The US savings rate is portrayed by left-Liberals, anti-American’s, and nations with superiority complexes, as unsustainably low. The reality is however quite different. Indeed the US is #1 with the highest savings rate, accumulated national savings and net assets in the world. The Japanese run a close second in savings, but along with the EU and Canada are far behind in net assets. Yet the threat to the US savings rate does not come from fat, greedy, Wal-Mart obsessed Americans who can’t save, but from government debts, social security and increasing taxation.

Edward C. Prescott, an economics professor at Arizona State University in Tempe who won the Nobel Prize in economics in 2004 says the traditional way of measuring the U.S. savings rate is flawed. ``The key measure should be the net worth of Americans relative to their income….savings actually are high, with wealth levels now at more than four times household income levels, up from just over 3 percent in 1971.'' Indeed the US net savings rate is 6-7 % not the 1 % portrayed in the media.

So why the misinterpretation on this key number ? It comes down to bad government statistics.

The Liberal, Canadian and EU Media spin:
The mainstream media in socialist dominated economies loves to portray the American model as weak focusing on the 5 % current trade deficit [which is not important see other articles on the deficit], and a low savings rate. The media reports come direct from US government stats on the savings level but the calculation, as any reporter who understands economics would quickly ascertain, is incorrect. The official calculation subtracts consumption, $8.5 Trillion in 2004, from disposable current income, which is only a subset of total household cash flow. It then labels the difference as ‘net savings’. This is wrong. The income side is understated since it does measure gains or cash flows to the consumer [dividends, and investments are excluded for example], and the consumption side is overstated since it includes large purchases such as education, company R&D, or car purchases, which are longer-term investments and not immediate consumption items.

When you take the government’s equation and normalize the income and consumption side you get radically different savings levels. According to the Heritage Foundation and others the Gross US savings rate is 16 % and its Personal Savings rate is 6-7 %, not the 1-2 % reported in the media. An important indication of high net savings is the increase in US net worth. Household net worth is now at $49 Trillion and climbing as net savings levels rise. Time deposits and savings accounts alone account for over $4 Trillion or 40 % of the size of the New Stock Exchange and 35 % of the size of the entire US economy. Credit card debt is by contrast a puny $800 billion. On a per capita basis counting only mortgages and NOT housing values, the US has $90.000 in per capita assets vs #2 Japan [$77.000]. In 2004 alone Americans added $590 billion in financial assets or 7 % of income. This is far better on a per capita level than any other country.

What about foreigners supplying the US with credit? First foreigners are supplying their capital to the US due to higher returns in the US juxtaposed against their slow growing economies. It is always better to attract than export capital. Second, foreigners are losing ownership as US domestic assets rise faster than foreign savings in the US. Foreign ownership, which stands at $2.6 Trillion, will be reduced as the US economy grows and the share of government falls. This will occur as long as the US keeps cutting government spending and growing its economy with tax cuts. This is the main US challenge – to keep the statists out of power and reduce spend. In other words, lose the Compassionate Conservatism and just stick with Conservatism.

Taxes and Social Security:
Allan Meltzer, a professor of political economy at Carnegie Mellon University and author of a book on the history of the Fed, says Social Security and Medicare programs also have ``taken away most of the reasons that people save'' -- to provide income to use for retirement and medical expenses. This is partly true of course. The problem with the Social Security ‘pay as you go system’ is that it is not a savings program but just another redistribution scheme – from the young to the old. It also makes it much more difficult for moderate- and low-income people to save. Specifically, because the current Social Security system does not allow workers to shift a small portion of their payroll taxes into personal retirement accounts [Bush’s plan is to allow only 3% and it probably won’t be passed], these workers are unable to build up savings.

As well, in the US as well as in Canada and Europe, the tax burden on savings and investment is much heavier than the tax burden on consumption. If a taxpayer spends his after tax disposable income, he will pay very little, if any, additional federal tax. But if he chooses to save and invest that income before tax, he will be penalized by the tax code. Depending on the ways he invests it, the government may subject any returns from the investment to as many as four layers of tax. These additional taxes send a very clear message: ‘spend your money, don't save it’. As usual government has created a problem and then loudly proclaims it a national tragedy – with of course more government programs and meddling needed to provide the remedy.

The tax code thus needs rewriting. In the US [and Canada for that matter], individual retirement accounts (IRAs) should become universal, so that all taxpayers could save as much as they want without being taxed twice. The double taxation on other forms of savings should be eliminated. The Social Security [Pension] system should be reformed to allow all workers to shift payroll taxes into personal retirement accounts. Finally, tax penalties on dividends, estates, capital gains, and other forms of capital should be eliminated.

By doing the above the US net savings rate – already at 7 % - will blossom. Reward profit, savings, hard work and an open economy and don’t worry about the negative media or the greedy socialists who delight in fabricating economics to support their politics.

Sources:
http://www.heritage.org/Research/Taxes/BG1309.cfm
Even Bloomberg misrepresents the facts Dresdner Report On US Savings and why it is higher than Gov't stats suggest
WSJ, Editorial, March 29, 2005 By David Malpass, A16

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