Should You Worry About the Negative Savings Rate?

On CNBC today a dialog took place between host and guest explaining why the negative personal savings rate in the U.S. wasn't really a concern. Specifically, they argued, it doesn't include contributions to 401k plans and other retirement accounts.

This claim comes up quite a bit in discussions as to why wary investors shouldn't fret about the U.S. economy before taking the plunge into the latest Wall Street offering. Certainly, on the surface, the argument has merit -- if workers in the U.S. are placing up to 15% of their income in a "personal savings void" that isn't included in the official government statistics, then there's far less cause for economic trepidation amongst the ranks of squirrely Wall Street holdouts.

But is this claim true?

Let's see what we can learn from the mighty BEA (Bureau of Economic Analysis) archives...

First, we'll look at the personal savings rate calculation described here:

personal saving rate — saving as a percentage of disposable personal income

Next, we'll consider the following definitions that appear in the BEA glossary (just the good parts appear below):

Disposable personal income. Total after-tax income received by persons; it is the income available to persons for spending or saving.

Personal saving. Personal income less the sum of personal outlays and personal current taxes.

Personal income. Income received by persons from all sources. It includes... compensation of employees (received)...

Compensation of employees (received). Wage and salary disbursements and supplements to wages...

Wage and salary accruals and disbursements. The monetary remuneration of employees, including... voluntary employee contributions to certain deferred compensation plans, such as 401(k) plans...

Both the income and saving figures used in the savings rate calculation include retirement account contributions. So by implication, the personal savings rate does too (if you dig a bit deeper you find that neither personal outlays nor personal current taxes contain retirement contributions, so these can just be dropped from the personal saving equation).

The key point to note is that these retirement account "deductions" are not some special pre-tax income excluded by the "after-tax" qualification of disposable income. These just come from normal income that has a portion of the taxes deferred. In other words, the personal savings rate does include contributions to 401k plans, IRAs, etc.

Correct me if I'm wrong.

(I'm dropping the pretense of collaboration with the reader here -- you're on your own from now on.)

Also, note that I'm following a chain of logic to reach this conclusion and am crediting the BEA with using a similar approach in their methodology.

Correct me if they're wrong.

Q.E.D.

Afterward: In defense of the naysayers, some more digging around reveals that there are potential flaws in the current personal savings rate calculation -- apparently, capital gains are not counted in the personal savings rate (likewise, losses aren't deducted). This may be a significant omission, but ultimately it has little to do with the issue of retirement contributions (which prompted the original discussion).

So...

Should you worry about the negative savings rate?

I was hoping CNBC would replay their earlier broadcast so I could take notes and formulate some additional insights, but a poker game came on instead.

I'll let you know if anything new comes up.