Eugene P. Coyle wrote:
>
>> When an individual goes into a 401 k or similar contrivance, reported
>>income for tax purposes goes down. Is the amount deducted "saving"? And
>>is that (or any other $$ figure for saving) in a ratio with income for tax
>>purposes, or the total income before the 401 k deduction?
Doug Henwood replied,
>Pension plan contributions count as income, so they're counted as personal
>savings (defined as income less expenditures).
True enough, but that's only part of the picture. Increases in liabilities
-- most notably mortgage and consumer credit debt -- are also counted as a
subtraction from net savings. So if an individual makes a $10,000
contribution to a 401k and in the same year takes out a $10,000 second
mortgage on the house, net savings are zero. Let's say an individual feels
he or she has a lot of money (on paper) locked-up in retirement savings but
is cash starved, taking out a second mortgage may seem like a prudent way to
draw on the retirement account without having to pay a tax penalty.
The table below shows a big jump in consumer credit in 1994 and 1995 and
then a big jump in mortgage debt in 1996 and 1997. Adding the two together
shows a much smoother trend. One might speculate that the shift from one
kind of debt to another had more to do with differential interest rates than
with the purpose of the borrowing.
1991 1992 1993 1994 1995 1996 1997
non farm mortage 171.7 167.9 155.5 177.8 173.7 263.9 266.7
consumer credit -10.7 3.9 60.7 124.9 138.9 88.8 52.5
subtotal 161 171.8 216.2 302.7 312.6 352.7 319.2
tot.liabilities 193.4 166 246.9 334.6 412.5 461 473.6
Regards,
Tom Walker
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