“The lack of money is the root of all evil.”
–Mark Twain
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 The U.S. government deficit is in the trillions and ticks up so highly that a number is obsolete as soon as I type it.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:
Most employers will let you direct deposit into more than one account. I’ve found one thing that helps me fight my monkey brain is direct deposit a constant “allowance” into my main checking account while direct depositing the remainder into long-term savings. The former is used for bills/day-to-day expenses. The latter I never see and don’t account for in my expenses.
I used to do that too, and it worked quite well. The less money that Monkey Brain sees in the account, the less tempted he is to spend it all.
I pretty much agree with everything you said. I try to set up my savings so I really don’t have a choice. I direct deposit my Roth IRA, I put 20% into my 401k, and I move money from my checking to savings/investments as soon as it hits a certain balance. I also try to cap my HSA, and pay medical expenses out of pocket. This way I can use the my HSA account to help pay for my healthcare when I retire.
I know that SS is only meant to supplement my retirement income, and that Medicare is going to need to be changed. I am planning ahead as much as I can and hope it’s enough. 😛
The other benefit of your HDHP/HSA plan is that you can withdraw the money without penalty once you reach age 65, so it becomes a de facto additional retirement account. Automating all of the rest of it, like you’ve done, makes sure that you’re not forced to say no over and over again because the money is sitting there in your account, causing Monkey Brain to go bananas wanting to spend it all on a 183″ flat screen TV.
If people would think about Social Security as it was intended – longevity insurance – then they’d be a lot better off. I think it’ll be around when I reach FRA and it’ll probably be around when you hit FRA (hard to tell your age from your picture, although I’d bet the farm you’re younger than me!), but the FRAs will be older for both of us, and the benefit might be reduced.
I view it as my duty now to ensure that I’m not a burden on someone later. I’d rather be in a position where I can give than to be in a position where I am a recipient of charity.
“I view it as my duty now to ensure that I’m not a burden on someone later. I’d rather be in a position where I can give than to be in a position where I am a recipient of charity.”
Exactly! In “The Ant and the Grasshopper” story i’m the ant, but I know a few grasshoppers, who are going to be shocked at how quickly retirement age sneaks up on you.