The Savings Rate

Max Sawicky sawicky at epinet.org
Wed Aug 5 13:05:34 PDT 1998



>Max Sawicky wrote:
>
>> The data include these as additions to savings.
>
>Only the contributions, not the employer matches (which is not
>income at all!) and not the capital gains. It's not hard for

That's news to me. In the NIPA there's a category "Other Labor Income" which includes employer expenditure on fringes. I would presume this includes the pension contributions. I'm also mystified as to why you say the employer match is not income to the worker.


>someone who has been contributing the maximum to a 401k for five years to
see the percentage of their account balance that is attributable to contributions (and thus accounted for in "the savings rate") to be 40% or less. This is a significant gap.
>

Dividends and interest on assets are counted, so it is only the capital gains which are in question. Hence it is more than contributions which encompass visible 'saving.'

I don't doubt your point that people see their returns to saving and count themselves well- provided for.


>An example here might be helpful:
>
>$100,000 salary
> 7,000 401k deferral ("savings" for "savings rate")
>--------
>$ 93,000 "income" - "savings"
>
>But, over in the 401k:
>
>$ 7,000 contribution
>$ 2,000 employer match
>$ 2,700 gain from ~+30% S&P index mutual fund
>--------
>$ 11,700 psychological value of "savings", 67% higher than
> what is captured by the savings rate ...

As noted, it is only the proportion of the $2,700 from capital gains that is not counted, far as I know.


>Carry this out over five years and you can start to see the
>problem with how things are counted. And of course it's worse with
higher-bracket salaries, since they are the most able to contribute the maximum and thus have the most to gain from being is a bull market and will thus be the most incented to *not* save in the taxable world. And it's precisely these people who would normally (without the glaring incentive of defined contribution plans) prop up a savings rate.
>

True enough.


> . . .
That's why I think we can't use the old analysis for this. The rules have changed and the incentives are different.
>

MBS



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