Saturday, April 15, 2006

Pay, Back?

Apparently, the nation’s savings problem is even worse than we think: Not only are we not saving enough, we’re spending more than we make. The Commerce Department's Bureau of Economic Analysis monthly report of the National Income and Product Accounts (NIPA) personal savings rate was a negative 0.5% recently. In fact, media coverage of the report noted that, in the course of 2005, Americans spent more than they earned for the first time since the Great Depression.

As it is currently defined, NIPA’s definition of personal saving is simply the difference between personal disposable income and personal spending. Personal income includes wages, asset income (dividends and interest), rental income, and supplements to wages, including those pension and 401(k) contributions. And yes, it counts those pension contributions made by employers to traditional defined benefit plans as though they were individual income – but not the subsequent gains (or losses) they might incur.

NIPA’s exclusion of capital gains – both from investments (including investments within retirement plans) and things like the red-hot housing market – is based on solid footing. These gains are perhaps transient and, in any event, probably shouldn’t be viewed with the same kind of permanency as a regular paycheck.

Still, when workers begin tapping into their retirement savings, the NIPA calculation ignores the retirement “income” – its logic is that those monies were already counted as income when the contribution took place. Moreover, since it ignores the subsequent appreciation in those accounts, it effectively glosses over potentially enormous increases in the savings dollars it originally accounted for. Think about it – the NIPA calculation counts the entire retirement plan distribution as spending (assuming the participant actually spends it), but never counts the market appreciation of that account over the years as income. Finally, its broad definition of “personal income,” which treats employer contributions as personal income at the point of deposit, also “misconnects” the savings behavior of employers with the consumption of those accumulations by retirees.

It’s easy to get lost in the numbers here but, essentially, as a growing number of the nation’s workforce enters retirement – or enters a phase in their lives where they start to tap into those retirement accumulations – as we begin to depart the accumulation segment of our working lives, and enter the deaccumulation phase – there will be a natural decline in the nation’s savings rate.

So, do we have a savings problem? Well, in view of how the NIPA numbers are compiled, it is hard to tell. However, an October 2005 Issue In Brief published by the Center for Retirement Research at Boston College titled “How Much Are Workers Saving?” (online at offers a suggestion – separate the income, taxes, and spending of retirees from the overall NIPA calculation. Researchers Alicia H. Munnell, Francesca Golub-Sass, and Andrew Varani took a stab at doing just that. According to their estimates, the 2001 NIPA national savings rate was 1.8% – a figure that consisted of a negative savings rate of 11.9% for the 65-and-over crowd, and a 4.4% savings rate for those still working.

Now, I’m not saying we don’t have a savings problem, though it is perhaps not quite as dire as the headlines would have us believe. However, it is worth noting that the above-referenced report also cautions that pension saving for most of the period since 1980 accounts for virtually all the saving of the working age population,” and that, since the mid-1990s, “savings outside of pensions for the working-age population has actually been negative.”

We need to remember that personal savings was considered a vital component of the traditional three-legged stool, alongside employer-sponsored accounts and Social Security. The fewer legs, the less secure our retirement will be.

- Nevin Adams

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