John Sabelhaus

The Decline in Saving: Evidence from Household Surveys

THE RATE of national saving in the United States declined precipitously in the 1980s. From World War II to 1980 the net saving rate averaged 8 percent of national income; today the rate is just 2 percent. While much public discussion has focused on the growth in the federal budget deficit as a source of this decline, a larger part of the drop in saving has come from a falloff in the rate of private saving. The extent of decline in the private saving rate is a surprise for several reasons. The slide comes after several decades in which the saving rate fluctuated within a very narrow range. The narrowness of that range inspired many economists to treat the private saving rate as an uninteresting constant. Second, the largest part of the decline occurred, ironically, after the government made an increase in saving a major objective of economic policy and redesigned the tax system to increase effective after-tax rates of return and promote saving. Finally, the decline coincided with a dramatic increase in real market interest rates, which should have greatly strengthened saving incentives. Economists have no shortage of theories to explain the decline in saving. Given the previous stability of the saving rate and the one-time nature of the decline, however, it is virtually impossible to sort out the

Understanding the Postwar Decline in U.S. Saving: A Cohort Analysis

Since 1980, the U.S. net national saving rate has averaged less than half the rate observed in the 1950s and 60s. This paper develops a unique cohort data set to study the decline in U.S. national saving. It decomposes postwar changes in U.S. saving into those due to changes in cohort-specific consumption propensities, those due to changes in the intergenerational distribution of resources, those due to changes in government spending on goods and services, and those due to changes in demographics. Our findings are striking. The decline in U.S. saving can be traced to two factors: The redistribution of resources from young and unborn generations with low or zero propensities to consume toward older generations with high consumption propensities, and a significant increase in the consumption propensities of older Americans. Most of the redistribution to the elderly reflects the growth in Social Security, Medicare, and Medicaid benefits. The increase in the elderlys consumption propensities may also reflect government policy, namely the fact that Social Security, Medicare, and Medicaid benefits are paid in the form of annuities and that, in the case of Medicare and Medicaid, the annuities are in-kind and must, therefore, be consumed.

Perspectives on the Household Saving Rate

We evaluate official saving rate measures in light of the recent decline of NIPA personal saving to effectively zero. We find, like others, that official saving measures are not representative of basic economic concepts, and that various adjusted measures of saving have moved in markedly different directions over the past two decades.In particular, although NIPA personal saving declined from about 5 percent of GDP in the 1970s and 1980s to less than 0.5 percent in 1998, a measure that adjusts personal saving for durables, retirement accounts, inflation, and tax accruals, and integrates personal and business saving fell from about 9 percent of GDP in the 1970s and 1980s to 7 percent in 1998. Using this measure, which we would claim is closer to an economic concept of saving, the decline is much smaller, and the current level of saving is much higher, than under the conventional measure. Adjusted Flow of Funds saving data show a similar decline. They also show that borrowing is not significantly out of line with prior years, and that the vast portion of the decline is concentrated in net acquisitions of non-retirement assets.Adding capital gains fundamentally changes recent trends. With all capital gains included, the adjusted household saving rate is the highest in at least the last forty years, despite the personal saving rate being zero. However, it remains controversial whether it is appropriate to include capital gains in general, and the recent capital gains in particular, in saving.Our findings suggest that, in principle, all discussions of whether saving has risen or fallen, and by how much, need to be qualified by the concept and measure of saving employed. In practice, this distinction appears to be particularly crucial when considering data over the recent past.

Earnings Volatility across Groups and Time

Inferences about earnings volatility across groups and time depend on the underlying models of earnings dynamics, data sources, earnings concepts, and sampling strategies. In this paper we evaluate a model of earnings dynamics in which the permanence of shocks varies by age and education. This specification is consistent with observed earnings changes in administrative panel data, and also with the variance of earnings levels in multiple cross–section (synthetic panel) data. However, expanding the earnings concept to include self–employment and changing sampling strategy to include observations with minimal labor force attachment has first–order effects, and may help explain why some studies conclude that earnings volatility is rising.

