The national savings rate is the total amount of savings by households, businesses, and the government in a country. It is what is left from a nation’s income after some of the income is spent on consumption. A high national savings rate leads to more investment in a nation’s capital stock, which can increase productivity and economic growth over the long term.
Let’s take a closer look at what the national savings rate is and how it works.
Definition and Examples of the National Savings Rate
According to the Bureau of Economic Analysis’ U.S. National Income and Product Accounts (NIPA) metric, national savings are the portion of income that is set aside rather than spent on consumption or related purposes. The NIPAs are compiled quarterly by the Bureau of Economic Analysis (BEA) and report income and savings for the U.S.
National savings can be illustrated by the following formula:
National savings = Private savings + Government savings
Government savings is the difference between government receipts (for example, taxes) and government expenditures. Private savings is the difference between income and expenditures in the private sector. The private sector represents both households and businesses.
Household (or personal) savings refers to an individual’s personal savings, while business savings refers to retained corporate earnings.
For instance, in October 2021, the personal savings rate was 7.1% and corporate profits were 3.4%, according to BEA. Profits are a source of retained earnings, which provide funding for capital investments that raise productive capacity. Together, these rates are widely watched U.S. economic indicators and components of private savings. Over time, business savings have become the dominant part of private savings.
In the 1950s, business savings were 65% of private savings. That percentage had climbed to 93% by 2003-2004, according to a Federal Reserve Bank of St. Louis study published around that time. By contrast, gross government savings have shifted from a level as high as $20 billion in the first quarter of 1956 to being nearly $1.4 trillion in deficit by the third quarter of 2021.
How Does the National Savings Rate Work?
When national income is not consumed, it is saved, and the savings can be put toward productive uses for an economy. For example, national savings can be used as investment to replace capital goods, such as factories and equipment. It can also be put to productive purposes to help build new businesses or expand existing businesses. As a result, savings can lead to higher economic growth as businesses produce additional output.
A higher savings rate means there is greater investment in businesses, which can lead to greater future consumption. By forgoing consumption today and saving instead, a nation can increase its amount of capital goods.
Increases in the amount of investment goods (or capital) per worker means productivity increases, which can also result in higher real wages and better standards of living.
Due to free capital flows in the U.S. and other countries, if there is a mismatch between a nation’s saving and investment, there will be capital inflows or outflows. If a nation saves less than it invests, foreigners will provide the capital to meet the investment need. The current account deficit, which shows the goods and services trade deficit, will show whether a nation imports more than it exports, and whether savings fall short of its capital investment.
If national savings is less than investment, the country must import foreign savings by borrowing.
In the U.S., national savings has been lower over the last few decades due to a drop in private savings rates and higher federal budget deficits. A low national savings rate is particularly troublesome due to the large number of workers retiring now or soon in the U.S. With fewer workers who are able to save, and more people drawing down those savings as retirees, it is likely government budget deficits will continue to rise. This further lowers the national savings rate and hurts future economic growth and standards of living.
The good news is there are ways to increase national savings. For example, a smaller federal budget deficit, or a budget surplus, can increase national savings. Other measures to raise national savings are tax incentives to increase private savings, such as the tax benefits associated with certain retirement accounts.
The National Savings Rate vs. the Personal Savings Rate
The national savings rate accounts for savings by households as well as businesses and the government, whereas the personal savings rate is a measure just of household savings. However, some people think of the nation’s total savings rate in terms of the personal savings rate. The personal savings rate is defined as the ratio of personal savings to personal disposable income, or income less taxes, and it’s expressed as a percentage. The personal saving rate has been 8.9% on average over the last 60 years, although it has fluctuated from a low of 2.1% in July 2005 to a high of 33.8% in April 2020.
- National savings measures the amount of income that households, businesses, and the government collectively save.
- National savings are measured by the federal Bureau of Economic Analysis (BEA).
- A higher national savings rate leads to higher productivity, economic growth, and better standards of living.
- A nation’s investment can be greater than national savings if foreign savings are invested there.