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Hidden savings


A penny saved is about what Americans are managing.

The nation's personal savings dropped in June to a few cents per person, with the rate as a percentage of disposable personal income rounded down to zero, the Commerce Department's Bureau of Economic Analysis reported this month.

Even though the rate has been declining for two decades, June's savings goose egg marked a socioeconomic milestone of sorts. Except for a negative 0.2 percent in the post-9/11 month of October 2001, when automakers unveiled the no-interest-loan sales promotion and spurred a tidal wave of car purchases, the nation hasn't had a zero-savings reading since the Great Depression.

In the mid-1980s, Americans were saving more than 10 percent of their disposable income. Since then, the personal savings rate has plummeted, measuring just 1.8 percent last year. Through the first half of 2005, the rate has averaged under one-half of a percent.

The situation is hardly ideal, experts said, but it may not be that bad.

This latest report touched off a flurry of commentary fretting over whether the June reading means Americans have completely surrendered to their spendthrift tendencies, and worrying that undersaving, overconsuming Baby Boomers may be moving toward retirement without enough rainy-day money.

Despite soft growth in payroll income, "people are spending like the Energizer Bunny," Merrill Lynch economist David Rosenberg observed in a review of the June data.

Last month, before the announcement that the June reading hit zero, Federal Reserve Chairman Alan Greenspan fretted about the nation's savings rate, trade deficit and the resulting dependence on overseas lenders.

"In the sense that we don't have adequate domestic savings and we can't count indefinitely that we will be able to borrow at the rate we are borrowing from abroad, clearly, then, our savings rate is inadequate, and we must address that over the longer run," Greenspan told members of Congress.

Of course, there's little doubt that millions of low-income Americans are just getting by, or that millions of better-off consumers are spending everything in their pockets when they should be setting money aside. That latter trend has been encouraged by super-low interest rates, which in recent years have encouraged many people to make big-ticket purchases they might otherwise have deferred.

That's helping to rev up the economy, since consumer spending makes up more than two-thirds of gross domestic product. Rosenberg estimates the drop in savings has contributed about 1 percentage point to GDP growth this year.

More deals on new-car purchases, for example, helped drive down June's savings rate, and some experts say July's will fall into negative territory as those deals lure more people into showrooms.

But many critics contend the government's methodology for measuring savings is old-fashioned and overly narrow, and, as a result, it sharply understates the nation's true savings.

The government starts with after-tax income and subtracts spending on personal consumption. The measure is designed to calculate the amount of income that consumers don't spend or pay in taxes - in other words, money that can be saved and invested.

But that method excludes a non-traditional but increasingly crucial part of many consumers' savings strategy, the part economists refer to as "wealth creation."

Back in the days when a weekly paycheck was practically the sole source of money for most Americans, the income-minus-spending measurement format worked pretty well, critics say. But nowadays, many Americans are in the stock market and they also are enjoying hefty increases in the value of their homes. But the government excludes those factors from its calculations.

The government doesn't count capital gains as personal income. If you cash out of a 10-year-old investment and ring up a $20,000 gain, then pay taxes on the gain and spend the rest on a new boat, the government calculation ignores the capital gain. But it does count the tax on the gain and the spending on the boat.

For many consumers, the biggest single source of wealth is their home. Even before the housing market began its astonishing climb a couple of years ago, home values had shown a protracted upturn. That created a potential gain that many Americans are banking on to finance their retirement years, although millions of homeowners have been cashing out some of those gains via refinancing and spending that money.

Once that wealth extraction slows, Greenspan said, "as it eventually will at some point, I think you will find this personal savings rate starting back up."

As with capital gains, the government doesn't recognize the increase in home equity as income. That's because assets like houses can go up or down in value over time, the government contends.

"Saving is not synonymous with wealth accumulation," noted Marshall B. Reinsdorf, a Bureau of Economic Analysis economist, in a 2004 paper titled "Alternative Measures of Personal Saving" that examined criticisms of the government format.

Instead, he argued, "Saving is one component of wealth accumulation, and holding gains or losses is the other component."

The Chicago Tribune is a Tribune Publishing newspaper.

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