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All Better?

Jonathan Clements  |  September 22, 2018

THE SAVINGS RATE has been revised by the federal government—and the new numbers offer a rosier take on America’s financial rectitude. But is the story believable?

Make no mistake: The old figures told a sorry tale. They suggested our savings habits fell apart after 1984 and with a vengeance after 1997. But suddenly, post-1984 doesn’t look so grim. Under the new methodology, the annual savings rate averaged 11.3% over the 35 years through 1984, modestly higher than the 11.1% average under the old methodology. But the big improvement has come in the 33 years since then: The new data put the savings rate at an average 6.7% a year since 1984, versus 5.9% under the old methodology—an increase of 0.8 percentage point per year.

Even more surprising, the new data suggest we’ve seen a resurgence of thrift since the Great Recession. Forget the old story of gradually deteriorating financial restraint in the decades since the Second World War. Sure, that has happened. But now we can give the story a happier ending.

From 1950 to 1998, the annual savings rate averaged 10.4%, according to the new methodology. We then became awfully naughty and started spending far too much. In 1999, for the first time in 60 years, the savings rate slipped below 6%. Over the decade that followed, we socked away a paltry 4.7% a year, on average.

Perhaps the late 1990s stock market bubble and the early 2000s housing bubble went to our heads. Perhaps we felt so wealthy that we saw less need to save. But it seems the Great Recession brought us back to our senses. Starting in 2009, the savings rate has averaged 7%, including an impressive 8.9% in 2012. In short, we were sinners, but now we’ve been (ahem) saved.

Nice story, right?

It seems that the Commerce Department’s Bureau of Economic Analysis, which computes the savings rate, found that Americans—especially small business owners—were earning more than it originally estimated. Result: If income estimates go up but spending stays the same, that means Americans must be saving more.

This brings us to two key issues with the savings rate. First, we don’t measure it directly. Rather, the savings rate is the residual that’s left after estimating all the components included in total income and total spending. If any of those numbers are off, the savings rate will also be skewed.

Second, the government’s savings rate isn’t truly comparable to the savings levels recommended by financial experts. Experts typically advocate that workers save 10% to 12% of pretax income. The government, by contrast, looks at total savings as a percentage of post-tax income, which makes the savings rate seem more robust. Even then, the official saving rate of 6.7% for 2017 falls far short of what most experts would recommend.

It’s impossible for me—or anybody else—to say whether today’s official savings rate is accurate. But even with the revisions, we’re still far below the savings rate we saw during much of the post-Second World War period, and also far below what experts recommend. Does the recent uptick herald a new era of financial rectitude? Let’s hope so—because it would make for a lovely story.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His new book, From Here to Financial Happiness, can now be ordered from Amazon and Barnes & Noble. Jonathan’s most recent articles include My Favorite QuestionsStriking a ChordTell Us a Story and Bad News.

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