Savings

Saving is measured in different ways, which frequently leads to confusion. One measure is the National Income and Product Accounts (NIPA), produced by the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce. Another is the Flow of Funds Accounts (FFA), produced by the board of governors of the Federal Reserve System. The news media typically cite the NIPA measure, and not the FFA measure. This can lead to a feeling among individuals that they have growing savings, even though the papers say that people are not doing well at saving.

NIPA. Under NIPA, personal savings is a residual. This means that personal savings is what is left over from personal income after subtracting payments for personal income taxes, individual payroll taxes (i.e., individual contributions for Social Security and Medicare), and all other personal outlays, such as food, housing, and clothing expenditures.

Personal income includes the following:

• • Wages and salaries
• • Other labor income (i.e., employer contributions to pensions and profit-sharing plans, group insurance, such as health, workers’ compensation, and supplemental unemployment coverage)
• • Rental income
• • Personal dividend income
• • Personal interest income
• • Transfer payments (i.e., Social Security benefit payments, government unemployment and insurance payments, veterans benefits, government employees retirement benefits, and welfare payments)

Personal taxes include the following:

• • Federal income tax payments
• • State and local income tax payments
• • Any penalties, fines, or interest payments made on income tax statements
• • Contributions to social insurance programs (i.e., Social Security and Medicare payroll taxes)

Personal outlays include the following:

• • Personal consumption expenditures (i.e., spending on food, housing, clothing, household operations such as utility bills, transportation, and medical care)
• • Consumer interest payments (i.e., payments of credit card interest)
• • Personal transfer payments to persons located outside the U.S. are treated as outlays, whereas transfers among persons within the U.S. are not

Disposable personal income equals personal income after deducting personal income taxes and payroll taxes, but before personal outlays are deducted. Personal savings is what is left over from disposable personal income after deducting personal outlays. Personal savings divided by disposable personal income is the personal saving rate. For the individual, this rate is the measure of how much was saved in a particular month.

FFA. Whereas NIPA measures personal savings as a residual, the FFA personal saving rate is a direct measure of the net acquisition of assets by households. FFA methodology differs from that used by NIPA in two ways: (1) in the treatment of consumer durables and (2) in the definition of personal income.

The FFA treats the net acquisition of consumer durable goods (i.e., automobiles, major household appliances, and other products that can be used for several years) as a form of saving, whereas the NIPA treats expenditures on consumer durables as a component of personal consumption. The FFA also makes some adjustments to the NIPA measure of personal income: The FFA includes certain credits from government insurance programs and realized capital gains distributions, whereas NIPA does not. (It is important to note that neither FFA nor NIPA includes unrealized capital gains.) For example, if an individual purchases ten shares of corporate stock at $10 a share, and the stock then increases to $30 a share, the increased value of the stock is not considered part of personal income under FFA until the individual sells the stock and realizes the capital gain. By contrast, under NIPA the increased value of the stock is never considered part of personal income.

For the individual this means that how much is saved is derived from a broader definition of income (wages or salary, plus interest income, plus gains from the sale of a house or stock), but with some of what one might have spent actually counted as saving (i.e., appliances, automobiles, etc.) even though one won’t be able to sell what was bought for the amount paid.

Implications. Neither NIPA nor FFA calculate savings the way most individuals think of it on a day-to-day basis. The individual looks at what is being saved now (the $500 just put into a savings bond), as well as the growth of what was saved before (how much did my 401(k) account go up this quarter), and thinks about savings as accumulated wealth. The individual does not generally think about a credit-card balance or a home mortgage as negative savings, meaning that if they charged $1,000 and put $500 into a savings account, they are likely to still say they saved $500.

NIPA and FFA, using different methods, add transactions together to get net figures. This is what the mortgage applicant does when filling out a ‘‘net worth’’ statement so that the bank can see how much ‘‘net’’ savings a person actually has.

Individuals who owned equities during the 1990s generally experienced tremendous increases in the value of those financial assets (i.e., they became wealthier). According to data from the Federal Reserve’s Survey of Consumer Finances (SCF), the net worth (the difference between a family’s gross assets and liabilities) of the typical American family (i.e., median net worth) rose 17.6 percent between 1995 and 1998—from $60,900 to $71,600. This increase in net worth was driven by strong growth in the financial assets held by families, especially direct and indirect holdings of stocks. As of 1998, 92.9 percent of American families held some type of financial asset, and the median value of assets, among those with financial assets, was $22,400 (comparable figures for 1995 are 91.0 percent and $16,500, respectively) (median means midpoint or 50 percent above and 50 percent below). Almost one-half (48.8 percent) of families held stock (directly or indirectly) in 1998, compared with 40.4 percent in 1995, and 31.6 percent in 1989. The median value of stock among families with holdings increased from $10,800 in 1989 to $15,400 in 1995, and to $25,000 in 1998. Over the same period, stock holdings as a share of families’ financial assets increased from 27.8 percent in 1989 to 40 percent in 1995, and to 53.9 percent in 1998.

One could argue that a more complete measure of saving would include increased wealth through capital gains (both realized and unrealized) as part of personal income. As mentioned above, FFA includes realized capital gains in its measure of saving, but not unrealized capital gains.

William Gale and John Sabelhaus (1999) identified other shortcomings, in addition to the exclusion of accrued and realized capital gains from income—and thus from savings—in the NIPA measure of saving. Among these shortcomings are:

• • While net acquisition of owner-occupied housing is considered saving, net acquisition of other consumer durables is counted as current consumption, not saving
• • Nominal (as opposed to just the real component of) interest receipts are counted as income, whereas nominal interest payments are counted as outlays
• • NIPA does not factor in the implicit tax liability of saving in tax-qualified plans