Why Standard US Savings Rate Calculations are Completely Wrong

During the current doom-n-gloom economic situation, where the entire economy is going to fall and everyone in America will soon be thrown out of their homes because of the collapse of our banking system, one statistic used to support this gloomy outlook is the abysmal state of the US Savings Rate. “Americans don’t save.” “Americans outspend their incomes.” “Americans have no self discipline.” And on and on the American-bashing goes.

One article puts the current US Savings Rate at 0% to minus 1% and many other articles (easy to find by searching for “US Savings Rate Chinese”) suggest that Americans should be more like the Chinese, who save anywhere from 25% – 50% of their incomes (pretty big spread between 25% & 50% – hmmm…). Our economy is going to come to a crashing halt if we can’t fuel the markets with savings, we’re told. (Of course, we’re also told at the same time that if we stop spending, the economy is going to crash too – so which is it? Spend or Save? Make up your mind people!)

The fact that Americans don’t save is accepted wisdom. The statistics don’t lie. Statistics can’t lie – they are what they are, right? That’s why a pull back in housing values is going to devastate the US Economy. People were using the increasing equity in their homes to fund their spending habits. If home values keep falling, eliminating our ability to spend, no one will be able to go on vacation or buy a new car ever again. We’re all doomed… Right?

Statistics Lie and Cheat

I have to admit it – I was sucked into this mindset. If savings and spending keep the economy going, and there are no savings and spending rates are falling, of course the economy is in trouble. Imagine what happened to my fragile psyche when I discovered a little-known truth about how the “US Savings Rate” is measured.

What is the number one savings instrument that Americans use? The answer is 401K or 403B accounts. Guess what? Neither of these vehicles is counted towards the US Savings Rate calculation! (Huh? Check this out for an in-depth discussion). And when you withdraw money from these accounts, it is actually counted AGAINST the Savings Rate. Who comes up with these formulas?

What’s more, most Americans view their increases in stock values and the increases in their home equity positions as being positive savings – but the Savings Rate formula again doesn’t consider these. Or investing in some additional rental properties or a 2nd home to build wealth? Not counted as savings, but counted instead as expenditures.

So while other world citizens pull money out of their economies – putting it under the rice mat or burying it in a vegetable garden – they get credit for “saving”. This type of savings can gut economic activity (search “Velocity of Money” for an Econ 101 lesson). Americans aren’t burying their money, they are investing it in places that grow the economy and help create more wealth for everyone. Instead, according to statistics, this type of activity is calculated as negative savings.

Should we all save more? You bet. There is a frightening lack of ANY savings activity from many Americans (No participation in 401K’s or IRA’s, Lifetime Renters, etc.), so there is still much to do to help ensure the fulfillment of the American Dream for everyone. But as a whole, we’re doing a good job. Yes, the current economic climate isn’t exactly roses and peaches – but the downturn didn’t happen because of lack of savings!

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