“The Savings Rate Has Recovered…if You Ignore the Bottom 99%”

[Hannah Bell]

It has become fashionable among equities managers of the bullish persuasion to argue that a strong recovery in GDP will occur in 2010 because the “structural adjustment period” of moving back to a more normal savings rate has been completed. We’ve gone from a savings rate of barely 1% in 2008 up to 4.2% in July...

This is the kind of conventional wisdom which could only emerge among folks in the 99th income percentile... In fact, it is almost certainly true that the savings rate for 99% of the US population is negative...

Economists Thomas Piketty and Emmanuel Saez have made careers of studying US income inequality using IRS data, which goes back to 1913. The most recent data available (for 2007) showed that the top 14,988 households (0.01% of the population) received 6.04% of income, the highest figure for any year since the data became available. The top 1% of households received 23.5% of income (the second highest on record, after 1928), while the top 10% received 49.7% of income (the highest on record).

The fortunate 14,988 had an average income in 2007 of $35,042,705. They had an average federal tax burden, according to Piketty and Saez, of 34.7%, leaving them after tax income of $22.9 million. If you assume a 50% savings rate among this group, you get total savings of $171.5 billion. This is nearly ONE HALF of the total savings for the entire country implied by a savings rate of 4.2%...

If we expand our survey to the top 1% of all households, we find an average income of $1.36 million for 2007... average federal tax burden of just under 33%...after tax income averaged $916 thousand.

If you assume this group had a savings rate of 33%, you get total savings of $452 billion...This is more than 100% of the personal savings of the entire population, according to the BEA data.

It implies that 99% of the US population still has, on average, a negative savings rate of around 1.3%. If you subtract the next nine percent, which likely still has a positive savings rate, the data for the bottom 90% becomes even more depressing, implying a negative savings rate of close to 5%...

http://www.nakedcapitalism.com/2009/08/guest-post-the-savings-rate-has-recoveredif-you-ignore-the-bottom-99.html

[WCGreen]

1. Does having a negative savings rate, according to these guys, mean

you are tapping into existing savings or using your equity for expenses or running up debt?

[Hannah Bell]

2. could be both, i'd think.

[Hannah Bell]

3. kick

[yawnmaster]

4. The savings assumptions are way off...

The top earners aren't saving 33% or 50% of their income.
They'd have to open a new account every year or more to keep it insured.
No, it is put into stocks, bonds, other investments, etc..

[Hannah Bell]

5. stocks, bonds, etc. = "savings" in economics. "savings" doesn't mean just a savings account.

"savings" = money not spent on consumption & available for loans/investment of various kinds.

just like when you put money into a simple savings account & the bank then loans it out for others to use & pays you interest for the privilege.

unless they buy mega-real estate, there are very few things the very rich can do with most of their income *besides* save it via investment vehicles.

It's not unreasonable to assume the super-rich consume half their income & "save" (invest) the rest. I'd actually assume they save more, myself.

[yawnmaster]

6. you are right...

my mistake regarding how savings are regarded.
But still not sure about how the super rich handle their income...shouldn't be too hard to find out...I have some research to do or become filthy rich quick.
yeah...I'll do the research.