Continuation of possible reasons for Americans' low savings rate.
Last time we covered temporal discounting (present bias), time/effort required to save (hassle), and underappreciating the vagaries of fortune (not expecting the unexpected). These explanations were deemed insufficient mainly because they're nothing new and American non-saving is a new behavior. We have to look at what has changed over the last few decades to make sense of this behavior.
So what has changed? For one, older Americans are much better off than they used to be. Between home equity, investment savings, pensions, Social Security, Medicare, and supplemental insurance, most have the assets, income streams, and protections against adversity that are the envy of the age-impaired. Almost 80% own their own homes, two-thirds without debt. According to the Census Bureau, the median net worth of those 65 and older is almost $300,000 - two-thirds of which is home equity. No one saying there aren't poor seniors in the US, only that the situation of the elderly have improved immensely over the years.
What does this have to do with the decline of personal savings in the US? Put briefly: people save partly for retirement, which just doesn't seem as urgent as it did when most old people were poor.* US economic history bears me out: the decline in private saving tracks the rise in the fortunes of the old. As noted by Summers and Carroll (1987):
"...rising private saving rates in the 1950s coincided with declines in the relative economic position of the elderly, while the turnaround in the relative income of the elderly preceded the downward trend in private saving rates that began in the mid- 1960s….”p. 626
Ok, so Americans are less motivated to save for retirement. But people don't save only for retirement. They save for lots of things: big ticket investments, financial shocks, their children's education. Are Americans less motivated to save for these things as well? Why would that be so?
Next: How have incentives for savings changed? Have the barriers to savings gotten more formidable?
Reference:
Summers, L. & Carroll, C. (1987). Why is U.S. national saving so low? Brookings Papers on Economic Activity, 2, 607-642.
* Of course, as employers transition from defined benefit to defined contribution retirement plans, retirees may no longer be in such an enviable position, inspiring pre-retirees to save more for their golden years.