How Much Are Workers Saving?

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It is crucial that today’s workers save for retirement. This is because Social Security replacement rates will decline due to increases in the Normal Retirement Age, rising Medicare premiums, higher income taxes, and potential adjustments to restore financial balance to the system. And 401(k) plan accumulations may well be much lower than people anticipate.

So how much are individuals saving? The standard measure, the personal saving rate reported in the official U.S. National Income and Product Accounts (NIPA), has fallen dramatically and in 2004 stood at a dismal 1.8 percent of disposable personal income. But is this indicator an accurate measure of saving behavior? NIPA combines the saving of the working-age population with the dissaving of retirees. This study attempts to separate these two groups.

Three conclusions emerge from this analysis. First, personal saving by the working-age population is significantly higher than the reported national rate and the discrepancy will only increase as the population ages. Second, commentators should be careful not to double count saving through employer-sponsored plans by referring to pension saving and personal saving as if they were different components. In fact, today at least, saving outside of pensions is negative for the working-age population. Finally, the analysis (inadvertently) helps explain the puzzle surrounding the collapse of the total NIPA personal saving rate beginning in the early 1980s. While capital gains were part of the story in the 1990s, most of the drop can be explained by changes in the saving rate of those 65 and over.