Show your kid, your client, yourself this little diagram, and sing the “Saving Song” of the righteous:
“Start saving now, my sweet, a 5% saving rate in your 20s is the same as 22% in your 50s.”
Why doesn’t advice to save consistently work? Why do most people have no or inadequate retirement accounts (with an average balance of $15,000)? One explanation for low savings is flawed humans: obsessive consumption and hyperbolic discounting. Sure, from the moment we wake up in the morning until we go to bed at night, we’re part of a machine designed to separate us from our money, including our poor, dopamine-loving brains addicted to the rush of spending and unrewarded for deferred gratification. Why the surge of dopamine when we spend?
Neuroscientists and anthropologists explain spending is fundamental to human activity – we strut, primp, and display to keep or elevate our social position. Author Wednesday Martin made enemies of her former neighbors in New York’s Upper East Side when she compared the consumption habits of neighbors to bonobos – a type of monkey. Academic Thorstein Veblen in the 1930s described conspicuous consumption – the white suit wasn’t just comfortable it signaled you are privileged – you didn’t have to come near dirt. Karl Marx described the fetishism of commodities. Economists Juliet Schor and Robert Frank focused on the harm of overspending.
Spending and its enabler, credit, are deeply ingrained in American life and commerce, and the focus on faulty human behavior is prominent. Advice on how to trim your budget and slash spending is everywhere. It’s click bait. “Ten Things You Could Do Now to Slash Your Monthly Savings.” There’s so much, in fact, that after clicking on all the advice, you could easily believe it’s your fault you don’t have a pension.
None of that science is false, but overconsumption doesn’t answer why Americans lack retirement savings. Pleasure from spending is real, but our government and financial institutions have shifted. They are better at loaning us money and overcharging for investing than rewarding us for saving. Social Security is eroding not because people are living longer, but because of lack of political will to raise the FICA tax.
Here is the truth. In our society, you are on your own. It’s your responsibility to save. But it’s not your fault if you don’t have a decent pension. While the math does work -- if you save 5% of your income starting in your 20’s, when you are 60, you will have the same amount saved had you started saving 22% of your income at 50 years of age. So my advice is twofold: save as soon as you start working and don’t spend more than you earn (an unsolicited third - eat less, mostly plants.)
But just as our car-dependent society and the availability of cheap, sugary and fatty foods contribute to the obesity crisis, so the financial environment contributes to the retirement security crisis. It isn’t our human flaws that cause us to have less retirement savings than we need. Rather, the fault lies with the flawed, ‘do-it-yourself,’ voluntary 401(k) and IRA system combined with student and credit card debt. Also, toss in low wages -- higher income folks have more discretionary income than the middle class, spending 30% on housing and 11% on food and lower-income workers a full 41% on housing and 16% on food. Where does the low-income worker cut? Cutting 10% of 16% by bypassing on avocado toast or latte won’t produce a pension.
Bottom line: Although without fixing Social Security AND creating pensions for all you are on your own and though it won’t matter, you must avoid the overspending. But, hear me, hyper-consumerism is not the cause of inadequate retirement savings – it’s the failed retirement system.
