Monday's podcast included an interview about how much money people should save. Kent Smetters, a professor at the Wharton business school, says the market knows — and should tell the rest of us. To which listener Jeremy responds:
I think that there's one major thing that Mr. Smetters overlooked in his analysis of why Americans don't save enough, namely the rate at which certain major expenses have risen over the past few years. This is largely based on the work done by Harvard Law professor Elizabeth Warren and her daughter Amelia Warren Tyagi. Their basic thesis is that it takes a lot more money to maintain a middle-class standard of living than it used to.
Namely, the cost of three big things has been rising a lot faster than inflation and wages over the past few years: health care, housing, and college education.
These are things that I think most families aren't willing to compromise on. Health care costs have been rising at rates much higher than inflation for a long time. Also, since people believe that public schools are getting worse, the cost of buying a house in a good school district is much higher then it used to be. Additionally, a college education is now a minimum (and really expensive!) requirement in order for your child to maintain a middle-class lifestyle.
I think that these three big expenses take a much bigger chunk out of a family's budget than they did in the past, and, when coupled with the negative wage growth we saw over the past few years, result in substantially reduced savings. This isn't to say that we are freed from the responsibility to live more within our means, or that there hasn't been a rise in unnecessary consumption over the past few years. While I think that Mr. Smetters is correct to say that the government needs to look at Social Security and Medicare reform. However, I think that if we really want to fix this problem, we also need to have policies that work on these big issues too. Just my two cents...