The savings rate and the investment rate

By Felix Salmon
September 1, 2009
Andrew Kaplan has taken IRS data from 2007, showing the income of the top 0.01% and top 0.1% of the population, and, making conservative assumptions about the savings rates in those sections of the population, has managed to come up with total savings larger than the $365 billion which the BEA says that the nation as a whole is now saving each year. He concludes that the other 99% of the population (still) has a negative savings rate.

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Is it kosher to compare two very different data series to come up with a startling conclusion? Andrew Kaplan has taken IRS data from 2007, showing the income of the top 0.01% and top 0.1% of the population, and, making conservative assumptions about the savings rates in those sections of the population, has managed to come up with total savings larger than the $365 billion which the BEA says that the nation as a whole is now saving each year. He concludes that the other 99% of the population (still) has a negative savings rate.

I think there might be a whopping great flaw in this argument: rich people don’t save their money, they invest it, in things like stocks. And, at least in 2006, the purchase of stocks and bonds was classified as consumption, not savings. If you assume that the rich are buying stocks and bonds with their excess money, rather than just keeping it in cash, there’s a real risk that Kaplan’s argument rather falls apart.

Kaplan unfortunately provides no hyperlinks in his blog entry: can someone clear up whether stock and bond purchases still count as consumption, rather than savings?

14 comments

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It depends. If you buy stocks or bonds from *current period* income it counts as savings.

Clearly ‘investing’ is saving! Just because it doesnt sit at a bank doesnt mean you havent set it aside for future consumption!

Why would bonds be classed different to equities? If they were would corporate bonds or high yield bonds be classed as savings? Then what happends if Citi offered a savings account with a yield equivilent to that high yeild bond?

Posted by Chris Allison | Report as abusive

If I buy stocks or bonds on the secondary market, someone is selling them, so it shouldn’t affect aggregates. New issues and maturing of bonds would be a different story.

I would assume that different data series handle this differently. It surprises me that the NIPA — which is where the savings rate usually comes from — would count stocks and bonds under “outlays”. Looking at
http://www.bea.gov/national/nipaweb/nipa _underlying/TableView.asp?SelectedTable= 17&FirstYear=2008&LastYear=2009&Freq=Qtr &ViewSeries=Yes
it looks to me like financial fees (commissions, expense ratios, etc.) are (properly) buried in “services”, but I don’t see anything that looks compellingly like net purchases of securities or the like.

If you think the wealthy have been just as scarred by the last 18months as everyone else, then it’s plausible they’d want to stay overweight cash. Of course, they’d have allocations to other asset classes, but while a few years ago they might have been with a tiny cash allocation, they might conceivably have got a much large one now. Especially, as they’ve seen how leverage can get you into trouble, regardless of wealth. (Felix- your series of post on Annie Leibovitz is one great example)

Posted by fxtrader | Report as abusive

As noted by your first responder, if you spend less on goods and services than your income, the difference is counted as savings. If you use cash you have in the bank to buy a bond, then you have changed the composition of your portfolio but not actually saved anything. So it is not the act of purchasing a security that is saving, but the act of not spending as much as you make.

Posted by Cole | Report as abusive

I doubt that the the savings rate for 99% of the population is negative even if this method of measurement is correct.

Contributions to defined benefit pension plans wouldn’t show up in income tax returns and is a key part of saving for those of moderate income.

Re: stocks/bonds on the secondary market.

While the aggregate net should be zero, when you single out the investors of a single country you would need to factor in the current account balance…

Posted by libor | Report as abusive

I didn’t look at the underlying paper, but IRS data usually means Adjusted Gross Income, which doesn’t include 401(k) and other deductible retirement contriutions. So the bottom 99.9% don’t save, except for their major retirement savings vehicles. That’s a WAY less sexy headline, which might be why you don’t see it.

Posted by Eric | Report as abusive

Could you please provide a definitive source for claim that “And, at least in 2006, the purchase of stocks and bonds was classified as consumption, not savings.”

The links do not provide enough information to trace the source of the claim.

Posted by DB | Report as abusive

I believe that the national savings rate would include 401k contributions and purchases of stocks and bonds based on the following table from the BEA:

http://www.bea.gov/national/nipaweb/Nipa -Frb.asp

Posted by James H | Report as abusive

Also, from the FAQ section of the BEA website is the following:

Personal saving is the amount left over from disposable personal income after expenditures on personal consumption, interest, and net current transfer payments. This amount is available to acquire financial assets such as bank deposits and mutual funds, to use towards acquiring a home, or to reduce liabilities by repaying principle on mortgages or consumer debt.

Posted by James H | Report as abusive

Buying financial assets has never counted as consumption. Personal saving is defined as income less consumption. The monthly figure on PCE does NOT include purchases of stocks and bonds. Never has, never will.

Posted by Andy | Report as abusive

Felix, did you ever get a conclusive answer to your question?

Posted by Brett | Report as abusive

Buying stocks and bonds is “saving”. Spending on physical capital stock is “investment”.

Posted by vimothy | Report as abusive