Solving The Savings Riddle

Medical outlays explain low saving

It's a mystery that continues to bedevil economists. Despite the availability of tax-favored savings plans and growing doubts about the future sufficiency of retirement income, the U.S. personal-savings rate has fallen from 8% two decades ago to around 4% today.

In a study in the New England Economic Review, Lynn Elaine Browne and Joshua Gleason of the Federal Reserve Bank of Boston conclude that the main cause of this decline is not a consumption binge, but Americans' desire for more and better medical care.

The two economists reach this conclusion by assessing the ways in which consumption has grown as savings has declined. The picture is complicated by the fact that consumer spending on goods--mainly food, clothing, and gasoline--is down about twice as much as savings as a share of personal income. Still, an analysis of the rise in services spending since 1975 is revealing (chart).

Over this period, outlays for housing and transportation services, which are basic necessities, have risen by 1.5% of personal income, and an added 1.8% now supports religious, social welfare, educational, and recreational activities. Meanwhile, the share going for personal-business services--including bank and brokerage fees and the imputed value of financial services--has grown by a hefty 2.1% of income. Such spending is a special kind of consumption, the authors note, since it reflects costs attached to saving.

That leaves only the huge increase in the consumption of medical services--up by 5.8% of personal income--as the prime suspect in the savings decline. And here the researchers note that government-sponsored health programs, which currently absorb 5% of income, account for only a small part of the drop in the savings rate. That's because outlays for Medicare and Medicaid are counted as additions both to consumption and to personal income. (If savings are 8% of income, and both consumption and income rise 5%, the savings rate will drop to 7.6%.)

By contrast, rising employer-sponsored health-care outlays, which are also counted as personal income, represent a direct shift in the allocation of such income, since they presumably replace wage and salary hikes. And employer contributions for health insurance have grown dramatically--from 2% of wages and salaries in the mid-1960s to 5% in the mid-1980s to about 8% today.

The bottom line is that much of the income Americans once saved appears to be going for medical insurance--partly government programs, but mainly employer-sponsored plans. "The public desires both better health care and the protection that insurance provides," says Browne. Future efforts to raise personal saving will have to confront that desire and the high costs of medical care that have made it so intense.

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