There has been a lot of ink devoted in the financial press to the declining US Savings Rate. But how much do you really know about this widely-quoted rate? What are its components? How accurately does it measure savings? Many would argue not very well at all, which I intend to prove in the following report.
First, it's important to understand what exactly the savings rate measures. According to the Bureau of Economic Analysis, the savings rate is defined as "the amount left over from disposable personal income after expenditures on personal consumption, interest, and net current transfer payments." In other words, it's your salary, minus everything you spend. But is this an accurate measure of the average US consumer?
One source of income that the BEA doesn't include are capital gains. This is the money that you make from selling financial assets like stocks, bonds, or a house. Unrealized gains are when the price of the financial asset has gone up, but you haven't actually sold the asset and gotten the money yet. So if I own 10 shares of Google, and they move from 400 to 500, I've made $1000 in unrealized capital gains. However, those shares could move to 300 tomorrow, so the gains are not as good as money in my pocket. If I were to sell those shares today, than that $1000 becomes realized capital gains. In either scenario, whether you sell those shares or not, the BEA has not included the money as income. The BEA does, however, include the taxes you pay on that money as spending.
This might not matter much for you or me. For many Americans, stock gains make up an insignificant part of our daily spending money. However the picture changes when we begin to look at the data by different income groups. The top 1% of U.S. households recieve 20% of "income" as defined by salaries and wages. However, 40% of that group's true income comes from other types of income, mostly stock options. Any time someone exercises their stock options, they don't count as income.
There are numerous examples where the data would be even more skewed. Take Larry Ellison, co-founder and CEO of Oracle Corp. He takes a salary of just $975,000, yet according to court documents from a lawsuit in mid-2000, he planned on spending $700 million over the next three years. Or Steve Jobs, Larry Page, or Sergey Brin, three of the tech sectors most powerful men, and each paid a $1/year salary. These reasons all contribute to the highest quintile of household income's -2.0% savings rate.
The lowest two quintiles, on the other hand, more accurately represent ing the average consumer, have a savings rate of 7.0%, which is similar to Japanese or European rates. The reason that average savings rates in the US are lower can be accounted for by the significantly smaller share of household income taken by the top 1% (8%, compared to the 20% for US mentioned above). As 13D Research reports:
In fact, the entire difference between national savings rate can be explained by income distributions. So there isn’t a specifically American propensity to consume.
There is, however, an American propensity to have richer rich people. Whether that is bad or not is a different debate entirely. What is on debate is the relevancy of the US Savings Rate. The facts show that the savings rate is, in fact, meaningless, and does not reflect the financial situation of the average American consumer.
Hopefully you guys like this new type of post. This stuff interests me just as much if not more than web 2.0, and I'd like to continue to post these types of pieces in the future. Please comment and let me know what you think. Or if you want to debate some of my points. I'd love to hear other views.
Comments