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The Controversy About the Savings Rate

June 16, 2008

One rather wonkish question I am often asked by people casually interested in the problem of low U.S. household savings is “aren’t all the statistics that measure savings wrong — aren’t things better than those numbers make it appear?” It is well known that the most frequently quoted measure of household savings, the National Income and Product Accounts (NIPA) measure provided by the Labor Department, has a considerable number of flaws. It doesn’t count some of the things that many of us would consider savings. The most critical and cited of these shortcomings is that the NIPA measure does not include capital gains in stocks, a huge store of wealth for the economy at large. Many people have commented on this exclusion and attempted to adjust the savings numbers to include capital gains. Here is one example. Maybe the low savings rate isn’t such a big social problem after all?

I don’t think so. One issue these studies consistently fail to take into account is that stock ownership in the U.S. is highly skewed towards those who have higher incomes. Most households that have higher than average incomes own equities either directly or indirectly though mutual funds. Most households with below average income do not. NIPA is not perfect, but it is far less perfect for very high income households. The trajectory of their wealth accumulation is much higher than the statistics suggest. Conversely, for lower and middle income Americans, who often hold little wealth in equities, the criticisms of NIPA are almost beside the point. They are indeed saving very little, much less than they need to secure their economic future, and the flaws in the government measures of savings to not blunt this fact.

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