Question/Comment: Has anyone ever done a study of medium household income to compare what households think they can save to what economists think those households can save?
Maybe even further broken down by age group, hopefully indicating wisdom/discipline? Can these households really save these days? Assuming there is a problem, is this something both national major political parties might be embarrassed about?
Paul Solman: Oh God, I feel a wave of grouchdom coming on. Let me give it a moment to pass.
There, it’s gone.
First, I don’t know of any study comparing the views of households and economists on this matter. Not sure, actually, what having a view on savings would mean besides what you seem to imply: that it’s a matter of “wisdom/discipline.”
That’s where I felt my grouch rising: Can’t most households save if they just think about it and then force themselves to? But of course, this is like saying most of us, your not-so-humble correspondent included, shouldn’t eat too much.
First, if you’re spending more than you’re earning, that’s expensive (credit card interest rates, not to mention late fees). And it’s a dicey way to proceed, should you happen to have much life ahead of you and no windfalls on the horizon.
Yet America’s savings rate has long been anemic and was actually NEGATIVE for a stretch. At least, as officially measured. There’s deep dispute over the measure, but no one would argue that Americans have been saving much, by our own historical or world standards: a few percent of our income.
But back to your question: How much SHOULD you save? As a percentage of income, say. It depends on several key factors:
1) How much do you want to spend in the future?
2) What kind of income will you have in the future?
3) How long a future are we talking about and when does it start?
There are retirement tools all over the Internet that at least give a sense of the variables. You can plug in numbers and they’ll spit out a total. Need $50,000 a year, inflation-adjusted, for life, starting in 10 years, in addition to social security … You get the picture.
The most sophisticated tool out there may be Boston University professor Laurence Kotlikoff’s E$Planner. Go to http://www.esplanner.com/ details. Kotlikoff’s new book, with co-author Scott Burns, is excellent and also relevant:“Spend Till the End.”
But you know how more and more Americans are coping with the problem of too little savings, don’t you? They’re continuing to work. And they’re beginning to save more. Because you can’t spend more than you earn past the point that no one will lend you money any more.