Friday, March 16, 2007

Til Death

The personal savings rate in the United States has been comfortably in the red for over a year now. This means that on average Americans are spending more than they make on a regular basis.

Does this mean our country is going to the dogs? Have we lost all sense? Are we mortgaging our children’s future in exchange for Plasma TVs?

Perhaps. Though I am skeptical that the entire nation has suddenly gone mad. I am not expressing an opinion about the fraction of countrymen who are mad. I simply don’t think that fraction has changed significantly over the last decade.

Then what other possible explanations could there be? The one that is the most interesting to me is that the nature of work has changed.

Increasingly Americans work in occupations that are less physically demanding. Increasing Americans also work in occupations that they enjoy, especially those who have more experience and are further along in their careers.

It is reasonable to suspect that many of these people don’t plan to retire in the traditional sense. Many of them likely plan to work well past their sixties and perhaps as long as they are physically able.

This radically changes a family’s financial life cycle. In the past we assumed that a family’s peak earning years during their 40s and 50s. This meant borrowing a little to get started in their twenties. Breaking even during their 30s and saving for retirement during their 40s and 50s.

If they plan to work into their 70s then the path changes drastically. In particular this means that there is an enormous potential gap between income and expenditures after 60. By then the kids will be gone and the mortgage will be nearly paid off. If they are healthy both spouses have the time to work.

Providing for two adults in a home that’s paid for costs a fraction of what most families spend. Yet, its entirely possible that two experienced 60+ adults could make significantly more than younger households.

In this case it makes little since to struggle to put away money, when money is tight simply to be rolling in dough at 70. Far from being mad the drop in savings might be a sign that Americans have escaped the madding oppression of slaving away at a job they hate only for the promise of a few years of peace.

11 comments:

dWj said...

This could be an explanation if a trend toward working later is more important than the trend toward increased longevity. I'm pretty sure average length of retirement is growing, but that in and of itself doesn't necessarily disprove what you say.

I think the simpler explanation, though, is that average household net worth is at an all-time high, and that -- until recently, at least -- housing, a significant part of that, was appreciating rapidly. The NIPA "savings" statistic doesn't count capital gains as income -- it's likely that, while us young folk save up to establish our grubstake and retirees dissave, that those in the middle have gone from a situation a generation ago where non-saving increases in net wealth weren't sufficient to prepare for future desires to a situation in which they are.

Karl Smith said...

I think the simpler explanation, though, is that average household net worth is at an all-time high

My problem here is two fold.

One, I think most people are aware that much of the build up in housing prices came from temporarily low interest rates.

From a finance prospective you might say that the underlying fundamentals haven't changed and so you shouldn't value your portfolio as highly as the market has, as the saying goes its only capital gains when you cash out.

From a man on the street perspective, you might think - yeah my house is worth a lot now, but that just means that the price won't rise as fast later so nothing has really changed.


Two, to the extent that the gains in housing do represent a move to a higher growth path for housing isn't this really just a transfer from one generation to the next?

Housing should show up as a gain on middle-aged balance sheets but a liability on the balance sheets of young renters who should now be saving furiously for a down payment.

dWj said...

Your concern 1 seems to represent an expectation that recent housing price appreciation implies slower housing price appreciation in the future, and concern 2 is that is the start of a new trend. I tend to think of the natural assumption as being that housing prices will appreciate in the future as they have in the longer term. A high future return isn't necessary, so long as there's no need to "give back" recent gains.

As for the concern about young people's housing liability, insofar as that has gone up because of a lowering in the discount rate, the present value of my future income has gone up to match. That the economy has decided that extant physical capital is more valuable than it had previously thought doesn't make it more urgent that we pre-pay on the services that capital will provide in the future, nor does it mean the services will necessarily be more expensive themselves.

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