And What To Do About It

The savings rate among workers has dramatically declined over the past few decades.  In many countries it’s now lower than the rate of borrowing.  No surprise.  It takes two wage earners in most family to make ends meet, and the families are still deeply in debt.

The recession we are still struggling to recover from was in part the consequence of encouraging workers to take on debts they had little chance of repaying.  And when they defaulted, as so many of them inevitably did, the whole superstructure of securitized investment instruments based on those debts collapsed as well — along with many of the highly over-leveraged financial firms that couldn’t sell enough of them.

In this context, it doesn’t make much sense to believe that families should strive to put aside money for savings, or even to think that they could if they wanted to.  Where will the extra money come from?  To be sure, it’s hard to disagree with the logic of saving for a rainy day, particularly in a society that has such fragile safety nets as ours.  But what will get people to squeeze the lemon harder when it’s already dry?

The easiest way is simply to make it automatic.  If people have to think about putting money aside, no doubt, they won’t do it.  Each month there will be another bill to pay off, another necessity to buy.  But even with an automatic payment plan, you have to agree to it initially.  When might that seem appealing — or, even, possible?

Cass Sunstein and Richard Thaler, two behavioral economists, offer an approach to such problems in their book Nudge.   They call it “choice architecture,” a means to encourage people to make choices that are in their own interest.  They suggest employees be offered the opportunity to sign up for automatic savings when they get raises. That way, it appears to cost them nothing, as it comes out of income they never had before.  Nothing lost, something gained.

But what to do if you are self-employed, or your employer is not enlightened enough to offer you such a plan?

You need your own choice architecture, your own attractive reasons to save.  One possibility is having goals that really matter.  If you can outline specific things you want — a vacation trip, some new furniture, a degree, a gift for your children — you will be thinking of ways to enhance your life.  With such goals in mind, each deposit in your savings account will have a positive meaning.  The balance will not be abstract, a matter of negative cash flow.  And, of course, you can change your goals as you see that you are actually getting somewhere.

This may seem like a mental trick, and to some degree it is.  But that doesn’t mean it can’t work.  It’s using your imagination to gain a greater degree of control over your lives.  It’s playing at engagement rather than indulging in escapism.