Saturday, March 2, 2013

Rich people like to save

Rich people, apparently, have a high propensity to save (graph at the link). Of course, with the federal government running trillion dollar deficits to the end of predictable time, somebody has to save and amass capital or we are all truly screwed. Yet another example of rich people doing the work that other Americans won't do!

2 comments:

  1. "people making more money save a bigger chunk of their paychecks"

    After a while, you run out of things to buy, especially if you on a quest for the best.

    - DEC (Jungle Trader)

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  2. The chart is based on a deeply flawed definition of "savings." According to the paper referenced, the savings rate on the chart includes in "savings" such things as mortgage payments, car payments, boat payments, etc. In other words, if you chose to finance your consumption with debt instead of equity, this measure would christen your payments on that debt savings instead of consumption. At the levels of income we're talking about here, I think it's fair to assume that the wealthy have larger debt-to-income ratios than the less wealthy (due to mortgages, car loans, etc.). If that assumption is true, then the inclusion of debt payments in savings will skew the savings rate artificially higher for wealthier people.

    Also included in the "savings" metric are capital gains (and losses), which likely again artificially skews the savings rate in favor of the rich. Including capital gains in savings is certainly a closer call than including debt payments. For the particular time period (1982-1986) examined in the study, however, the S&P 500 gained about 12% p.a. in equity value. As a rough estimate, TSR was therefore probably in excess of 15% p.a. Even if you believe that capital gains ought to count as savings, then, the extraordinary bull market over the time period will distort the true long term savings rate, once again in favor of the rich due to their higher propensity to own stocks and similar financial assets.

    The authors of the study looked at a few other measures of savings that try to correct for these effects, and nearly all of them show a significantly shallower slope in savings rate vs. income (i.e. they show that the difference between rich and poor savings rates is significantly smaller). As far as I can tell on a quick reading, none of the metrics deals with the debt payment as savings problem detailed above, but a few exclude capital gains. Notably, in the measure that excludes capital gains but includes pensions, the rich only save ~3x more than the poor as a percentage of income, not the ~17x indicated in the chart.

    So let's not let the rich off the hook for America's low savings rate just yet...

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