Are We Saving Enough?

Kevin L. Kliesen

Just as the proverbial piggy banks of our youth offered the promise of future riches-or a more enjoyable trip to the toy store!-a country that saves a relatively high percentage of its income will usually find that its living standards improve over time. Why? Because saving finances business investment, which is a key building block of long-term economic growth.

But with the nation's households currently saving only about 1 percent of their after-tax personal income (personal saving rate), many policy-makers are increasingly concerned about our future economic prospects. Indeed, if this low rate persists, it could lead to much lower growth rates of labor productivity and real incomes, which would mean slower growth of living standards over time.

Many people view the nation's total saving rate in terms of the personal saving rate. In reality, though, gross national saving is the sum of saving done by the three major economic sectors: households, businesses and the government.

Throughout most of the postwar period (1947-1999), gross private saving-the sum of household and business saving-remained at about 17.25 percent of GDP because increased business saving roughly offset the declining saving rates of households. Business saving averaged about 69 percent of gross private saving from 1947-1999, but rose to about 93 percent between 2003 and 2004.

The third component, government saving, usually was positive during the postwar period. That's only because state and local governments tend to run budget surpluses, while the federal government usually runs deficits. Although government saving at all levels is less today than, say, 30 or 40 years ago, government saving also tends to be a relatively small percentage of the gross national saving rate-even during periods of budget surpluses.

By adding these three components, we find that gross national saving (GNS) averaged a little more than 15 percent of GDP between 2000 and 2004. Although 15 percent is a modest fall from the nearly 17 percent average rate seen between 1983 and 1999, it is more than five percentage points lower than the 20.3 percent average GNS rate that prevailed between 1947 and 1982.

Foreign saving recently has become an important source of investment funds for our economy, helping to keep gross national investment rates nearly constant (as a share of GDP) throughout most of the post-war period. From 2000 to 2004, net foreign capital inflows-for example, foreign purchases of U.S. stocks or bonds-averaged 4 percent of GDP.

Some commentators are alarmed by this development; they believe U.S. residents must save more and rely less on foreign sources of investment funds. To others, the upsurge in foreign-capital flows to the United States is a measure of a fundamentally sound economy that offers high (risk-adjusted) rates of return. Regardless, foreign purchases of U.S. dollar-denominated assets have helped to lower long-term interest rates, which have been a boon to the U.S. housing industry and other producers of interest-sensitive products, e.g., cars and trucks.

Low interest rates are only one reason why American households have been saving less. Another reason is that household wealth has increased during recent years-arising largely from the rising values of stocks, bonds and house prices. Evidently, many households also have viewed this increased wealth as permanent and have decided to spend part of it by saving less out of their current wage income.

Ultimately, it's hard to escape the conclusion that current U.S. saving rates are low by historical standards and may need to be raised significantly. Why? Because the United States and most of the world's developed countries will soon be in a situation where the percentage of retirees-those who are drawing down their accumulated saving-will begin to rise relative to workers. Without sharp increases in taxes and/or reductions in benefits, it is likely that government budget deficits also will rise sharply, further lowering the national saving rate.

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