22 Jan 2020

What Is the National Savings Rate?

The national savings rate measures the amount of income that households, businesses, and governments save. It is an economic indicator tracked by the U.S. Commerce Department’s Bureau of Economic Analysis (BEA). It essentially looks at the difference between the nation’s income and consumption and is a gauge of a nation’s financial health, as investments are generated through savings.

KEY TAKEAWAYS

  • The national savings rate is the GDP that is saved rather than spent in an economy.
  • It is calculated as the difference between a nation’s income and consumption divided by income.
  • The national savings rate is an indicator of a nation’s health as it shows trends in savings, which lead to investments.
  • Household savings can be a source of borrowing for governments to provide funds for public works and infrastructure needs.

Understanding the National Savings Rate

The national savings rate takes into consideration the personal income and expenditures of individuals, the earnings of businesses, and the taxes and expenditures of the government. The rate can be somewhat misleading as governments usually operate at a deficit, which would lower the national savings rate.

The rate is an indicator of financial health and investment, particularly as household savings can be a source of borrowing for governments, allocated toward public works and infrastructure needs.

The first factor in calculating the national savings rate is the National Income and Products Account. This is provided by the Bureau of Economic Analysis, which categorizes the private and public sector’s money as income, consumption, and savings. The national savings rate is thus as follows:

Factors Affecting the National Savings Rate

The collective spending behaviors of households and public and private entities can swiftly affect the direction of the national savings rate. Even if incomes rise, if the consumption rate also increases, the savings rate will not improve, and in some cases, it may even decline.

Retirement plans, such as 401(k)s and IRAs, represent a large portion of savings that contribute to investments. These are not considered cost outlays and are thus included in the national savings rate. A negative perception can occur among individuals that the overall returns generated by retirement programs will generate more than enough income for their retirement, leading to households not saving more of their income, which would, in turn, reduce the potential of a higher national savings rate.

There may also be government-backed pension programs for retirement, paid for through taxation of those who currently work. This can contribute to a trend of less money being saved by households in anticipation of benefiting from such programs.

In instances where households do not have access to subsidized retirement funds, they must focus on setting aside more of their own money for retirement, which would subsequently elevate the national savings rate.

When measured as a percentage of the gross domestic product saved by households, the national savings rate can be used as a barometer for growth in a country.


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This content was originally published by Investopedia. Original publishers retain all rights. It appears here for a limited time before automated archiving. By Investopedia

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