Around the world, social security and health care are today's hottest economic issues due to the rising dependency ratio: the proportion of elderly people relative to younger, economically active, workers. According to the Population Resource Center, this ratio will double in the world's more developed regions and triple in less developed regions by 2050. With so many more old people in coming decades, governments will be hard pressed to raise enough money to pay for their needs by taxing the young.
None of this is news. But that is the point: despite the vast attention currently paid to the looming old-age crisis, household saving rates have been falling in most of the world's rich countries.
Why aren't people saving more for their future retirement? Why are they actually doing the opposite by saving less?
According to a recent study by the Organization for Economic Cooperation and Development (OECD), household saving rates declined between 1984 and 2001 in Australia, Austria, Belgium, Canada, Finland, Italy, Japan, Korea, New Zealand, Portugal, Spain, the UK and the US. In some countries, the decline has been dramatic: in the US during this period, the annual household saving rate -- expressed as the share of disposable income -- fell from 10.6 percent to 1.6 percent.
One might think that, with declining birthrates in rich countries in recent decades, it should be easy to save more. Fewer children mean fewer expenses and adults can work longer to earn extra income beyond their immediate needs. So why have so many different countries experienced a decline in savings?
The answer must be that people do not decide whether to increase their savings on the basis of careful calculations about their future needs. The decision to stop spending and save stems from more immediate concerns, and we have to look at the economic factors -- common to many countries of the world -- that play on those concerns.
A study in 2000 of saving rates in 150 countries, headed by Norman Loayza at the World Bank, found that some basic economic factors explained much of the variation in national saving rates, without any reference to cultural differences.
Surprisingly, the study found that saving rates tend to be high when inflation is high, and to decline when inflation declines. Since inflation has been declining in most countries of the world over the last 20 years or so, this could help explain the global decline in saving rates.
Loayza and his colleagues thought that inflation encourages saving because it creates an atmosphere of uncertainty. When people see high inflation, they conclude that the economy is precarious, so perhaps they should tighten their belts. Thus, inflation serves as a visceral reminder to save, while old age seems too far away for most people to think about.
There is another reason why the high inflation of the past encouraged saving: the high interest rates that tend to accompany rapid price growth. Borrowers may be forced to "save" more by paying higher mortgage rates. Consider the US in 1980, when the personal saving rate was 11 percent. The inflation rate was 12 percent and 30-year fixed-rate home mortgages were over 15 percent. The real interest rate was not really high -- just 3 percent -- but one still had to pay that 15 percent interest out of current income.
Imagine buying a house valued at three years' income and paying 45 percent of your income just to make mortgage payments. In America in 1980, this effectively forced some households to reduce their consumption expenditures drastically, contributing to the high saving rate of the time. When inflation fell, people eventually refinanced their mortgages at lower rates, breathed a sigh of relief, and started spending more.
That example also underscores the strong improvement seen in mortgage institutions around the world during the past 20 years -- another force tending to reduce saving. The easier it is to get a home mortgage, and the lower the down payment that lenders demand, the less young people need to save to buy their first house. The increase in credit cards and consumer credit has had the same general effect.
Finally, declining saving rates around the world reflect strong growth in asset markets -- namely, stocks and real estate -- over the last twenty years. The explanation for this growth is subject to dispute, but it seems to reflect an optimistic attitude towards the future, as we enter a modern world in which technological advances are supposed to make corporations extremely valuable and our economies perform well. We value our assets more because we imagine that they will be in great demand in the future.
Rising asset prices follow from this psychology. For most people, the troubles caused by the old-age crisis seem remote, while booming share or housing prices look concrete in brokerage statements or on the business pages of newspapers. People feel richer and save less.
The problem is that these increases in value create the impression that our lack of saving for the last decade has had no serious consequences. We think we're still getting richer even though we save less. But since speculative prices are ultimately determined by psychology, they can also suddenly be deflated by psychology. Unless we come to terms with the lethal combination of declining saving rates and falling birthrates, many more people may retire poor than we ever imagined.
Robert Shiller is professor of economics at Yale University, and author of Irrational Exuberance and The New Financial Order: Risk in the 21st Century.
Copyright: Project Syndicate
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