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In Brief: The Declining Personal Saving Rate: Is There Cause For Alarm?

How much we save as a nation is important because saving provides the capital for the investment which makes the economy grow. Its importance is reflected in the preferential treatment the tax code provides to employer pensions, IRAs, 401(k) plans and other saving vehicles. Gross saving-the sum of personal saving, business saving, and government saving- is an important indicator of how much a nation has available to save and invests to produce goods and services. The personal saving rate is an indicator of personal welfare and is a component of gross saving. It is a measure of whether households are saving enough for their retirement, financial emergencies, spells of unemployment, and medical expenses.

In recent years, despite the booming economy, the personal saving rate has declined steadily. Policy makers and economists are concerned about the effects of the decline in personal saving on household financial well-being as well as on the economy's overall health, including the nation's increasing dependence on foreign capital. In October 1998, concerns were heightened when the personal saving rate published by the Bureau of Economic Analysis (BEA) declined sharply and actually turned negative after adjustments were made to the treatment of certain kinds of capital gains. However, a year later in October 1999, BEA revised the personal saving rate again, this time upwards, to 3.7% in 1998 and 2.5% in 1999 (see Figure 1).

These two recent revisions, based on redefinitions of saving categories, merely shifted items among the three components of gross saving. As a result, while the personal saving rate declined, the gross saving rate has remained steady between 1998 and 1999.

Personal Saving Rate

BEA's October 1998 revisions were significant because they shifted capital gains from personal saving to business saving. Specifically, BEA revised its definition of personal income which in turn affected its personal saving measure. The revised income definition excluded all mutual fund distributions to households and counted them instead as business saving. Mutual fund distributions had been counted as dividend income prior to the revision. As a result no capital gains were included in personal income. Although the personal saving rate has been declining steadily for the last two decades, BEA's decision to exclude mutual fund distributions accelerated the decline.

On the other hand, BEA's October 1999 revisions had the effect of increasing personal saving by shifting government retirement plans from the government sector to the personal sector, and interest and dividends earned on these plans to personal income. The net effect of BEA's two revisions, however, was a continued decline in the personal saving rate. However, if we also recalculate the personal saving rate by adding the capital gains back into personal income, the personal saving rate, as shown in Figure 2, turns out to be much higher-12% in 1992 and 7.3% in 1998.

Both the revised personal saving rate and the gross saving rate gradually declined during the early 1980s. Since 1994, however, the gross saving rate has started rising gradually, and is expected to rise to 21.3% by 2008 (see Figure 3). This increase in the gross saving rate is due to gains in government and business saving. Government saving increased due to a large surplus in the federal unified budget-primarily from Social Security revenues exceeding its payments-which has helped in reducing public debt, interest payment on debt, and hence the interest rate. Business saving increased partly due to the recent revision in the NIPA's personal income definition, discussed above, that shifted a major portion of personal saving to business saving, and partly due to a huge increase in capital consumption (also known as the depreciation fund).

Projections of saving rates for 1999-2008 (as shown in Figure 3) indicate that recent trends will continue well into the next decade. Forecasts by the Macroeconomic Advisers (St. Louis), show a personal saving rate below 3.5%, but project the gross saving rate to continue as high as 21.3% by 2008 (not significantly different from 1979 level), and the business saving rate to continue at about 15%. If capital gains are added back into personal income, the personal saving rate is projected to be 6% in 2008 (Figure 2).

In sum, while there is no cause for alarm regarding the saving rate, there are reasons for concern. There has been no significant decline in national saving, although there has been a dramatic change in the composition of saving away from personal saving to government and business saving. The sharp October 1998 decline in the personal saving rate was a statistical aberration and coincided with BEA's technical changes. The decline in personal saving-if capital gains are included-is not a major one. However, a saving measure based on capital gains is highly volatile and subject to market fluctuations. Furthermore, only those in the upper half of the income distribution invest in the stock market, and therefore such gains are not shared by all segments of the population.

Finally, a national saving problem is not likely to develop as long as projected federal surpluses materialize, but these are subject to the vicissitudes of economic and political cycles.


  1. Two government agencies­the BEA and the Federal Reserve­measure personal saving and each publishes an official personal saving rate. BEA's personal saving measure in the National Income and Product Accounts (NIPA) calculates saving at a point in time by subtracting personal outlays from personal income. The Federal Reserve's personal saving measure uses its Flow of Funds Accounts (FOFA) data over a year and adds all net acquisitions of personal assets (cash, bank deposits, bonds, securities, and tangibles like housing and durables) less short­term and long­term liabilities.
  2. The share of personal saving in gross saving dropped from 29% in the 1970s to 9% in 1999; while the share of business saving has increased from 53% to 69%; and that of government saving from 18% to 23% during this period.

Written by Satyendra Verma and Jules Lichtenstein, AARP Public Policy Institute
March 2000
©2000 AARP
May be copied only for noncommercial purposes and with attribution; permission required for all other purposes.
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