Can we recover from excessive consumption?


What you are about to read here is not politically correct.  The government, industry and financial firms want you to spend more, not save more.  That is how each gets the maximum revenue.  Economists either ignorantly or purposefully forget to account for the heritage of decades of over-consumption and under-savings and the effect on an aging population.  This article roughly quantifies the size of the problem for the ever-growing number of people who must begin to examine their retirement prospects as compared to past cohorts.


For the past twenty-five years we have been on a consumption binge.  Excessive spending by both the government and individuals has brought on massive debts and far too little savings to pay government entitlements and future retirement income.  (See  This is exacerbated by an aging population as the baby boomers start passing age 65 in huge numbers.


Those over 65 largely use entitlement receipts in the form of Social Security, Medicare, Medicaid, tax credits, welfare payments and government pensions.  Entitlements are funded by government debt and increased taxes.  Funding difficulties increase because we are on a steady trend of fewer workers to support entitlements compared to retirees and welfare recipients who consume them.  Ever increasing entitlements make it harder for workers to save.  Increasing life-expectancies further increase the burden of entitlements on those still working.


My focus here is personal savings for retirement.  By means of an example, I will illustrate why it is impossible for the baby boomers to get retirement income from savings anywhere near that of previous cohorts, much less enough to preserve modern life-styles.


The average personal savings rate from 1946 through 1984 was 8.86%.  Savings rates started a precipitous decline in 1985 and reached below zero in 2005.  Since then savings rates have increased, but are still a fraction of the historical 8.86%.


I will begin the analysis in 1985 and will call someone who saved 8.86% from 1985 through 2010 a “consistent saver.”  Those who did not, I will call “actual savers.”  I will assume actual savers saved at the same rate as depicted by the Bureau of Economic Administration (BEA) as personal savings as a percent of disposable income.   Thus they represent the population as a whole.


The few very large savers at the top of wage scales tend to skew results so that the median (person in the very middle) must be saving less than the average.  So more than 50% of the population could be saving less than the “actual” saver.  The difference between a consistent saver and an actual saver represents the difference between a major part of the retirement income for future retirees compared to past retirees.


Social Security is another component.  This too will be less for retirees as the “full-retirement-age” for normal Social Security has increased from age 65 up to 67.  This means that a person retiring at 65 will now get a reduced percentage of the “full-retirement-age” benefit.  The Congress is considering other changes needed to bring Social Security benefits in line with Social Security tax receipts.


Pensions are still another component of retirees.  Pensions used to be the third-leg for retirement support after Social Security and personal savings.  The transition of most employee benefit plans from defined-benefit to defined-contribution plans has put even more emphasis on the need to save more than past savers.  The focus of this paper is only on personal savings without any consideration of additional savings that might be needed from reduced Social Security or pensions.


In other papers, I have shown that younger workers should probably start saving 10% of their gross income and grow that percentage by 0.5% per year so that after working 20 years they should be saving 20% of their gross income for retirement to preserve the life-style of previous cohorts.  The savings percentages in the rest of this paper are far below these amounts but nevertheless reflect the differences that the “average” person will face compared to previous cohorts.  Previous cohorts did not enjoy the benefits of modern technology, but neither did they have to bear the costs of computers, flat screen television, cell phones, well equipped automobiles, large homes, travel, and so on.


Let us first compare the cumulative savings of both a person representing the average saver in the United States with a fictitious saver who consistently saved at the rate of previous cohorts.   The chart below illustrates the resulting investment balances of an “actual” saver and a “consistent” saver.  It assumes that both have disposable inflation-adjusted income of $50,000 per year and investments earn 5% above inflation.  The main thing the chart illustrates is the huge difference in results caused by differential savings percentages.





An actual saver would have saved about 38% less than a consistent saver over the period 1985 through 2010 for any disposable income assumption.  Suppose we consider the leading edge of baby boomers who will retire in 2011.  This translates to a retirement income for an actual saver of about 62% compared to a consistent saver.  Together with reduced Social Security and pensions, future retirees will be poor in comparison.  This assumes that people had a return on investments of 5% more than inflation, but this assumption is far less important than the savings rates as a percent of disposable income.  In the extreme, it does not matter what the return is if a person does not save anything at all.


Let us now look at people near the trailing edge of the baby boomers.  These people will be working another 20 years.  The penalties become even larger because investments compound over time.  An actual saver would have only about one-third of a consistent saver’s retirement income.  (This assumes a return on investment that is 3% more than inflation over the last twenty years of work and that the actual saver saves 8.86% of disposable income over those same years.  3% may be an optimistic assumption considering the aging population and need for everyone including the government to spend less, but return is much less important than the shortfall in savings before the last twenty years.)


Let us now look at it another way by asking how much an actual saver would have to save annually to catch up to a consistent saver’s  retirement savings twenty years from now.  Actual savers would have to save over 30% of their disposable income to catch up to the consistent saver.


So how real is a 30% savings rate?  The answer is that 30% is nearly impossible.  The highest savings rate in our history was during World War II when savings peaked at 26%.  That required rationing.  There was virtually nothing to buy in stores.  Almost all spouses worked.  Remember Rosie the riveter?  It was patriotic to buy Savings Bonds.  Even children saved their pennies for Savings Stamps to someday accumulate enough for a $25 Savings Bond.  Children did not have all of the goods of modern-day youth.  Irrespective of the fact that you could not buy a new car, nor get gas for it, a car for a high school student would have been unfathomable.


Whether one of the first baby boomers to retire or one expecting to retire in later years of the cohort, there is practically no chance that baby boomers will have anywhere near the retirement resources of past retirees.  To the extent that there are exceptions, the remainder will bear an even larger burden.  And this is only the savings contribution to retirement.  Consider the reduced Social Security and pensions as well.  Further, even these savings will not be able to preserve the life-styles we have enjoyed for the past several decades.



Henry K. (Bud) Hebeler