Saving out of Different Types of Income.

This article considers differences in the response of consumers to changes in different types of income as a possible explanation for the major swings in personal saving that have puzzled economists, as of June 1971. The total of household disposable income is a heterogeneous mixture of after-tax earnings from wages and salaries, rent, interest, entrepreneurial pursuits, and transfer benefits such as old-age pensions and underemployment compensation. The composition of income by components has shifted dramatically in the past few years as a result of the slowdown in overall economic activity, the expansion and liberalization of government transfer benefits, and important changes in rates for personal income and social insurance taxes. The author relies on an analytical model in which every dollar of income ultimately adds a dollar to consumption, but in which the time patterns of responses are allowed to differ depending on the type of income earned. Statistical findings imply that increases in social insurance paid by employees initially reduce personal saving more than dollar for dollar. Since employers pay half the tax, the result could make sense if workers who pay social insurance taxes believe that the government is saving on their behalf both their tax payments and those of their employers.