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

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.)


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.