(MONEY Magazine) – You can't pick up the newspaper these days without seeing some pundit chastising us for not saving enough. And based on the U.S. government's official figures you could easily get the impression that Americans--who saved a pathetic 1.6% of disposable income last year--are a bunch of hedonists more interested in lavish vacations and other pleasures of the moment than stashing away money for retirement.

Ah, if we could only mold ourselves into disciplined saving machines like the Japanese, who salt away 11% to 13% of their income, then we could...what? Enjoy living in a country that's been in a virtual recession for the past 10 years and has a stock market mired about 70% below where it traded in 1989? Wait a minute. If the Japanese are such terrific savers and we're so pitiful, why are we doing so much better than they are?

Welcome to the wacky world of government statistics, where things aren't always what they seem. This month, we're going to take a look at the often quoted but little understood U.S. savings rate to see if we can answer a few fundamental questions like: How is the rate calculated, anyway? Are we really the wastrels our low savings rate makes us out to be? And should we use the official rate as a guide for our own investing and retirement planning?

The official formula. The savings rate quoted in the financial press is published each month by the Bureau of Economic Analysis, a branch of the U.S. Department of Commerce that collects tons of statistical information about the U.S. economy. The bea arrives at the rate by massaging massive amounts of data about our income and spending. The agency starts with an estimate for the gross income of all U.S. households, which includes wages, interest and dividends, and from that figure the BEA deducts the amount paid in income taxes and payroll taxes for programs like Social Security and Medicare. This leaves what the BEA calls "disposable personal income." From disposable personal income, the bea then deducts "personal outlays," which is what we spend on everything from essentials like food, shelter, utilities and transportation to nonessential but fun items like travel, video games, cable TV and so forth. Finally, the bea deducts personal outlays from disposable income and voila: Whatever is left over is considered savings.

So, for example, if you earn $80,000 and pay $20,000 in income and payroll taxes, you would have personal disposable income of $60,000. If you then spent $55,000 on living expenses and the like, you would have $5,000 of savings and a savings rate of 8.3%, or $5,000 divided by disposable income of $60,000.

Squirrelly numbers. This all seems perfectly reasonable. And on the basis of this formula, at least, our savings rate has definitely flagged, dropping from 8.7% in 1992 to 1% in 2000. But if you do a little digging, you'll find that this official savings rate is, to use a technical phrase, kind of squirrelly.

One major problem stems from what the bea does and does not consider income. Money that we receive in the form of dividends and interest payments counts toward income and is thus factored into the savings rate calculation. But the bea ignores price appreciation, or capital gains, that you may have on your stocks or funds in retirement accounts such as a 401(k) and in taxable accounts. The same goes for house-price appreciation. These are considered changes in the value of an asset, not income, so they don't count as savings.

To see just how much this can distort things, let's take an example. Say you invest $10,000 in a stock that doubles in price over several years, giving you a $10,000 gain. As far as the bea is concerned, that 10 grand gain does nothing to boost your savings rate. In fact, it can do the opposite. How? If you sell the stock and realize the gain, the bea doesn't include the profit in income, but it does deduct the taxes you pay on that gain from your personal disposable income. So if you pay tax at the maximum 20% rate for capital gains on your $10,000 profit, $2,000 is deducted from your income. Going back to the example above, your disposable personal income would drop from $60,000 to $58,000 and, assuming your spending remains at $55,000, your savings would fall from $5,000 to $3,000 and your savings rate would drop from 8.3% to 5.2% ($3,000 divided by $58,000).

The savings rate gets pushed down even further if you dare to spend some of your stock-sale profits. Let's say you spend $4,000 of your $8,000 after-tax profit on a new computer system. Even though the capital gain isn't included on the income side of the bea's equation, the spending that resulted from the gain is deducted on the spending side. So your spending has gone from $55,000 to $59,000, but you still have disposable income of just $58,000 (your original $60,000 minus the $2,000 in taxes on your stock gain). So according to the bea's accounting, you have spent $1,000 more than your disposable income, which gives you a savings rate of negative 1.7% (negative $1,000 divided by $58,000).

