What is Behind the Decline in U.S. Savings Rates?

In the November/December 2007 Review of the Federal Reserve Bank of St. Louis, Guidolin and Jeunesse examine the decline in the U.S. personal saving rate. Their purpose is to determine whether the decline results from methodological flaws in the measurement methods and whether it is a concern.

There are two primary measures of the U.S. personal savings rate: the NIPA measure used by the Bureau of Economic Analysis and the Flow of Funds measure used by the Federal Reserve. The NIPA measure is most commonly referenced, but is known to have several flaws, including:

  • Capital gains are excluded from disposable income, understating the savings rate
  • Pension benefits are excluded, but pension contributions are included
  • Household interest payments are expressed in nominal rather than real terms
  • Education outlays are treated as personal expenses rather than investme

Despite these issues, it becomes clear that the savings rate has declined sharply. The authors then consider three arguments that imply that the decline is not cause for concern:

  1. Net wealth data rather than NIPA data should be used, capturing capital gains
  2. The savings rate of the nonfinancial business sector should be taken into account
  3. The Flow of Funds measure, though superior, also may understate savings rates by failing to account for productivity enhancements

Such theories and others do explain part of the decline, but none account fully for the drop. The authors conclude that neither methodological flaws nor economic theories account for the drop in savings, and that the decline remains cause for concern.

For more information, see all articles on: Economic Analysis, Research

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