Problem Isn’t Rate of U.S. Savings, but Where the Money Goes | Wall Street Journal | 03.23.89

A rose may be a rose, but, as anyone who buys a house or analyses a financial statement discovers, when it comes to money, a number is not necessarily a number. It can appear to tell one story but, once explored, really tell another.

For example, look at a report issued earlier this month by the American Business Conference, a group long associated with supply-side politics. In it, the ABC declares the “low level of national savings . . . the single greatest economic problem facing the country.” At root, it says, this is “primarily a problem of high personal consumption.” Its recommendations include a national expenditure tax.

Like others who have signed on to similar proposals, the Conference is alarmed about a number — the personal savings rate. Published by the Commerce Department, the rate fell to an all-time low, 3.2% of personal income, in 1987. But does this really mean that American families overconsume and undersave? Not at all.

To see why, think of savings from the point of view of a typical saver — yourself — and ask one or two common-sense questions. For example, do you think of it as “saving” when you or your employer, as a substitute for paying you more, puts money into your pension fund? Of course. But while Commerce counts some pensions as savings, it doesn’t count others.

Take another example: When you buy a car, is it solely for consumption? Probably not. As with any asset, resale value is also important — with some cars, very important. Until it is ready for the junkyard, a car is a repository of value and part of what most of us consider our personal savings. Commerce, however, counts cars and all other consumer durables as consumption, pure and simple.

From the point of view of the saver, the government publishes a better — though not perfect — savings calculation: the Federal Reserve’s “Savings by Individuals.” (I am using the series in the Council of Economic Advisers’ recent Economic Report to the President.) The Fed number includes all pensions and the net value of consumer durables, as well as certain capital gains that Commerce leaves out. In 1987, calculating from these figures, Americans saved 9.4% of their income — almost triple what Commerce shows. From 1977 to 1987 the Fed savings rate fluctuated between a low of 9% in 1980 and a high of 12% in 1984.

But that’s not the end of the story. Again from the point of view of the saver, both the Fed and Commerce leave out one big contribution to savings — the biggest pension of all and, for most of us, the most expensive, Social Security. Counting Social Security payments, we Americans sock away nearly one in every five dollars we make — 18.5% in 1987, up from 17.1% in 1980 and 17% in 1970.

And in fact we almost certainly save even more than that. Both the Fed and Commerce lump nonprofit institutions into their calculations of what “individuals” save. Taken together, nonprofit institutions are a big part of the economy, with roughly as many employees as all state and local governments combined. And the money they may make and keep is restricted by law, so most save little or nothing. Drop out nonprofits and the savings rate for individuals rises.

Also, both the Fed and Commerce treat the sale of the family home in a perverse way. When you sell your house, your savings, from your point of view, go up, as you pocket the capital gain. But while neither agency recognizes your capital gain as income, both pick up your capital-gains tax payment as expenditure, and your personal savings rate drops. This aberration may account for most of the Commerce savings rate’s fall over the past decade.

Add all these statistical peculiarities together — throw in others, such as undercounting income from investments overseas — and you can’t help concluding that, from the saver’s point of view, America is a most frugal nation — indeed, perhaps the most frugal nation. After all, the value of our per-capita financial assets is almost twice that of the super-saving Japanese. And a Federal Reserve study completed in 1987 found that in the previous three years we “acquired financial assets at the most rapid pace in postwar history.”

Does this mean that we can forget the ABC’s worries about a dearth of personal savings and move to other matters? Maybe not. As with most who wring their hands over the savings rate, the Conference is really concerned about a lack of investment capital for American industry, of which inadequate personal savings is assumed to be the cause. A careful look at the Fed savings numbers plus Social Security gives a clue to why domestic capital sources appear thin and how to fix it.

Three-fourths of our annual savings go into four broad accounts: in descending order, Social Security, life insurance and pension funds, homes, and government bonds (including municipal bonds). Social Security is mandatory. The others get tax breaks.

All that we as individual savers put into industry through bank accounts, money market funds, corporate bonds, and stocks barely exceeds the smallest of those four big-ticket items. But then, of course, the interest on bank accounts and corporate debt is taxed, while corporate earnings are taxed as income, dividends, and, indirectly, as capital gains.

To be sure, much pension and insurance money goes into industrial investment. Still, equities in particular carry such a heavy tax burden that, over the past three decades, more corporate stock has dropped out of the markets than has been issued.

To put it simply, the problem is not the volume of savings but the distribution. And we Americans distribute our savings in just the way our regulations and taxes push us.

How to fix it? Level the playing field. It’s time to think not only about this or that rate but about the basic architecture of our taxes on business investment. Should we tax interest, dividends, or capital gains at all? Should dividends be deductible from corporate earnings, just as interest is? Should capital investments be expensed?

Perhaps it’s also time to think about where the Social Security Trust Fund puts its money. Its surplus is growing by $1 billion a week. Unlike in the past, the Trust Fund now has money that each paying member of the system can claim. Social Security has always invested every dollar in Treasury bills. Shouldn’t each member have the choice of directing a portion of his “account” to other investments?

It’s been said that the first of all moral obligations is to think clearly. The key to thinking clearly about savings is to look at them from the point of view of the saver. Before we start to give such patent medicines as an expenditure tax to a supposedly anemic savings rate, we should, with the saver in mind, examine the numbers carefully and skeptically. As accumulators of savings, we Americans are doing just fine. Now maybe our government should think about where its policies actually channel our savings.