401k And IRA Contributions ARE Included In The National Savings Rate Figures

One of the most enduring misconceptions about government statistics, apart from CPI, is the idea that National Savings Rate numbers do not include pre-tax 401k and IRA contributions.  The myth goes something like this:  since the national savings rate is defined as what is left over after consumer spending is subtracted from after-tax income.  Since 401k contributions are actually pre-tax, they are over-looked.  Therefore, the recent low and “negative” national savings rate numbers make things look worse than they really are.  Or at least, that’s how the argument goes.  Needless to say, that is incorrect.

How The National Savings Rate Is Calculated

The National Savings Rate is published by the Bureau of Economic Analysis (BEA), a branch of the U.S. Department of Commerce.  It is comprised of two parts:  public and private savings.  Government savings is simply defined as the difference between government receipts (tax revenue) and government expenditures while private savings is defined as the difference between after-tax income at outlays.  According to the Federal Reserve bank of San Francisco:

“Since IRA and 401(k) contributions are not part of personal outlays (and, therefore, must be included in the difference between personal income and personal outlays), these contributions are included in national saving computations.”

Like most wide-spread misconceptions, this one does have a small kernel of truth.  As economist Martin Barnes points out in this Businessweek piece,

“…some items that households regard as income are not included in the government’s income tally, while some that households ignore are…”

Says Barnes,

“…rather than counting…pension benefits as income…, the statisticians count corporate contributions to pension funds.  And because such contributions weren’t needed as fund assets grew during the equity boom, the official measure of personal income was held down, making it appear that people were spending out of their savings.”

So does the National Savings Rate as calculated by the BEA under-estimate the actual savings rate?  Probably, but it’s probably pretty close.  After all, 401k and IRA contributions are far and away the most popular vehicles for personal savings in this country.  In fact, many consumers never bother to save anywhere else.  So while it may not be perfect, the National Savings Rate does, in fact, account for retirement plan contributions.