General · 20 Aug 2005

Savings and investment

This WaPo column about the U.S. savings rate explains something I had been wondering about. It mentions this statistic: “The Commerce Department … reported that Americans’ personal savings rate had dropped to zero.” Every time I’ve read a similar statistic (I recall the rate dropping to 4%, then 3%, then on downward) it has reminded me of the passbook savings account I held in 1980.

Back then, you had an actual physical savings passbook that looked like a passport (here’s an image of one), and if you made a deposit or withdrawal they would flatten the book’s spine and insert it into a sort of a line printer to record the transaction and your new total. Then, as now, you got some nominal interest rate. I used that savings account quite a bit because I was saving for a couple of lovely synthesizers to play in my band. Somewhere I’m pretty sure I still have the passbook, showing the massive $1600 withdrawal to buy these babies.

Every checking account I’ve opened since has required me to get a “companion savings account” into which they make me put a minimum of $20 or something, and which I thereafter ignore. Usually the checking account is a money-market account of some kind that earns interest anyway, and I try hard to put saved money (or occasionally borrowed money) into other vehicles that I think will earn even more (401(k) retirement account, IRA, stocks, real estate, etc.), with the whole having a reasonable risk spread. I think of all this other stuff as “investment.”

I guess I haven’t been paying enough attention to how the Commerce Department defines its terms because I just assumed that when they talked about “saving” they were talking about “savings accounts” — which is why the hoary passbook image always comes to mind. It turns out that their definition isn’t as simplistic as that, but it might as well be. The columnist, Robert Samuelson, describes it like this:

The personal savings rate is derived by subtracting Americans’ total consumption spending from their total after-tax income (i.e. “disposable income”). By definition, the rest is “saving.” In 1984 the personal savings rate — savings as a share of disposable income — was 10.8 percent. It’s drifted down ever since. It was 4.6 percent in 1995 and 1.8 percent in 2004. It hit zero in June.

But that isn’t the whole story; here comes the enlightening part:

These low figures are not inconsistent with huge 401(k) and IRA contributions. Suppose you put $4,000 into a 401(k) account. You think you’ve “saved.” But then you borrow $4,000 to go to Vegas or pay college tuition. Now your savings rate is zero. Ditto if you’d sold $4,000 of stock. Borrowings and stock sales offset much retirement saving.

The trouble with the official savings rate is that it excludes some items that people intuitively count as savings, notes Susan Sterne of Economic Analysis Associates. A big omission is the capital gains — aka profits — on housing or stocks, both realized (if you sell) or on paper (if you don’t). If your home or stocks increase $10,000, you may feel comfortable borrowing $4,000 to spend. You’ve still got an extra $6,000 in savings. But the savings statistics ignore these value changes; all they show is that you’ve saved less by spending another $4,000.

So if you realize the gain by selling the asset, you now have a pile of cash and it no longer counts, and any actual profit doesn’t seem to count anyway. And if you don’t realize the gain it’s just a paper profit — and may even give rise to what looks like a typical American consumer-spending spree — and it doesn’t count. Et voilà, a personal savings rate of zero or even less.

On the infrequent occasions when I’ve been forced to do a real household budget, I have added the traditional heading Savings and Investment. But it’s impractical to treat “savings” separately from “investment”; what I’m really doing overall is more like “Increasing My Net Worth,” or trying anyway. The notion of entirely risk-free savings has receded pretty far, much as the notion of entirely risk-free employment has. I think we need to stop according so much value to old-fashioned “savings” as an activity and find some better label that meets today’s complex financial reality. (Heck, more than half of American households have some money in the stock market in some fashion. The workers are starting to own the means of production!)

Unfortunately, I never did take very good care of my synthesizer “assets”; hauling them around from club to club probably wasn’t good for them, and I didn’t keep the original packaging and manuals and such. As a result, 25 years later, they were just “old” rather than “antiques,” and I regretfully sold them at a loss a few months ago in preparation for my cross-country move. Can’t win ’em all.