Encouraging Pessimism for Greater Savings?

(Photo: Aric Riley)

(Photo: Aric Riley)

During the Social Security lecture to my class of 500 freshman, most expressed disbelief that the program would exist when they retire.  Like a young colleague of mine, they were sure they would never collect.  

Wrong!  I can’t see the program being abolished.  It is very popular, and its potential bankruptcy is one of the most easily dealt with policy problems we face:  just raise the age for regular benefits by one year in each of the next four quinquennia, raise the taxable base for FICA, and voilà — problem solved.

But perhaps my students’ pessimism is a good thing.  If they believe this, and act on their beliefs, they will set aside more for their private pensions — saving more. Given the low American saving rates over the last few decades, maybe I should encourage their pessimism!

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  1. Jason says:

    Sure, it’d be easy to fix, just like it has been for the past two decades.

    You seem to be to optimistic that it will be fixed. ;-)

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    • DanSanto says:

      This is basically my pessimism – sure it can be fixed, but will it be fixed, and if it is fixed in some way will it be fixed to a useful state? (ie. will it be fixed like the ACA is fixing healthcare?)

      I just don’t see it happening.

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  2. JeanDjin says:

    Hidden due to low comment rating. Click here to see.

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    • steve cebalt says:

      Hi JeanDin: A very good, very “Freakonomics” observation! I have no idea why your comment earned a “disliked” rating. You pointed out the hidden side of the issue. And for that, your comment is hidden?

      I’m not in love with the hiding of comments anyhow, for several reasons: The merit of an idea is not a beauty contest nor a democracy. Freakonomics is all about revealing radical ideas, even if they are uncomfortable. The people on this blog are smart enough to evaluate things for themselves. Rankings create a bias of some sort. And, finally, hiding comments only draws MORE attention to them; I read them 100% of the time. I will say, though, that the rankings have a certain “entertainment” factor.

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  3. P. Noble says:

    Professor Hamermesh,

    Can we assume your suggested solution takes into account the change in U.S. population structure with the Baby-Boomer generation retiring over the next couple of decades? (I assume it does since you mentioned raising the receiving age over that span) Also, I think you are right about your students’ pessimism being acted upon. It certainly has goosed me into saving more money!

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    • Bill McGonigle says:

      I bet it doesn’t include gene therapy! What are we going to do with a huge number of 120-year-old baby boomers who have been on Social Security for the past 55 years?

      Oh, the required gene therapy technique showed up last week in a new paper.

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  4. Steve Laurette says:

    From an economics perspective, isn’t it better to encourage your students to spend their money–putting it back into the economy–rather than saving it?

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    • James says:

      I think that depends on your definition of saving. Converting it all to gold coins and hiding them in your crawl space, like this guy http://www.businessweek.com/articles/2012-12-20/a-gold-hoarders-legacy probably doesn’t do much for the economy. But investing those savings in stocks &c provides investment capital, which arguably would benefit the economy.

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      • Tom says:

        Interesting point, James. Especially since for the last five years we’ve been hearing that isn’t true, and the road to economic recovery comes from taxing it away from you so you can neither buy gold coins nor invest in stocks. The money is sent to Washington so they can spend it on projects they choose and that is supposed to give us the economic recovery.

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  5. Matt says:

    As a professional in my mid-20s, I’m pretty sure SS will exist when I retire. However, I expect that payouts will have shrunk enough that they’ll figure minimally in my retirement planning, or the government will have finally given up any notion that benefits are anything but transfer payments and means-tested them so I won’t get any.

    I think the more credible threat is that the government as a whole will default in the next several decades, given that the current debt load per full time worker is currently worth more than my house and expanding with no end in sight.

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  6. James says:

    Well, it worked for me :-)

    I’ve never had any confidence that SS would be around when I reached an age where I could collect anything, so – in addition to giving up the idea of retirement as a goal – I chose to live well below my income*, invested the rest, and now could retire comfortably without needing anything from SS.

    *But quite comfortably none the less: I may eschew a lot of popular consumer goods, but I have horses, fly my own plane, have enjoyed a variety of classic sports cars, etc.

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  7. Emily says:

    This worked for me. I’m 61 and believing SS wouldn’t be around for me to collect, I’ve been saving diligently since I graduated from college. The result is that I have a nice stash of $$$ and retired at 55.

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  8. Ryan says:

    Is increased savings actually good for the economy? If we want out of this recession faster, shouldn’t people be spending more, so long as they’re not borrowing?

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    • Bill McGonigle says:

      We need capital to build new businesses. Remember, we need 350,000 jobs a month for ten straight years to get back to pre-2008 employment levels. That’s not going to come from current businesses.

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