Much Ado About the Personal Savings Rate

The Personal Savings Rate (PSR) once again made headlines recently when the Department of Commerce released the May 2009 figure, which was a whopping 6.9%. For some perspective, April’s 2009 rate was only 5.6% and the last time the PSR rate was this high was back in April 1993.

But what does a PSR of 6.9% actually mean? Are Americans really saving more than they have in over a decade?

The PSR measures personal savings as total disposable personal income less personal outlays (expenses). A lot happened in the last couple months that has pushed up personal income and pushed down personal outlays, which drove up the PSR.

For instance, one-time payments to seniors, veterans, and others as part of the stimulus increased personal income by 157.6 billion in May, and one-time tax credits to working low-income populations decreased personal outlays by 49.8 billion. Other big changes that pushed up the Personal Savings Rate for this year’s first quarter were government unemployment insurance benefits, which increased 34% from the fourth quarter of 2008.

If we continue to save at the Quarter I 2009 rate, 4.3%, for the rest of the year, as a nation we would save $464.2 billion. This is a huge difference from Quarter I 2008 rate, 0.2%, which if continued throughout 2008 would lead to collective personal savings of $20.6 billion.

Pro’s and Con’s

The PSR data is useful for observing savings trends and to measure large movements in earning and consumption. It takes a lot to move from 0.4% in 2007 to 1.8% in 2008, that’s clear.

But like all data analytics, it has a number of limitations.

The PSR measures savings by taking the difference between income and consumption. This means that it picks up not only reductions in spending (which lead to savings), but also increases in income — even if they are temporary.

LA Times reporter Tom Petruno identified this shortcoming in a recent piece–and kudos, because he adds what is all too often missing from typical PSR discussions.

The PSR does not explain shifts in saving decisions, or monitor debt repayment.

As an aggregate measure, the PSR is more impacted by the behavior of high wealth households. It is less sensitive to income and consumption changes by lower-wealth households, and thus is a less useful measure for those interested in policy design to increase savings by those who need it the most.

Does the 6.9% mean we’ve returned to become a nation of savers? I’m not sure.

Consider this chart. You’ll see increases in personal savings rates corresponding with recessions (and their decrease timed with the recovery).

Households of all incomes would prefer to save to protect against unexpected disruptions in income or to cover emergency expenditures, to acquire assets (such as a home, higher education, or to start a small business), and to build a next egg for retirement. They may be doing this, but the PSR doesn’t capture it.

We know that about one quarter of all American families do not have three months worth of income in financial wealth resources to weather an unspecified emergency expense. Enacting policies to help more families save should remain a priority-our work should not be guided by a flawed measure.

Overall I think it’s far too simplistic to say that Americans saved 6.9% of their income in May.

We’ll keep watch for the monthly press releases and hope that as the nation recovers economically, households prioritize household saving for precautionary and asset-building purposes. The true test of whether we have reverted to more thrifty ways will be if we can maintain a strong savings rate through and well beyond the recovery.

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