“The lack of money is the root of all evil.”
Back during World War II, U.S. citizens were encouraged to buy war bonds – to save 10% of their paychecks for the war effort. From Hollywood to Dr. Seuss, influential celebrities extolled everyone else to pitch in to the war effort as a social responsibility to fellow citizens.
We can make a similar argument for the social responsibility to save nowadays. The U.S. government deficit is in the trillions and ticks up so highly that a number is obsolete as soon as I type it. Political discourse doesn’t happen without either an accusation that someone is going to take away Social Security and Medicare or a defense that they’ll preserve the status quo.
Government policy certainly encourages the notion that we have a social responsibility to save. Wage taxes create the presumption of forced saving, since both employer and employee have to contribute to Social Security and Medicare taxes.
But, do we have a social responsibility to save more?
As individuals, we have difficult in voluntarily saving. It’s against our psychological makeup. Monkey Brain likes to discount the gain or the pain caused to our future selves in exchange for benefits that we can realize right now. It’s the same reason that we wolf down an entire pizza, even though we know that we’ll be miserable in the morning. It’s why we pay for gym memberships and then never go; it’s easier to commit our future selves to something than to commit our present selves to something.
As a result, we justify buying the HD TV right now and we eschew saving for retirement. It’s also easy to come up with an argument – we’re paying for Social Security, so we should get what we put in when we’re eligible for retirement.
I argue that we do have a social responsibility to save more.
First, let’s look at how we want to live our lives. In an ideal scenario, we will spend the same real amount every year of our adult lives so that we get the same level of enjoyment throughout our lives. We’d prefer to remain at a relatively level state of happiness throughout our lives. If given the choice between alternating between really good and really bad years or living a life at a relatively constant level of fairly good, most of us would choose to live a life that’s consistently fairly good.
In order to accomplish that goal, then we need to redistribute income to our future selves. There will be times when we don’t work, either through unemployment or through retirement, and if we could, we’d gladly apportion some of the income that we make during good times to help our future selves out if times get bad.
However, what happens in reality is that we wind up spending more when the times are good, even though the marginal utility of the additional spending isn’t high. Studies show that we don’t tend to be much happier beyond $75,000 of household income, so if we make more than that, we can think of additional savings as insurance for times when we’re below that threshold – insuring ourselves against future unhappiness.
But, most of the time, we don’t think that way until we’re in a situation where we wish that we had some of that money which we previously had. Anyone who’s been laid off and didn’t have a sufficient emergency fund knows how this feels. This feeling is tied into something called prospect theory – we feel pain of a loss more than we feel joy of an equivalent gain. So, when we lose our ability to enjoy a certain lifestyle, we hurt worse than we feel joys of the same increase in lifestyle. It’s what causes the billionaire to be jealous of the deca-billionaire.
Furthermore, when we don’t save up when times are good, we have to rely on others to help us out when times aren’t good, even though we could have, with sufficient planning, prepared ourselves to avoid needing to lean on others for support.
Some of you will be thinking to yourselves that it’s the role of the government to take care of us when the chips are down. Some of you will be thinking that we are responsible for our well-being no matter what happens to us. I’ll address each in turn, but, regardless of what you think the role of government versus the individual is, here are a couple of things you can do to convince yourself to save more: