The argument that the personal saving rate is headed to 7% is based on a long-term relationship between the wealth-to-income ratio and the personal saving rate (pictured above) that is assumed to be stable over time. In fact, this long-term relationship shifts for reasons that are well understood. For example, over the last 25 years, transfer income has risen as a share of personal income, while labor income has declined. The rate at which households consume out of transfer income is roughly double the rate at which households consume out of labor income. So this shift in the composition of income has put downward pressure on the personal saving rate and has, indeed, accounted for about 4 percentage points of the roughly 7 percentage point decline in the trend in the personal saving rate since the mid-1980’s. These trends in the composition of income are unlikely to reverse anytime soon, so the 4 percentage point decline in the personal saving rate from this source is here to stay.
Factoring in these and other considerations, the current wealth-to-income ratio is consistent with the current personal saving rate (about 3%), not 7%. Over the next 2 years, the relationship between the wealth-to-income ratio and the personal saving rate is expected to shift in such a way as to suggest only modest upward pressure on the personal saving rate — enough pressure to suggest an increase to about 3½% — but not nearly enough pressure to raise it to 7%.
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