The U.S. personal savings rate has declined sharply in recent years, but not because frugality is a forgotten virtue.
The biggest culprit is the rising cost of medical care, according to a study by economists at the Federal Reserve Bank of Boston, with higher financial services expenses also playing a major role.
The savings rate has plunged to less than 4% of personal income from an 8% level 20 years ago, noted Lynn Elaine Browne, the Boston Fed's research director, and economist Joshua Gleason.
The precipitous drop has generated considerable attention from banking, business and political leaders, since savings is seen as vital to investment, higher productivity and a rising standard of living.
"In addition, the decline in savings is sometimes presented as a national character flaw and evidence of a more profligate and self-centered population," Ms. Browne and Mr. Gleason said.
But the Boston economists stressed it is wrong to interpret current low savings levels "as resulting from the selfishness and profligacy of today's generations as compared with their predecessors.
Today's increased consumption is not occurring at shopping malls, electronics stores, airline ticket counters or theme parks.
The share of income going to durable goods has stayed nearly constant at around 10% while the slice for nondurable goods, especially food, has grown only slowly.
The big increase has been in the "services" section. "The fraction of income absorbed by services has risen from a third in the 1960s and 1970s to over 40% in the mid-1980s to over 45% today," the economist said.
A large segment of this spending in lieu of ostensible savings is involuntary, they noted, and does not fit what most people typically describe as consumer spending.
Most notably, consumption of medical services has risen to 13% of personal income from 7% in the mid-1990s. That includes not only consumers' out-of-pocket medical costs, but also expenditures on their behalf by private insurance plans, Medicare and Medicaid.
"By design, these private insurance and government transfer programs decouple the decision to consume medical services from the purchase decision, permitting an individual's consumption of medical services to surpass what his or her income could support." Ms. Browne and Mr. Gleason said.
The federal government's large budget deficits over the past two decades, mostly because of transfer payments, have helped finance an important part of this consumption. At the same time, the deficits have subtracted from the nation's gross savings rate.
For consumers, there is limited choice in the matter.
"While employees can choose to consume or save the income they receive as wages and salaries, they can only consume their employers' contributions to health insurance," the Boston economists noted.
And such contributions now amount to about 8% of wages and salaries, compared to 5% in the mid-1980s and 2% in the mid-1960s. "Had employers' contributions not increased, wages and salaries presumably would have grown faster," Ms. Browne and Mr. Gleason said.
Of the growing share of income allocated to other significant services, "personal business" costs accounted for roughly half.
Recently, the economists said, "the fastest-growing components have been expenditures for brokerage fees and investment counseling and bank services charges." Life insurance and legal expenses are also in this category. In short, the costs of saving have been among the fastest-rising consumption items.
Another fast-rising consumption category over which little control can be exercised is day care for young children, a necessity for many working families.
However, while the personal savings rate has fallen in recent years, as evidenced by the steady drop in bank deposits, households' net worth has actually risen, boosted by increases in asset values, notably stock prices.
Ms. Browne and Mr. Gleason think that households' strong net worth may even have contributed to the lower savings rate, with individuals viewing the wealth created through rising asset values as a substitute for savings.
The troubling question is whether rising asset values can substitute for savings on a larger scale. While individuals can convert capital gains into future consumption by selling assets, society as a whole cannot, the Boston economists said.
"Capital gains do not make resources available for investment and, thus, do not promise an increase in the future stream of goods and services the economy can produce," they noted.
Ms. Browne and Mr. Gleason suggest that more traditional forms of savings having a higher "societal return" may need to be stimulated through alterations in the tax system or other policy changes.
