Wikinvest Wire

Stop Trying to Redefine Savings!

Thursday, February 22, 2007

Everyone just stop it! If, in some twisted sort of way, redefining "wealth" or "net worth" as "savings" makes you feel better about the world and your own lot in life, then go ahead and do it - just do it in private.

Whatever gets you through the day.

But, please, stop sharing your rationalizations with the rest of us who prefer to continue believing that "savings" (as either a verb or a noun) is not something that can come and go as quickly as a subprime lender.

Call it old fashioned if you want, but, just leave the word "savings" alone. Please.

Since the personal saving rate turned negative in 2005 and then plunged even further into the red last year, there has been a steady stream of commentary and research papers intent on blurring the lines between "wealth", "net worth", and "saving(s)" - sort of like a bad doctor anxious to ease the immediate discomfort of an ailment with one pill or another while the underlying illness remains untreated.

Wealth is the value of your assets.

Net worth is assets minus liabilities.

Saving is income less expenditures or money put aside.

Stop confusing them.

Commentary such as this($), appearing in respected publications such as the Wall Street Journal, doesn't do anyone any good (particularly Chinese manufacturers of piggy banks).

This month, the Commerce Department's Bureau of Economic Analysis put the nation's personal saving at negative $116.6 billion for December 2006.

To get that number, the bureau starts with after-tax disposable income then subtracts "personal consumption" of all sorts.

Here's what doesn't get counted, though: the increased value of stocks or mutual funds in brokerage or retirement accounts, or the rising value of your home.
If you're already trying to figure out where you stand, pay attention to the nomenclature. Commerce's study of personal saving is all about the verb -- "saving" -- what you make, minus what you spend.

But a more complete snapshot may well come from also adding in your "savings," the noun -- an accounting of your total assets and how they've grown, even if you haven't realized the gains yet.
No, there's another word for when savings are used to buy stocks - that's called investment.

And real estate?

Up until a few years ago, real estate was just a place to live in - with sometimes hefty maintenance expenses and even heftier taxes to pay. But, lately it's become plan B for retirement planning, as in, "I was too busy to save and invest while I was younger - it's a good thing my house did that for me".

Real estate is not savings.

Enter the Economists

The added perspectives of Federal Reserve economists and college professors doesn't seem to be helping the word savings retain its original meaning.

What appears below may be comforting to dismal thinkers, but translating all the squiggly lines and formulas into a conclusion that Americans may be saving too much for retirement as in this report from personal finance columnist Laura Rowley, well, that's just plain irresponsible.

[At the risk of offending any readers of this blog who may be economists, it should be noted that Economics is not a "hard science" - far from it. Some scientists and engineers view their math as kind of a "pretend" applied mathematics.]

Here's what Ms. Rowley had to say about the squiggly lines:
Conventional wisdom suggests that people are woefully unprepared for retirement. Study after study portrays most Americans as the proverbial grasshoppers, playing the fiddle with their finances while a minority of conscientious ants store up supplies for their golden years.

In 2004, for example, the Center for Retirement Studies at Boston College estimated that 43 percent of working households were in danger of having too little income to fund their retirement, even after tapping home equity.

Now a group of economists is offering a wildly contrarian view: People may be saving too much for their retirement. A few go so far as to suggest that the financial services industry is deliberately encouraging over-saving because it profits from managing such assets.

Consider a recent study (.pdf) conducted by Paul Smith and Lucy McNair of the Federal Reserve Board, and David Love, an economist at Williams College. They found that 88 percent of all households with breadwinners over age 51 had accumulated sufficient resources to finance adequate consumption in retirement.

A separate study by John Karl Scholz, an economist at the University of Wisconsin, Madison, and two other researchers found more than 80 percent of households headed by Americans born between 1931 and 1941 have accumulated their optimal wealth targets for retirement.

The other 20 percent missed their goal by a relatively small margin, according to the study published in the Journal of Political Economy (.pdf).
Fortunately this piece was more food for thought than personal finance advice as the author ultimately recommends that individuals "err on the side of caution" and economists develop "more accurate models".

You don't get that message from just reading the first few paragraphs, which is about as far as anyone would get if they were looking to rationalize their spendthrift ways.


Anonymous said...

"You take the blue pill and the story ends. You wake in your bed and you believe whatever you want to believe."

Anonymous said...

The advice that we should stop saving so much and go out to consume instead sounds very similar to the advice that we should jettison the fixed rate mortgages for the variable rate ones.

Sacrifice the sheep to forestall the inevitable?

Anonymous said...

I agree that the "asset inflation == saving" gambit is nonsense.

However, many people have contended that the savings figures do not count 401k and other retirement account contributions -- only savings of after tax income. The wikipedia link seems to suggest this is true ("personal saving has been defined as personal disposable income minus personal consumption expenditure.")

Unlike increasing asset prices, however, reducing ones' salary by putting it into a 401K IS real saving. So it seems like the savings figures do understate saving to at least some extent (although the trend changes are still informative).

Anyone have thoughts or know where to find a better gauge of savings?

Anonymous said...

Tim, the definition of savings has always confused me. Isn't a person's savings rate zero when integrated over their lifetime? Don't they eventually spend what they save?

Anonymous said...

Apollo, I see it as sacrifice the sheep to hasten the inevitable. The PTB are straight out of "1984". Their newspeak is designed to confuse and to ensure conformity. God help anyone who is not exercising critical thinking skills in every aspect of their life. The sheeple are about to get slaughtered.

Dr Housing Bubble said...

With negative savings rate and high credit addiction they need to redefine what "wealth" is. Unfortunately the subprime mortgage market isn't taking this news lightly; Novastar is down 30%+ from yesterday and New Century financial got hit on the chin last week.

The subprime market and employees realize what real savings is and it isn't a zero down no doc interest suicide note.

Dr. Housing Bubble

Tim said...

This is from the Federal Reserve:

The most frequently cited measure of the personal saving rate is based on the National Income and Product Accounts (NIPA). It is constructed by forming the ratio of Personal Saving to Disposable Personal Income (DPI), where DPI is defined as Personal Income (including wage and salary income, net proprietors' income, transfer payments less social insurance, income from interest and dividends, and net rental income) less tax and nontax payments to governments. Personal Saving is found by subtracting from DPI total Personal Outlays, 97% of which consists of Personal Consumption Expenditures (including consumer durables), with the remainder composed of Interest Paid by Persons (individuals, nonprofits, and trust funds) and Net Personal Transfer Payments to the Rest of the World.

So, 401k contributions don't count as a personal outlay. Basically, we spend more than our after tax income and the extra money comes from new debt.

Anonymous said...

I'm not understanding. so 401ks count as savings or not. If they do then were in more trouble then we think. If they don't - then as long as Americans are maximizing these accounts we should be ok (as long as those same Americans stop withdrawing from those accounts to fund their consumption habits).

Anonymous said...

But we have to keep re-defining all those terms, or Joe and Jane Average will realize that the economy is a house of cards. On a folding card table purchased at Goodwill. On a boat.

jmf said...


it looks like the japanese are playing catch up....

The bank is counting on consumption, which accounts for 55% of Japanese GDP, to become the locomotive of the economy. Households are certainly spending what they have. According to the OECD, Japan's household saving rate has fallen by over eight percentage points since 1998, a deeper plunge than America's. The country's households now fail to dispose of just 2.9% of their disposable income.........(wow!!)

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