Americans just aren't saving

Economist Peter Morici

KAI RYSSDAL: Are you worried about how much money you didn't save last year? Well, if you're not, maybe you ought to be because the Commerce Department reported last week on our personal savings rate for 2006 - negative 1 1/2 percent. The only year that was worse? 1933. Think about that for just a second. The only year where we lived more off our savings was in the middle of the Great Depression. Peter Morici is an economist at the University of Maryland. And Pete, let me ask you - what is the savings rate exactly and is the report as bad as it sounds?

PETER MORICI:
The personal savings rate is what's left over after we spend from the income we take each week or each month from our paycheck and any other payments we might receive.

RYSSDAL:
Now does it include that big thing that about 70 percent of the people in this country have, a house?

MORICI:
No, it doesn't. If you're home appreciates in value, you only receive income from it when you sell it. So it only becomes recorded as personal income when you receive the capital gains through a sale. So, for example, if you earned $100,000 a year and spend $110,000, according to these statistics, you are dis-saving or going in the hole by $10,000. That's economist talk dis-savings.

RYSSDAL:
Yeah, that's right.

MORICI:
However, if at the same time you own a home and it goes up $100,000 in value, you feel richer nonetheless and that's what's going on. The capital gains that people are experiencing through the rising values of their homes make them feel better off. They can borrow money against it, they can spend against it. As a consequence, they spend more than their take home pay.

RYSSDAL:
This is a little bit touchy for what is clearly a quantitative issue, this personal savings rate. But if we feel richer, why not just spend this money. You know what I mean?

MORICI:
I understand. The question is will these home prices that we see highly elevated continue indefinitely into the future? Hopefully we can adjust out of this process without a crash of some kind. And I think that we probably will. But we will likely go through a period similar to the '80s when living standards were not growing as rapidly as we like and people were feeling stressed in their pocketbooks.

RYSSDAL:
And are you worried about it then if we are spending money that, in reality, we don't have in our pockets?

MORICI:
Actually I am because we are spending as a nation about 5 1/2 percent more than we produce.

RYSSDAL:
OK then, how come I read in "The New York Times" not too long ago that some out there and specifically we should say that some of the big financial institutions on Wall Street they say, you know what, we're actually saving too much. That we're putting too much away for retirement.

MORICI:
I really find that difficult to believe. Any study that we do, we're looking at, for example, the baby boom, which is rapidly approaching retirement would indicate they are underfunded for retirement and that they are likely going to have to work past what is now the official retirement age of 66.

RYSSDAL:
Is that part of the reason, perhaps that we're saving less now, that we know we're going to have work past 65 or 66, so we're not necessarily so worried about socking it away for a rainy day.

MORICI:
I think that a lot of people have implicitly decided they're going to work past 66 at some level. Either they're going to work at a somewhat reduced load or they're going to continue working as they are. So we're employable as long as we're reasonably healthy and at 65 we can continue on working.

RYSSDAL:
Peter Morici, an economist at the University of Maryland. Peter, thanks a lot for your time.

MORICI:
It's been my pleasure.

RYSSDAL:
So you want to save more but you're not sure where to park your money. Send us your personal finance questions. Just visit our website, it's marketplace.org. Click on that link that says contact. This is Marketplace Money from American Public Media.

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