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Home Publications Blogs Beat the Press Washington Post Doesn't Know Which Way Is Up #45,671: Savings are Low, not High

Washington Post Doesn't Know Which Way Is Up #45,671: Savings are Low, not High

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Tuesday, 02 October 2012 03:57

Consumption amounts to 70 percent of the economy, so getting the basic facts right about consumption and savings is pretty central to understanding the economy. That's why it is pretty incredible that the Post told readers today:

"Households began squirreling away cash in the midst of the recession. The savings rate, which was at 1 percent in 2005, generally fluctuated between 5 percent and 6 percent during the recent recession. This year it has hovered around 4 percent, still above historical norms."

No, this is not true. The saving rate actually averaged above 8.0 percent through most of the post-war period. It began to fall in the late 80s when the wealth created by the stock market run-up led to more consumption. It fell as low as 2.0 percent in 2000 at the peak of the stock bubble. It then fell even lower at the peaks of the housing bubble in the last decade. While the saving rate has risen from its bubble driven lows, it is still well below historical norms. (Adjusted savings uses an adjustment to disposable income based on the statistical discrepancy.)

saving-as-per-disp-10-2012

Source: Bureau of Economic Analysis.

The piece also badly misleads readers when it reports:

"the average household approaching retirement had only $120,000 in 401(k) or individual retirement account holdings in 2010, roughly the same as in 2007. That balance translates to about $575 in monthly income."

This figure refers to the average holding among the group that has a 401(k) account. In fact, close to half of those near retirement have no account at all. Furthermore the holdings of the typical household even among with retirement accounts is far below the average.

An analysis by the Pew Research Center found that the typical household approaching retirement had just 164,000 in total wealth. This counts equity in their home, which is by the largest source of wealth for most middle income families. Since the price of the median home is slightly over $180,000, the Pew finding means that the median household approaching retirement has roughly enough money to pay off the mortgage on their house and then would be completely dependent on their Social Security benefits for income in retirement. The Post's discussion would have grossly misled readers into thinking that the typical household approaching retirement could anticipate substantial non-Social Security income.

Comments (8)Add Comment
...
written by foosion, October 02, 2012 6:42
The usual flim-flam is to mix up mean and median. People don't notice the difference between the average household (median) and the average amount held by households (mean).

Given the degree of inequality in the US, there is a large difference between mean and median.

Throwing in average 401(k) takes the confusion a step further.
...
written by skeptonomist, October 02, 2012 8:35
Dean's explanation of the decrease in savings rate as due to wealth effects does not fit the facts. The decline started around 1980 when stock prices were extremely low - nobody was feeling wealthy because of stock prices at that time. Stock wealth really began to increase in the late 90's, but there was no particular decrease in savings rate at that time, nor was there any big change after the dot-com crash in 2000.
More likely explanations include the proliferation of credit cards, and the decline of real wage income, which crashed badly starting in the 70's:

http://www.skeptometrics.org/WeeklyWages/WeeklyWages.htm

A decline in purchasing power can alternately be considered an effect of rising prices because of the inflation of the 70's and 80's which was not accompanied by as great a rise of nominal wages.
...
written by skeptonomist, October 02, 2012 8:42
Stock prices peaked around 1969 and declined severely during the 70's, while savings rate continued up.
I Am Shocked, Shocked!
written by Paul, October 02, 2012 10:24
"It (savings rate) began to fall in the late 80s when the wealth created by the stock market run-up led to more consumption. It fell as low as 2.0 percent in 2000 at the peak of the stock bubble. It then fell even lower at the peaks of the housing bubble in the last decade."

You mean to say that as the savings rate fell, consumption increased and the economy expanded??? But, but that contradicts all conservative economic theory and validates Keynesian economics! That is IMPOSSIBLE!
...
written by Arne, October 02, 2012 10:37
"the median household approaching retirement has roughly enough money to pay off the mortgage on their house"

This seems like a piece of statistical finagling as well. I realize that there is a lot of people refinance or move right up to retirement, but surely the mortgage balance or near retirees is not the same distribution as that of the entire population.
Global Excess Savings
written by Stephen, October 02, 2012 10:56
Isn't the problem exactly that savings has risen, despite being below historical norms? Clearly we haven't been under normal circumstances for the past two decades in terms of trade so you'd expect low savings during that period.

I get your overall point, that we can't get a sustained recovery by boosting already high consumption rates, and need short-term deficits and balanced trade. I guess I can't shake the "Global Excess Desired Savings" analysis via Bernanke-Krugman though.

I guess you can say savings are low historically, but still high enough that the gov't can put them to use through deficit spending.
Arne, Please!
written by ellen1910, October 02, 2012 5:19

All Dean is saying is that the median household approaching retirement is dependent upon income from pensions and social security to meet all expenses other than interest on mortgages.

Or to say it differently, those households have no effective income earning investment assets. If they have them, they're being used to pay the mortgage; if they don't have a mortgage, then, they don't have investment assets.
Wages
written by FoonTheElder, October 09, 2012 12:28
More like the savings rate began to stagnate when real wages began to stagnate and people began to dig into their savings to make up the difference.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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