Capital Ideas Blog

Consuming today at the expense of tomorrow

By Chelsea Vail
July 09, 2013

From: Blog


The stock market is doing well. Pensions funds are looking relatively good as a result. But you can’t retire on blue skies ahead, and that’s a big problem for an estimated 53 percent of US workers who are at risk of not being able to maintain their lifestyle in retirement.
 
The “feelgood factor” conferred by a bull market could boost consumer confidence and spending, but policymakers shouldn’t encourage that, according to leading economists. Policies that boost consumption in ways that reduce the savings rate are likely to lower standards of living in the long term, top academic economists agree in a new poll from Chicago Booth’s Initiative on Global Markets (IGM) Economic Experts Panel.
 
It’s basic economics, according to Robert Hall of Stanford. Hall cast his vote in favor of the proposition and rated his confidence eight on a 10-point scale. “Only an unlikely exotic economy could overcome the basic principle that more now means less later,” he commented.

People are impatient, and a vacation now looks a lot better than prescription medication later. But there is a solution to the retirement savings crisis.

Save More Tomorrow (SMT), a plan devised by Richard Thaler of Chicago Booth and Shlomo Benartzi of UCLA Anderson, works like it sounds. It invites people to commit now to increase their savings later. By linking savings increases to pay increases, people don’t feel the pain of a smaller paycheck. And, voila! You have more money in your pocket, and more money in the bank.

Some of the IGM panelists were less certain about the universal efficacy of consumption-boosting policies, indicating that the case may be different depending on the demographic and economic challenges faced by each country. “I would give a different answer depending on whether we were talking about Brazil or China,” noted Barry Eichengreen of the University of California, Berkeley.
 

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