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Healthier, Wealthier, and Maybe Wiser
The media has made much of American's growing prosperity of
late.
Low unemployment and inflation, a massive technical
revolution, and trade expansion into heretofore unopened markets count as a few of the
reasons for this growth, and for the media's ubiquitous analyses of the financial
well-being of the American worker.
Media speculation on the eventual outcome of America's
current broad economic changes have ranged from alarmist to reassuring. But, a widely
perceived increase in the quality of life for Americans does not fit with one very
important aspect of personal wealth: personal savings.
The most-often quoted personal savings rate in the media is
the National Income and Product Accounts (NIPA). This has decreased steadily in recent
years, falling to 0.8% in February 2000*. This anemic rate doesn't seem congruent with the
country's recent economic strides. But, it may be the accounting methods that are out of
whack, not Americans' savings rate.
Traditionally, money in instruments like 401(k) accounts
and IRAs haven't been counted as personal savings.
The Latest In: NIPA May Soon Be
"Out"
The idea that tax-deferred savings accounts should be
included in overall savings estimates seems to indicate new thinking about how assets are
quantified, and this reflects the increasingly less enamored view of NIPA.
NIPA is described by the Employee Benefit Research
Institute (EBRI) as income that is "residual," meaning that personal savings
"...is what is left over from personal income after subtracting payments for personal
taxes, individual contributions to social insurance (i.e., payroll taxes for Social
Security and Medicare), and personal outlays such as food, housing, and clothing."
NIPA has come under scrutiny of late because of its
accounting method, which doesn't take capital gains into consideration. In the bull market
environment of the past 10 years, NIPA has decreased by 50% in the past five years alone,
according to a March 2000 EBRI issue brief, Retirement Plans, Personal Saving, and
Saving Adequacy.
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Under NIPA, personal savings
"...is what is left over from personal income after subtracting payments for personal
taxes, individual contributions to social insurance (i.e., payroll taxes for Social
Security and Medicare), and personal outlays such as food, housing, and clothing."
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| — EBRI |
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Paul Yakoboski, senior research associate at EBRI in
Washington, D.C. and author of the EBRI issue brief, detailed for 401Kafý how national
savings are measured, and the affect retirement plan savings, specifically 401(k)s and
IRAs, have on saving levels.
"What you have to keep in mind is that NIPA is not
directly used to measure savings, so it's not a flaw in NIPA," he said, adding that
NIPA's biggest shortcoming is that it doesn't factor in capital gains.
Counting Earmarked Assets
So, what better reflects Americans' savings levels?
"The Federal Funds Accounts comes a little closer
because it takes into account realized capital gains," said Yakoboski. "If we
fully accounted for unrealized and realized capital gains, the personal savings rate would
stand somewhere in the neighborhood of 30%."
And if retirement funds were counted?
If the monetary factor of retirement savings were taken
into consideration, American personal savings rates could stand as high as "33
percent...(when) accounting for capital gains results in an aggregate personal savings
rate," according to the EBRI issue brief.
Indeed, among EBRI's key points was the "...major
policy question..." of "...the impact of tax-qualified retirement savings plans
(e.g., IRAs and 401(k) plans) on personal savings rates."
Since the values of valuation are shifting, shouldn't
Americans also count their retirement savings when measuring how prosperous they really
are?
Are Americans Saving Enough?
Yakoboski pointed out that this is hard to pin down.
"If we ask the basic question, how are we doing
(financially), the simple fact is that we just don't know how consumption behavior will
change when the market isn't the bull market we've seen the last 10-plus years." In
other words, will consumers be able to curtail their currently heady spending habits when
the markets inevitably wane?
According to 1999 EBRI data, "...many consumers show a
lack of confidence that they are financially prepared for retirement."
How's your retirement saving confidence level? Use this
checklist to measure how you're doing in setting aside money for retirement:
- Save at least 4 to 6 months of monthly expenses to avoid
tapping retirement funds in a financial emergency.
- Contribute the maximum amount allowable (25% of income or
$10,500 maximum) to a 401(k).
- Shop for the best interest rates, on credit, automobile, and
equity debt.
- Plan for retirement by using to your advantage: estate
planning that benefits you and your family's individual situation, and tax-advantaged
savings vehicles, like IRAs.
- Define your goals and time horizon, and your risk tolerance
and diversification needs, including your need to balance your investment's growth with
potential retirement income.
In addition to factoring liquid savings, consumers can also
figure in the potential of current retirement assets, and the best interest rates money
can buy, as money saved.
If consumer durables, as well as all investments, are
thrown into the mix, including savings earmarked for retirement in 401(k) plans and IRAs,
this revised savings rate could indeed better represent Americans' personal wealth.
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