Blame the rich? Things get even screwier if you look at the savings rate by household income. You probably think the richest Americans have the highest savings rates. After all, they ought to have more money available for saving after meeting expenses, right?

Not necessarily. According to a study last year by two Federal Reserve Board economists, virtually the entire decline in the savings rate during the 1990s was the result of a drop in the savings of the highest 20% of income earners in the U.S. While that may seem to defy all logic (and it does, but remember, we're in the world of government statistics), there's a simple explanation. You see, the decline in the savings rate among wealthy Americans can be traced back to the bea's treatment of capital gains, plus a little thing called the wealth effect. The wealth effect holds that, as the prices of assets like stocks and homes increase, we become more likely to increase our spending. Some economists have even put a number to the wealth effect, claiming that for each $1,000 our net worth rises, we spend an extra $35 to $50, or 3.5% to 5%.

During the '90s, affluent Americans saw the value of their stocks, funds and houses zoom upward in value. And that increase in turn spurred their spending. And since rising stock values and capital gains from stock sales weren't considered part of the wealthy's income while their wealth-effect spending was counted, Americans with the highest incomes pretty much singlehandedly drove down the savings rate to its lowest level since the Depression.

The real question, of course, is whether the falling savings rate really means we're more financially vulnerable or less prepared to meet goals like retirement. That does not appear to be the case, however. As the chart on page 63 shows, the whole time the savings rate was spiraling downward, rising stock and real estate prices were pushing the wealth of American households to historic highs. So if you think of economic security in terms of wealth or net worth (the reserves you can draw on after subtracting what you owe from the value of your assets), American households overall are far better off than they were at the beginning of the '90s, even after the stock market's sell-off in 2000 and 2001. Indeed, Lehman Brothers co-chief U.S. economist Ethan Harris estimates that if you adjust the savings rate for the impact of rising stock and house prices, you have pretty much accounted for the entire decline.

Save yourself. Clearly, the savings rate alone doesn't tell us much about our financial security as individuals or as a nation. If you are looking for a comprehensive gauge of how you're doing financially, you'll want to look at how much your wealth is growing. To be fair to the people at the bea, I should add that they know this. "What we're trying to measure is some notion of a sustainable amount of saving," says bea director Steven Landefeld. The bea's notion of saving from regular income is hardly harebrained. "You can't just depend on capital gains, personally or as a nation," says Landefeld. "Over time you also need to save out of current income."

He's right, of course. As a nation, we need ongoing savings from income to replenish our productive capacity. And individually, most of us must set aside money on an ongoing basis if we hope to accumulate enough for a decent retirement.

That said, however, there's no single "correct" savings rate we should all shoot for. So I wouldn't necessarily worry if the percentage of income you're putting away on a regular basis is less than the official U.S. savings rate. Nor would I strut around like a banty rooster if I salt it away at a higher rate. The percentage that makes sense for you will depend on factors such as the amount you have tucked away in taxable and tax-advantaged accounts, how you have those assets invested, whether you have a company pension, and how much you eventually plan to draw on your investments during retirement. And no official savings rate is going to help you figure all this out, although a few online calculators can help, including the Retirement Planner at our own site (www.money.com).

The acid test for financial security is whether your assets and the return you earn on them plus current savings from income are likely to generate enough income to see you through retirement. And that's something you ought to monitor on a regular basis to assure that you're on track. For tips on that score and more on retirement planning, check out the special report that begins on page 68.

So the next time you read about what lousy savers we are, remember: Ultimately, it's building your net worth that counts. Focus on that, and let the rest of the country--and the Japanese for that matter--take care of themselves.

Senior editor Walter Updegrave is the author of Investing for the Financially Challenged (Warner Books). You can reach him at investing101@moneymail.com.