Americans save more than you think

April 1, 2005 — This week’s government report showing a continued rise in consumer spending and a continued drop in the savings rate has J.R. in Houston wondering if paying off his credit cards would help matters. But it turns out that -- like most Americans -- J.R. is probably saving a lot more than the government gives him credit for. Frank is Massachusetts, meanwhile, is puzzled by differing reports on the size of the U.S. government's debt.

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SAVING TOO LITTLE?
A Commerce Department report stated that consumer spending is up and the savings rate is down.  So, how does paying down your debt (home loan, car loan, or credit cards) impact the nation's savings rate? —J.R. B., Houston

Ironically, it won't help. Like most government accounting, the monthly statistics on consumer spending and savings bear little resemblance on the way the average household manages its finances. You're right that using some of your paycheck to pay off your credit cards (instead of spending on more stuff) is as good as putting that money in the bank. You’ve increased your household “net worth” -– the difference between what you own and what you owe.

And by that measure, American households are in great shape. It’s true that consumer debt is at record levels in the U.S. -– but so is household net worth. (As of the third quarter of last year, household assets stood at $57 trillion and debt was at $10.3 trillion, for a total net worth of $46.7 trillion.) That “net worth” includes what most of us would consider savings: cash in the bank, plus the value of our investments and our homes, and every thing else we own.

But the government definition of savings doesn't see it that way. According to the folks down at the Bureau of Economic Analysis, “savings” simply represents what you have left over from your “disposable income” after you’ve gone shopping and paid the bills (including taxes.) By that measure, the savings rate has been falling since the early 1990s and is approaching zero.

How can savings be falling and net worth rising? Because this widely quoted “savings rate” overlooks some major sources of American wealth. For one thing, gains on stocks don’t count. Neither does the increase in the value of your house -– which for many Americans represents a major portion of their net worth.

When it comes to pension plans, the savings numbers get even screwier. For example, money set aside in a 401(k) plan at work doesn’t count as savings because those are pre-tax dollars -– and not considered part of your “disposable income.” For older, so-called defined benefit pensions, the impact is even worse on the spending vs. savings picture. That’s because income statistics are based on the employer contributions to these plans, not benefits paid out -– which is a larger number. So retirees have a lot more money to spend than the official figures take into account.

The conventional wisdom holds that free-spending American consumers are on a perennial spending binge, in debt up to their eyeballs and unable to put away a dime for a rainy day. The clear implication is that Americans should embrace personal sacrifice, put away their credit cards and emulate other, more frugal societies, where savings rates are higher and consumption is more restrained.

All of which may be true. But it’s hard to know for sure because the government statistics that fuel this conventional wisdom are seriously flawed.

HOW MANY TRILLIONS?
In very round numbers, I often see our national debt as being around $4T; other articles use the figure $8T. Why? — Frank R., Salem, Mass.

Government accounting of the national debt is another example of Uncle Sam's screwy record keeping -– especially if you try to use the kind of common sense rules most people apply to their household budgets.

It turns out there are two kinds of government debt: paper held by the public (the Treasury bonds in your savings account) and another pile of debt scattered in what’s called Intragovernmental Holdings. (Most of that paper is not marketable -– which means it can’t be bough or sold in the bond market.)

So the larger number includes both public debt and Intragovernmental Holdings. As of this writing, the public debt was $4,583,541,016,541.40, the Intragovernmental Holdings portion was $3,203,065,669,718.56, for a total of $7,786,606,686,259.96. You can get the latest numbers here.

While those intragovernmental holdings are a real liability (just like your home mortgage) it’s a liability that represents future government payments to itself. That’s why some people consider the smaller number (just the debt held by investors, banks, other countries, etc.) as a more accurate picture of what the U.S. owes others (not itself.)

The pile of Intergovernmental Holdings includes Treasury bonds squirreled away in over 150 different trust funds and other accounts. The granddaddy of them all is the Social Security Trust fund (roughly $1.7 trillion), but there are other sizable accounts, including civil service and military retirement funds, highway and aviation trust funds, and bank insurance funds. But most of them are for causes and projects you’ve never heard of.

For a complete list, check out the Monthly Statement of Public Debt. The list starts on page 7. It makes for some fun reading.