One of the supposedly good things produced by the Great Recession is a change in the spending behavior of the American public. The personal savings rate is now running at 6 percent -- three times higher than in 2007. Do a Google search on the term “personal saving” and you’ll find articles applauding Americans’ newfound abstinence.
When I read these stories, I cringe. The personal savings rate, like the federal deficit, is a made-up, accounting measure, with no economic content. Its value and changes through time are entirely dependent on how we classify things. For example, counting Social Security contributions dramatically raises the personal savings rate, but lowers its recent growth.
Calling Social Security contributions part of personal savings seems as natural as not. After all, the system provides most Americans with much of their old-age income. And it sends us an annual statement detailing what we’ve contributed and can expect to receive in retirement. That’s pretty darn personal.
But why stop with Social Security? Medicare contributions can also be called personal savings: We’re buying an asset -- an old-age health-insurance policy -- with those contributions.
Labeling contributions to Social Security as personal savings makes last year’s rate 9.8 percent, not 4.6 percent. Treating Medicare and Social Security contributions as personal savings raises the rate to 12.7 percent.
Pick a Rate
So, which rate was it? Take your pick. Or classify some other tax payments as personal savings and make the rate even bigger.
If you prefer to claim personal savings were negative, simply reclassify a chunk of the funds the public receives in transfer payments from Uncle Sam as borrowing from the government. (To be consistent, also designate part of the public’s future tax payments as repayment of this borrowing.) Voila, rather than taking in income, the public is taking on debt. And since it’s consuming the same, its personal savings are lower.
John Mitchell put his finger on economics’ labeling problem. He was Richard Nixon’s attorney general and a real expert on deception. Before being jailed for perjury, Mitchell used to say, “Figures lie and liars figure.”
The personal savings rate is one of those figures, thanks to the U.S. Commerce Department.
The right saving rate to consider is calculated by dividing total national savings by total national income. National saving is a label-free measure because it references physical concepts. It’s the value of a country’s net output minus its consumption.
The national savings rate provides an entirely different picture of America’s behavior with money. As the chart shows, national saving has, for the first time since the Great Depression, gone negative.
You read that right. Instead of adding to our seed corn, we’re eating our existing stock!
In the mid-1960s, our country was saving more than 14 percent of national income. Today, we’re dis-saving 2 percent. This is a truly remarkable achievement. The U.S. is possibly the only developed country that is saving less than nothing.
Countries that don’t save end up as the poor kids on the block. They also have no wherewithal to invest. And less investment means less plant and equipment for workers to use on the job, which spells lower labor productivity, which means lower wages.
Negative national saving is possibly the scariest indicator of America’s economic demise. But enter “national savings rate” in Google, and you’ll find just a handful of articles on this topic. The government reports the values of national income and consumption, but doesn’t do the arithmetic to form a national savings rate.
Fortunately, foreigners, including governments, are investing in the U.S. They see good investment opportunities that we aren’t capturing. The amount of foreign investment coming, on net, into the U.S. constitutes our current-account deficit. Our failure to save explains why this gap is so huge.
Unfortunately, foreigners could turn off the spigot. The Chinese government has started to do so. Since July 2009, it has been gradually selling its holdings of U.S. Treasuries. Other countries may follow suit, leading to the great U.S. bond bust that many fear.
So, why aren’t we saving? The answer is personal consumption. Fourteen percentage points of the 16 percentage- point decline in the national savings rate since 1965 reflects a higher rate of personal consumption. A higher government consumption rate explains the other two percentage points.
Incidentally, the increase in the rate of government consumption isn’t defense-related; defense consumption actually fell by three percentage points as a share of national income over the period.
Our propensity to consume, privately and publicly, continues to rise. The rates of personal and government consumption are both higher now than they were in 2007, although the government consumption rate has risen by more of late.
If personal consumption is the main villain for the long- term savings rate decline, whose consumption has risen? The answer is the elderly. Over the past five decades, our policy of taking ever larger sums from young savers and giving them to old spenders has more than doubled the ratio of average consumption of oldsters to average consumption of youngsters.
Overspending on Elderly
Much of this redistribution has taken place through Social Security, Medicare, and Medicaid. Collectively, these three programs spent $1.2 trillion on the elderly last year. Their total payment per oldster equaled a whopping $30,000, which is three-quarters of U.S. per-capita income. And, about half of this total constituted Medicare and Medicaid benefits, which are provided to the elderly directly in the form of personal consumption of health-care goods and services.
The bottom line? If we are serious about reversing the decline in national saving, we need to stop expropriating the young for the benefit of the old.
Laurence J. Kotlikoff is a professor of economics at Boston University and author of Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking.” The opinions expressed are his own.)
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