Is the Consumer Expenditure Survey Representative by Income

Aggregate under-reporting of household spending in the Consumer Expenditure Survey (CE) can result from two fundamental types of measurement errors: higher-income households (who presumably spend more than average) are under-represented in the CE estimation sample, or there is systematic under-reporting of spending by at least some CE survey respondents. Using a new data set linking CE units to zip-code level average Adjusted Gross Income (AGI), we show that the very highest-income households are less likely to respond to the survey when they are sampled, but unit non-response rates are not associated with income over most of the income distribution. Although increasing representation at the high end of the income distribution could in principle significantly raise aggregate CE spending, the low reported average propensity to spend for higher-income respondent households could account for at least as much of the aggregate shortfall in total spending.

Early withdrawals from retirement accounts during the Great Recession

Early withdrawals from retirement accounts are a double-edged sword, because withdrawals reduce retirement resources, but they also allow individuals to smooth consumption when they experience demographic and economic shocks. Using tax data, we show that pre-retirement withdrawals increased between 2004 and 2010, especially after 2007, but early withdrawal rates are substantial (relative to new contributions) in all of those years. Early withdrawal events are strongly correlated with shocks to income and marital status, and lower-income taxpayers are more likely to experience the types of shocks associated with early withdrawals and more likely to have a taxable withdrawal when they experience a given shock.

State and local retirement plans in the United States

State and Local Retirement Plans in the United States explains how economic and political events have shaped the development of pension plans in the last century, and it argues that changes in the structure and generosity of these plans will continue to shape policy and funding in the future. It also brings to bear a new rationale to the policies behind public sector pension plans. The authors use the history of how early public pension plans were established, how they matured and how they have grown in generosity to analyse what changes may be expected in years to come. Unique in its scope, this comprehensive history of the development of public sector pension plans in the United States during the twentieth century expands upon current ideas relating to the changing economic environment, the passage and evolution of social security, and the expansion of the public sector.

Heterogeneity in Economic Shocks and Household Spending

Large swings in aggregate household-sector spending, especially for big ticket items such as cars and housing, have been a dominant feature of the macroeconomic landscape in the past two decades. Income and wealth inequality increased over the same period, leading some to suggest the two phenomena are interconnected. Indeed, there is supporting evidence for the idea that heterogeneity in economic shocks and spending are connected, most notably in studies using local-area geography as the unit of analysis. The Survey of Consumer Finances (SCF) provides a household-level perspective on changes in wealth, income, and spending across different types of families. The SCF confirms that inequality is indeed increasing in recent decades, and the data provide support for the proposition that shocks to income and wealth are indeed related to large swings in spending across and within birth cohorts. However, the economic shocks associated with the Great Recession and changes in spending and debt to income ratios are widespread, and inconsistent with a narrow focus on the experiences and changes in behavior of particular (especially low- and modest-income) households.

The Evolution of Retirement Wealth

Is the current mix of tax preferences for employer-sponsored pensions and individual retirement saving in the U.S. delivering the best possible retirement-preparedness across and within generations? Using data from the triennial Survey of Consumer Finances for 1989 through 2013, cohort-based analysis of life-cycle trajectories shows that (1) overall retirement plan participation was relatively stable or even rising through 2007, though participation fell noticeably in the wake of the Great Recession and has remained lower, (2) participation is strongly correlated with income, and the shift in the type of pension coverage occurred within--not just across--income groups, (3) relative to previous cohorts and a counterfactual lifecycle benchmark, the recent decline in retirement plan participation and defined contribution (DC) retirement account balance-to-income ratios is concentrated among younger families and lower-income families.

Has Tax-Preferred Retirement Saving Offset Rising Wealth Concentration?

The share of wealth owned by top wealth-holders in the U.S. has been rising over the past few decades, though there is some debate about exactly how concentrated wealth is, and how fast those top wealth shares are rising.