Immediate Gratification: Why the Developed World Ought to Save More

A 2008 study undertaken by Loretti Dobrescu from the University of Venice, Laurence Kotlikoff from Boston University and Alberto Motta from the University of Padua entitled “Why aren’t developed countries saving?” provides evidence of a growing trend: namely, that the developed world is saving less and less. France, Italy and the U.S. each recorded a saving rate decrease of more than half since 1970. The same applies to Japan, the U.K. and Spain. The current generation, the paper explains, simply prefers to spend now and keep less for later with the assumption that future generations continue with “intergenerational selfishness.” In the study, social-uncertainty preference is represented by two models; one where the society knows its current intertemporal and intratemporal preferences but not its future intertemporal preferences, and the other where each society realizes that it can control future consumption and leisure allocation indirectly through the amount of capital that they leave behind. Using these models, it appears that the “chief culprit for reduced savings is evolving social preferences that place ever-greater weight on current generations relative to future generations.”
      This hints at an increased confidence in future financial security, exemplified in the ease of access to credit finance. In addition, citizens of OECD countries rely on the fact that their governments will provide them with economic safety nets should their livelihoods truly take a turn for the worse. Irresponsible as they seem, however, these lax spending habits and preference for conspicuous consumption have played a major role in keeping OECD economies afloat.
     But with the collapse of consumer confidence and the worsening of the economic climate, conspicuous saving has become the new norm. And this is where the Keynesian theory of the paradox of thrift comes in: the more people save, the less consumption there is, thus resulting in a further fall in economic growth. This may in turn encourage more people to save in increasing amounts, should the future grow bleaker – a move which would paradoxically perpetuate the recession cycle. As such, many policymakers in the U.S. and elsewhere have exhorted their worried populations to throw caution to the wind and go on a spending spree, just as they have in the past years. The onus therefore falls on the government to jump-start the economy and restore consumer confidence, with the hope that they resume their old spending habits.

     However, the answer to maintaining a stable economy as far as saving is concerned is not as easy as simply saving less. After all, future earnings are never guaranteed, and there are many scenarios, such as early retirement or future college expenses, for which responsible adults may wish to prepare. On the level of national rather than individual welfare, there is also a need to ensure that the future generations of these countries live in as much comfort as possible. The problem does not therefore lie in falling saving rates, but in finding the right balance between overconfident spending and stingy saving.