girlnextdoor

financial discussions with the girl next door

US Savings Rates September 11, 2009

Filed under: Uncategorized — girlnextdoorfinance @ 6:52 pm

In one of my classes we’ve read multiple articles* this week about the US savings rate, which most of us have heard time after time is decreasing every year and possibly even negative (as in, people are spending more than they earn). The articles we read focused on why this may not be accurate, and it may not be a problem.

Estimates of income and expenditures tend to look only at a given year’s data, and don’t include wealth (assets) that had previously been built up. It’s possible that people are saving less from their current incomes because they feel they have accumulated a comfortable amount of wealth already and don’t need to continue saving at a higher rate.

The point of saving money is to provide for future consumption. There’s no reason to save money if you don’t intend to spend it later (and “spend” could mean “give away”). Essentially the idea is that your goal probably isn’t to die with a net worth of 8 million dollars, but rather to use any money you’ve saved for later expenses. Buying durable goods (things that aren’t replaced often, like houses, cars, household appliances, etc.) is also a way of providing for future consumption. If I spent $500 on a new washing machine, it’s not because I plan to get $500+ of use out of it this year. Rather, I make the initial investment in order to be able to consume the use of the washing machine for 10 or 15 years to come. In savings estimates, however, durable goods are counted as expenses in the same way as buying food and other items that need to be replaced frequently. If you believe that durable goods should count as savings (or investment), since they provide for future consumption, then the savings rate is grossly underestimated.

If a business buys a new machine, it is considered an investment rather than consumption, because the additional equipment should increase output or production for the business. However, if a person buys an education (pays for college or skills training, professional workshops, etc.), it is counted as normal consumption rather than as an investment in human capital. Most people would argue that education is an investment, because purchasing education should lead to a more valuable skill set (and therefore, higher pay) for the person receiving the education. Yet education is also counted as an expense, not an investment. Should we include education as savings, as providing for future consumption?

Some savings rate estimates don’t include pension funds. It certainly makes sense that if someone expects a large pension at retirement, they will save less money on their own. Should pensions count as savings, even if the employer is in charge of them (in defined benefits plans)?** I know if I were to expect a pension from my employer, I wouldn’t feel a need to save as much money for long-term (in particular, retirement) plans. Wouldn’t that be reasonable? (I realize that defined benefits pensions are virtually unheard of among 20-somethings, but since many older employees still plan to take advantage of them, it’s still very relevant for the country overall.)

I’m not trying to argue that people are saving plenty of money – I have no idea what would be “enough” and will probably never reach a truly “comfortable” amount of savings – after all, the more you have, the more you think you need, right? I just thought the articles brought up some interesting points, and I thought I’d share them. Comments?

*Links to articles:
Webb, 1993 (Richmond Fed)
Guidolin and La Jeunesse, 2007 (St. Louis Fed)

**To see the differences between defined benefits and defined contributions, click here.

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