written by Mark Lamb
A Federal Reserve study cited in The Atlantic reported nearly half of Americans could not come up with $400 in savings in an emergency. Along with that data is indications that nearly half of people 55 and older have no retirement savings other than Social Security.
Behavioral economists have used insights from psychology and economics to understand what prevents people from saving.
Common reasons people don’t save or effectively plan for retirement include:
- Current desires prioritized over long-term goals. For many people, ‘present self speaks louder than ‘future self . Human nature tends toward immediate gratification. This ‘present’ bias can lead to the temptation of making short sighted financial choices.
- Competing financial priorities. Each season of life has financial challenges. Raising a family, buying a house, or planning for children’s college can especially produce feelings of many and competing priorities.
- Complacency resulting from past financial success. One reason to save is the safety it offers. During the 1990’s as incomes grew, savings steadily fell because economic shocks were shallow and unemployment low.
Suggestions to stimulate savings and retirement planning include:
- Reward people for saving. The current tax system does not encourage it. In fact, by generating income from savings, the saver is effectively punished by being taxed.
- Require employee contributions to retirement accounts. Enrolling employees in retirement plans automatically and setting default contribution rates increases people’s retirement savings. The employee still owns the account. Along with required contributions, tighter restrictions on premature withdrawals should be put into place.
- Rely on automatic savings. Banks can offer more options for automatic savings. For example, automatically diverting amounts into emergency savings accounts unless the customer opts out. Or -once a loan is paid off, switch the automatic loan payment into an automatic savings deposit.
The savings problem may not change without overcoming one profound mindset related to our economy. Upticks in consumption and declines in savings are typically celebrated by the media as signs of a healthy economy. They should actually be interpreted as the opposite for the financial health of households.
The US seems uniquely susceptible to conspicuous consumption. Americans don’t save money because it has been made easy to spend, easy to borrow, and easy to raid savings to spend more and borrow more. Changes in the savings rate can be made, but will require a shift in the way we think about it.