens year after year, the returns on our capital will not be paid to Americans but to owners of that capital, namely people from all over the world except the United States," Shoven adds.

Our dependence on foreign capital also makes us more susceptible to the political and economic crises that often shake developing countries.

Which of these economists are right?

The Chronicle explains what "personal savings" is, as reported by the BEA:

"It's the amount of money out of your income that you don't spend and don't pay in taxes. It's what you can put in the bank or stock market," says Shoven.

The saving rate is personal savings expressed as a percentage of disposable personal income.

This rate has been falling for 20 years. It was 10.8 percent in 1984, 4.8 percent in 1994, 1.8 percent in 2004 and 0.4 percent in May 2005.

While economists can quibble, and they do, about if this is bad news, or a worrisome trend, they generally agree there is a downward trend:

Stanford economist Michael Boskin says the main reason the saving rate seems to be falling is because it excludes capital gains.

Say you buy a share of stock in 1984 for $10. Twenty years later, you sell it for $40 and spend it on a watch.

The bureau ignores the $30 gain, but counts the $40 as spending, deducting it from income.

He points out that "401(k)s and IRAs got started in the early 1980s. The value of those assets is vastly larger than it was 20 years ago." As people begin spending that money, it shows up as negative savings.

"I believe the saving rate is lower than it used to be but not nearly as much as these figures suggest," Boskin says. He says it is probably 3 to 5 percent, not zero.

However, consider this tidbit from a Seattle Times article last weekend on the same topic:

A majority of Americans have less than $25,000 stockpiled for retirement; many experts say a healthy nest egg is upward of $500,000.

OK, so those numbers can possibly mean anything without knowing further details about how many years the Americans have left before retirement to add to their measly $25,000, but that doesn't detract from the point that Americans just simply don't save very much money, and are falling far short of what would be considered a target nest egg.

Should any of this surprise us? After coming to grips with the shocking numbers, it all seems to fit with what we have seemingly become as a nation: spenders who live in debt.

As a nation we run record deficits ($668 billion in 2004), and have a national debt that is closing in on $8 trillion (costing the nation over $300 billion annually in interest payments alone - that's more than the cost of 1 Iraq War or 1 Congressional Transportation Funding Bill!).

As individuals we increasingly live in debt too, living off credit cards, buying cars and houses with no money down and dangerous financing terms, and being encouraged to do so by a society that seemingly makes no effort to dissuade people from piling up bills today, that you may not be able to pay off for years.

Many people rely on Social Security, or their company pensions for the totality of their retirement nest egg. These sources typically just aren't enough, and many would argue can't be relied on to exist when the time comes for you to start receiving your monthly payments.

Young adults need only understand that the power of compounding interest benefits them the most, but only if they start saving money at an early age. Yet so many are burdened by debt they can't even begin to think that saving even a little bit each month can pay major dividends in the long run. They've got large student loans, low paying jobs, or can't imagine they'll ever live long enough to even retire.

So what's going to happen when these people find themselves on the short end of the stick? They'll either keep working well beyond the retirement age, or we'll have a growing number of people dependent on some sort of government charity, living in subsidized housing, unable to afford basic health care or groceries. Maybe it won't get that bad, but it certainly doesn't look good as things stand if the current trends continue as they have.

While ignorance of the importance of saving isn't an excuse I want to hear anyone give should I be asked to help pay for a retirement other than the one I am planning for myself, ignorance certainly abounds when it comes to the necessity to save for that rainy day, or for that future retirement, or simply to be able to pay one's way until the day one passes on from this mortal realm.

Being in debt is neither good for a nation or for an individual, and while we ask that our government reduce its debt, and our reliance on foreign nations due to it, we must all do our part to try to save money, and escape our own debt and future reliance on others.