OT: Personal Savings

[SiouxMD]

Way off-topic but I found this interesting...

Personal savings drop in 2006 to the lowest level in 74 years - StarTribune

People once again spent everything they made and then some last year, pushing the personal savings rate to the lowest level since the Great Depression more than seven decades ago.

The Commerce Department reported Thursday that the savings rate for all of 2006 was a negative 1 percent, meaning that not only did people spend all the money they earned but they also dipped into savings or increased borrowing to finance purchases.

[PCM]

What this country needs is a federal program to put more money into peoples' personal savings accounts. I know that I'm all for it.

[The Sicatoka]

I read a claim once that 401k/403b contributions are not counted as "savings" in surveys like this.

Fact? Fiction?

[siouxnami]

I read a claim once that 401k/403b contributions are not counted as "savings" in surveys like this.

Fact? Fiction?

This is probably correct because this is really a deferment on earned income until later years. Thus no taxes (unless you have a Roth IRA).

[GeauxSioux]

I read a claim once that 401k/403b contributions are not counted as "savings" in surveys like this.

Fact? Fiction?

You may be on to something, since 401 programs are pre-tax...

The savings rate is computed by taking the amount of personal income left after taxes are paid, an amount known as disposable income, and subtracting the amount of spending. Since the figure has dipped into negative territory, it means consumers are spending all of disposable income and then some.

OTOH..

During the Great Depression, when one-fourth of the labor force was without a job, people dipped into savings in an effort to meet the basic necessities of shelter and clothing.

I doubt if this is what is occurring. I find it more likely that people are living beyond their means. Is every household now required to have a big screen HD TV? I see people with families down here spend huge dollars for the rims on their car and live paycheck to paycheck. Priorities and responsibilities are not what they used to be.

[ScottM]

I read a claim once that 401k/403b contributions are not counted as "savings" in surveys like this.

Fact? Fiction?

I believe that qualified and non-qualified retirement programs, like 401Ks and pensions, are not factored into most of the "savings" surveys. As well, they generally do not also account for appreciation in home values or securities portfolios. That said, most people in this country do not max out their 401k contributions and spend well beyond their means on depreciating assets, e.g., cars, TVs, boats, etc. with various credit products.

[jimdahl]

I'll play contrarian a little bit...

<contrarian>

The problem with "savings rate" is that it's essentially an income statement. An income statement is nearly useless without a balance sheet. If you look at household net worth, it rose almost 10% last year.

How much of "consumption" dollars went into investments that contribute to net worth? How much were net worths increased by factors that aren't counted as income (e.g. capital gains)?

Savings rates are not an indicator of economic well-being, they're a counter-indicator. Why save when your net worth is growing? You save when you're worried about the future, when the economy is bad.

</contrarian>

No doubt that a lot of people live well outside their means. I think there's a fair chance that the rapid loosening of credit in the last decade is going to cause serious pain for a lot of people who took advantage of that credit, particularly those who overbought on housing.

I do think we'll see a legitimate structural shift in net savings as boomers retire. When they quite socking away money into 401(k)s and IRAs and start withdrawing and spending it, then we're going to see some serious consumption.

[Sioux27]

I'll play contrarian a little bit...

<contrarian>

The problem with "savings rate" is that it's essentially an income statement. An income statement is nearly useless without a balance sheet. If you look at household net worth, it rose almost 10% last year.

How much of "consumption" dollars went into investments that contribute to net worth? How much were net worths increased by factors that aren't counted as income (e.g. capital gains)?

Savings rates are not an indicator of economic well-being, they're a counter-indicator. Why save when your net worth is growing? You save when you're worried about the future, when the economy is bad.

</contrarian>

No doubt that a lot of people live well outside their means. I think there's a fair chance that the rapid loosening of credit in the last decade is going to cause serious pain for a lot of people who took advantage of that credit, particularly those who overbought on housing.

I do think we'll see a legitimate structural shift in net savings as boomers retire. When they quite socking away money into 401(k)s and IRAs and start withdrawing and spending it, then we're going to see some serious consumption.

You make great points and are all valid. I agree 100%.

[wxman91]

I think there's a fair chance that the rapid loosening of credit in the last decade is going to cause serious pain for a lot of people who took advantage of that credit, particularly those who overbought on housing.

Bingo. There are already problems with some of the sub-prime lenders.