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Family Finances

Negative Savings? Not on Your Life

For Americans, the road to wealth is paved with capital gains.


Ed Yardeni is chief investment strategist of Oak Associates.

KIPLINGER'S: You have strong opinions about the so-called negative savings rate in America. Why?

YARDENI: The official savings rate as reported by the government is defined very simply: disposable income minus consumption. Some 70% of disposable income comes from wages, benefits and bonuses, but most of our wealth comes from capital gains, which are not included in disposable income. If you get a big gain and treat yourself to a new car, it will show up in your spending, but the gain won't show up in your income. It makes us look like a bunch of spendthrifts and drunken sailors living beyond our means.

What's the real story? Americans are remarkably prosperous. But it's hard to accumulate wealth by saving out of current income. You have to have an enormous income and save a lot of it to get wealthy. Most people in their twenties and thirties aren't making enough to build a nest egg. People in their forties and fifties typically make more. But many have enjoyed capital gains in real estate. Rightly or wrongly, they don't see much point in saving when they're sitting on gains of several hundred thousand dollars. That alone explains the drop in the savings rate.

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It doesn't sound representative of how we're really doing, then. It's not. Corporate benefits, such as pensions, are another example. Statisticians treat company contributions to a pension plan as income for the employee. But when the company pays out pension checks to its retirees, that money is not treated as income. Companies have been paying more in retirement benefits than they are contributing to pension plans. You're going to spend that benefit check, but it doesn't count as income. Once again, it looks as if we're living beyond our means.

So as a nation we're richer than we appear on paper? If you really want to get rich, take the money you'd have saved and use it to build a business or invest in real estate, stocks or bonds. That involves more risk, but many investors and entrepreneurs wind up rich. The bubble bursts sometimes, too. Capitalism and wealth creation can be two steps forward and one step back.