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Savings rate still not good enough

The Baltimore Sun

Hey, America, we're not the slacker savers we thought.

A while back, the government reported that for the first time since the Great Depression our personal savings rate went negative in 2005, meaning we spent more than we took home. And we did worse in 2006.

But those figures were recently revised. It turns out we squeaked out positive savings rates of 0.5 percent in 2005 and 0.4 percent last year.

That's nothing to brag about, of course. Basically, we saved a half-penny for every dollar we took home. We need to save more. But it will be a relief to write about the status of Americans' finances without having to mention the Great Depression in the same sentence.

Accurately measuring savings is difficult -- and controversial. Critics claim the way the savings rate is computed makes our situation seem bleaker than it really is.

They point out, for instance, that the savings rate doesn't consider gains on investments, yet it subtracts taxes paid on those gains. Rising home values aren't factored in, although that's allowed many Americans to pull money out of their homes in recent years. And employer contributions to pensions are part of savings, but the pension checks retirees collect aren't part of income.

Revisions in the savings rate are common, too.

The recent one came after the Bureau of Economic Analysis, which compiles the savings rate, got new data from the IRS that showed interest and dividends we earned were much higher than earlier figured.

"That savings rate was revised 38 of the past 41 years," says Richard DeKaser, chief economist for National City Corp. "It tends to be revised upward a year later, or two, three, five or 10 years later."

Nevertheless, the savings trend is disturbing.

Twenty-five years ago, the savings rate was 11.2 percent. It underwent a swift decline in the 1990s as the stock market soared and so did people's investments and 401(k) accounts. Even if the gains were on paper, Americans felt wealthy and they spent. And after stocks tanked, home values jumped. Homeowners still felt wealthy and continued to borrow and spend.

"Our generation will be known as the generation that spends too much and has to work too long," says John Bacci, a Linthicum financial planner and a baby boomer.

Mark Zandi, chief economist for Moody's, predicts the savings rate will rise slowly -- although it likely won't go back to the old double-digit figures.

In an article last year in Regional Financial Review, Zandi wrote that once consumers saw that the surge in energy prices wasn't receding, they would curb their spending. Likewise, as the housing market weakened and it became harder to take money out of houses, homeowners would be forced to save more and spend less, he says.

It may be too early to tell if that's happening, although the savings rate was 1.0 percent and 0.5 percent for the first and second quarters this year respectively, slightly higher than the corresponding quarters last year.

Economists want us to save more, but they don't want everyone to become thrifty at once. The economy needs us to spend money to keep running.

So, how much should we be saving?

Charles W. Macmillan, president and chief economist of MBG Information Services in Washington, ventured a recommendation: "I think everyone should tell their kids to save at least 10 percent."

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Charles W. McMillion's name was misspelled in Eileen Ambrose's column in Sunday's Business section.The Sun regrets the errors.
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