The American Savings Rate, Long Sneered At, May Rise

Americans will soon be saving more. The reason: Baby boomers are beginning to approach their retirement years. The first of the boomers hit 50 a few months ago, this year, and they are now in a race to save before it's time to collect Social Security.

"Actually, demographers expected to see the personal savings rate go up in the last two years, but it hasn't yet," says Michael Rome, a New York investment analyst for Donaldson, Lufkin & Jenrette. "But it is inevitable."

Moreover, young people just embarking on careers - worried that Social Security and traditional pensions won't be there for them - show signs of being better savers than their elders.

Analysts have lamented for years that America's personal-savings rate is declining and is low compared with rates in other industrial nations.

The savings picture is important, economists say, because it helps determine changes in productivity and living standards.

That's because the flip side of a nation's savings is its investment - in new offices, factories, technology, and equipment.

The national savings rate depends on the habits not only of individuals but also of businesses and governments. The federal budget deficit is often seen as a drag on America's savings and investment, for example.

Government's role

Balancing the federal budget would obviously help US savings. But the government could also help in other ways.

Last month, for example, President Clinton proposed a Retirement Savings and Security Act to strengthen retirement savings.

The legislation has yet to arrive on congressional desks, but according to Thomas Foster, head of retirement services at Aetna Life and Casualty Company in Hartford, Conn., its elements were selected to attract bipartisan support. Congress has been working on the topic for some time, and financial institutions are lobbying for liberalizing changes.

Some argue the decline in savings has been driven considerably by the disincentives of middle-class entitlements such as Social Security and Medicare, which make saving less essential.

Others argue that America's savings picture is already brighter than the official savings rate suggests.

That dispute hangs on the definition of personal savings. To get the savings rate, the Commerce Department's Bureau of Economic Analysis (BEA) first measures the difference between personal disposable (after-tax) income and personal spending. This savings figure is then divided by disposable income to get a percentage rate. In 1995, for example, Americans' personal disposable income totaled $5.3 trillion, savings were $241 billion, and the savings rate was 4.5 percent.

"Why has the savings rate gone down?" asks a BEA official who helps do the calculations. He answers in two ways. "Because incomes have been going up less rapidly than spending," but also, "The US tradition is to spend first and pay later."

But the figures do not measure total savings, some say, because they do not account for capital gains on homes and financial assets such as stocks and mutual funds. For example, if you buy a house, the BEA's accounting method treats the owned property much like rental property. Yet home equity has risen dramatically from the late 1960s.

Many Americans buy houses, a much larger proportion than in Japan and Germany, where the savings rate is calculated to be much higher than in the US.

"But don't we [as individuals] count the true value of investment in a home?" asks Richard Kopcke, an economist with the Federal Reserve Bank in Boston. Allowing for today's rising stock market and the value of home ownership, he says "the dip in savings seems to go away."

The capital gains from homes and stocks help account for the wealth accumulation of boomers, Kopcke adds.

Wealth rising

Boomers have more wealth relative to their income, on average, than their parents had, according to a study published last year by Joyce Manchester and John Sabelhaus, economists at the Congressional Budget Office.

"We've been getting richer and richer," says David Bradford, a Princeton University economist. His research finds that real per capita wealth has been generally rising since 1945, albeit with some dips and flat patches.

And even if recent personal-savings rates are lackluster, some experts say savings, as the BEA measures them, will soon go up - a trend driven by boomers and by young people concerned about their retirement security.

"The slightly higher rates of saving observed in younger generations will continue for future generations," predict Lowell Bryan and Diana Farrell, consultants with McKinsey & Co. in New York, in their new book, "Market Unbound."

Another new book, "The Return of Thrift," by Phillip Longman, argues that governments in the US and other nations will be forced to cut middle-class entitlements and that private savings will grow. "Many sources inside [the US] government are already saying this," he says.

Even the BEA's savings figures "will be showing increases in a year," predicts Mr. Longman, a journalist. One big reason: "Many in their 40s now believe they have trusted a safety net" that won't hold together, and so they are beginning to put away more money.