Ask Bud - What's Included in the National Savings Rate?

Answer from Bud:

Over the years, financial sales firms have tried to find reasons to ignore the lack of savings as depicted in the charts on national savings rates from the Bureau of Economic Analysis, BEA. Remember when they said that the returns were so high that people no longer had to put in additional money into retirement plans? Then there was the time when we were all going to inherit fortunes (presumably from Bill Gates, Warren Buffet and George Soros). In more recent times it was no longer necessary to put money into savings because housing prices were rising so fast. There have also been charges that the national savings rate doesn't include a lot of savings. So I asked the BEA if the national savings rates included all of the following, some of which writers have said are excluded from the national savings rate computations:

1. Employee contributions to 401(k), 403(b), etc.?
2. Employer matching funds to the above?
3. Contributions to IRAs?
4. Employer contributions to defined benefit plans, i.e., pensions?
5. The net of people's deposits less withdrawals to mutual funds not in empoyer savings plans or IRAs?

The answer given below in more detail by the Bureau of Economic Analysis, is, in brief, "Yes, the savings national savings rate includes these things."

There's not much wiggle room now. People flat out haven't saved enough for retirement -- and when they wake up consumerism is going to take one heck of a big hit!

Bud

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Details from "Kunze, Kurt" <Kurt.Kunze@bea.gov>
Subject: RE: Are employer savings plans included in ntl savings statistics
Date: Mon, 12 May 2008 19:09:25 +0000

As you are aware, personal income is the income derived from the economic activity for a certain period of time. Personal saving is the amount of current-period income that is used to fund savings accounts and other investment activities. No surveys directly identify the amount of investment activity (purchase of stocks, bonds, and other financial instruments) that is financed from current-period income. Therefore, personal saving is a residual calculation equal to disposable personal income (which is personal income less personal current taxes) minus personal outlays.

Given the above relationships, any addition to current-period income that is not spent in current-period outlays is an addition to current-period personal saving and would boost personal saving as a percentage of disposable personal income.

Therefore:

1. Employee contributions to 401(k)- or 403(b)-type pension plans are part of wage and salary disbursements (which is a gross concept before such deductions). Therefore, such contributions are part of personal income in the period of the contribution, they cannot (except under very unusual circumstances, which could involve penalties) be used for outlays, and thus they are typically an addition to current-period personal saving.
2. Employer contributions to pension-type plans (including matching funds) are part of employer contributions for employee pension and insurance funds. These contributions are included in personal income and they cannot be used for current-period outlays; as a result, they are an addition to current-period saving.
3. Contributions to IRAs are less clear cut. Contributions to 401(k)-type pension plans are payroll withholding arrangements. Contributions to IRAs are not typically funded by payroll withholding. Therefore, whether a contribution to an IRA is part of personal saving depends on how the contribution is funded: If the contributions are from current-period income, then they would be included in personal saving; if the contribution is financed from personal saving accrued in a previous measurement period or from capital gains, then it would not be included in personal saving.
4. Employer contributions to defined benefit pension plans are part of employer contributions for employee pension and insurance funds. These contributions are included in personal income and they cannot be used for current-period outlays; as a result, they are an addition to current-period saving.
5. If contributions to mutual funds are financed from current-period income, then they would be included in personal saving. If the contribution is financed from saving from a previous period or capital gains, it would not be include in personal saving. Withdrawals from mutual funds have no impact on personal income, and therefore, have no impact on current-period personal saving.

Keep in mind that current-period personal saving is a flow concept: What is the change in personal saving in the period of measurement? Any transactions involving previously accrued savings balances have no direct impact on current-period income or saving.

Kurt

H. K. Bud Hebeler is author of J.K. Lasser's Your Winning Retirement Plan, Getting Started in a Financially Secure Retirement, and retirement articles on www.analyzenow.com. He is often quoted in The Wall Street Journal and other financial publications.

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