Not So Negative Savings

This week's "the sky is falling" news was the fact that the personal savings rate dipped into negative territory in 2005 -- down 0.5% -- for the first time since the Great Depression.

While the nation grappled with financial collapse and massive unemployment, personal savings fell by 0.9% in 1932 and by a record 1.5% in 1933, according to Commerce Department statistics. Little surprise, the pundits pounced on this latest downturn.

One camp held that Americans are maxing out their credit cards in quiet desperation, spending all their after-tax income and dipping into savings just to keep up with rising fuel and food costs. This group points to the fact that consumer spending for December rose by 0.9%, more than double the 0.4% rise in income for the month. But minus food and energy costs spending rose by only 0.1%.

The second chorus repeated the oft-told story that people are still extracting equity from their overvalued homes and using the money to live beyond their means. This scenario could end in disaster if home values stop skyrocketing but spending continues to grow.

But technicalities may be driving the savings rate down, not spendthrift consumers who can't keep their wallets shut.

"As the baby boom generation retires, it automatically means we'll see a dramatic increase in the proportion of the population that, by definition, spends more than they earn" says Dallas Salisbury, president and chief executive of the Employee Benefit Research Institute.

When the Commerce Department calculates the savings rate, it adds up income, subtracts expenditures and checks out how much is left in the bank. When more is spent than is earned, that equals a negative savings rate.

Based on this comparison, the retired population is currently "dis-saving" at a negative rate of 12%, says Salisbury, citing findings from a study conducted by the Center for Retirement Research.

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