Finance

Why Are Americans So Bad At Saving? (Part II)

Note: This is the second of two related posts

In his latest New York Times Magazine column, Adam Davidson writes, "savings...have fallen steadily for more than 30 years, from a high of nearly 12 percent of income."

To continue the discussion, we asked two economists on different sides of the debate - Laurence Kotlikoff of Boston University and Annamaria Lusardi of George Washington University - to answer the following question:

Why are Americans so bad at saving?

Laurence Kotlikoff's answer is below. To read Annamaria Lusardi's response, click here.

America has a saving problem. Our national saving rate in 2009 was negative 1.7 percent. Last year it was 0.1 percent. This year it's running at 0.6 percent. You have to go back to the early 1930s to find saving rates this low. In the fifties and sixties we saved roughly 14 percent of national income. It's been a generally downhill ride ever since.

Who's spending so much more? It's not Uncle Sam. His rate of consumption spending, be it on defense or White House janitors, is a lot lower than it was. The answer is the elderly. Their consumption has risen dramatically relative to that of all other age groups.

So why are the aged spending so much more? Our politicians have spent the last six decades providing oldsters with ever-larger resources (which the oldsters have consumed) in the form of Social Security, Medicare, and Medicaid benefits. Back in 1970, these three benefits, averaged across oldsters, equaled 42 percent of per capita GDP. Today's figure is 72 percent.

The fact that each of these benefits is paid out as long as the elderly live and on an inflation-protected basis, makes spending them a safe bet. It's "Eat, drink, and be merry, for tomorrow we collect our next check."

Moreover, the fact that Medicare and Medicaid checks go straight to the docs and hospitals for healthcare services (i.e., consumption) means the elderly have no ability to save this in-kind income. Finally, increases in longevity as well as the growing number of people entering retirement are swelling the ranks of old spenders.

Pity the young, who are struggling to find decent jobs and pay off their student debt, let alone handle the massive oldster bills both parties are planning to dump in their laps. Many are throwing up their hands when it comes to saving and lifetime financial planning. And if they turn to the financial industry, they are met with sales pitches from "financial experts" who charge an arm and a leg for managing their money and routinely under performing the market.

Economics has clear saving messages for the old and young.

For the old: Economies that don't save, don't invest, and economies that don't invest, don't produce real wage growth. If you love your kids and grandkids, lobby the government to stop taking from young savers (them) and giving to old spenders (you).

For the young: About 40 percent of you are saving far too little, and about 20 percent are saving far too much. Your goal is to not to starve today to splurge tomorrow nor do the opposite. Your goal is a smooth living standard per household member before and after retirement. Beware financial planners hawking risky and expensive mutual funds to meet impossibly high retirement spending targets ranging from 75 to 85 percent of pre-retirement income. The right consumption-smoothing replacement rate is likely to be 45 to 55 percent. Economics-based financial planning will not only keep you on an even spending keel. It can show you a host of ways to safely raise your living standard, with no risk and no fees.

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