EYE ON THE PIE: We’re saving more than you think

For years, I have been listening to Paul Harvey on the radio decrying the low savings rate of Americans. Our seemingly profligate ways, spending nearly all we earn, will lead us to the poorhouse, if not the eternal fires of debtors’ damnation.

Many of my learned colleagues share this view. Americans are spending too much, consuming too much, saving too little. They tell us the personal-savings rate hit an all-time low in October, at 0.1 percent. That means we put aside just 10 cents, a mere dime, for each $100 of our after-tax income.

That’s pretty shocking. It makes our Puritan souls recoil in horror. Those who lived through the Great Depression, or had parents who lived through that economic nightmare, quake in terror that the bills will come due and we will not be able to pay them.

I do not want to convince you the situation is good, that all is well in the American household. I would like you to understand that the numbers used to frighten you are so misleading that no reasonable public policy should be based on them.

Stick with me through this, please. The savings rate is the amount of savings divided by disposable personal income. All these are aggregate numbers for the whole nation with no individual, local, state or regional figures.

How much do we save? The best we can do is take total disposable income and subtract total consumer spending. The residual is savings. What is total disposable income? That is personal income less personal taxes.

OK, but what is included in personal income? Most important are the wages and salaries we get from our jobs. But also counted in there are the contributions made by our employers to our pension and insurance funds plus to Social Security. Do you ever have a chance to spend these monies on a TV or a trip to the Grand Canyon? The best you can do is have an appendectomy to spend any of these funds.

Yet such funds account for $1.3 trillion a year, more than 13 percent of total personal income. Shouldn’t this be considered savings? It’s money set aside in your name by your employer on which you or others will have some claim in the future.

Suddenly, the savings rate doesn’t seem so bad.

But wait, there’s more. Personal income does not include capital gains on homes or stocks or all those precious items you hold to display on “Antiques Roadshow.” Capital gains, realized when an asset is sold, are funds you can spend on that BMW. Clearly, capital gains are part of your disposable income, but not according to our economic accounts.

Thus, both our savings and our disposable income are understated. How would changing our economic accounting alter the savings rate? We do not know. The current system leaves a huge hole for the “sky-is-falling” alarmists to dive through.

I would argue, and many would disagree, that the problem is not that we consume too much, but that we consume the wrong things. We spend too much for swimming pools and vacations and not enough for education and roads.

The problem is the composition of our spending, not its magnitude or portion of personal income.