The real reason people regret not saving

Never too old.
Never too old.
Image: Reuters/Juan Carlos Ulate
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Do you save enough? Probably not. It is one of those questions that only seems to have one answer, like asking should you eat less sugar and exercise more? But economists are divided on whether most people actually under-save. They also don’t know why the people who should save more don’t save enough.  The reason why people under-save is more than an academic curiosity; it determines policy that can impact our lives.

If people don’t save enough, policy makers can justify doing things to make us save more. Some economists argue people don’t save because they procrastinate and don’t value the future enough. If we have behavioral biases that make us procrastinate, nudging—or automatically signing people up for work place retirement accounts—is the right policy. There is evidence auto-enrollment increases retirement saving, though other evidence finds saving more for retirement accounts can reduce other forms of more liquid saving.

Another reason people may not save enough is they underestimate the odds of an expensive, bad event happening to them. A new study released by the National Bureau of Economic Research by economists at RAND and the Max Planck Institute attempts to figure out why people don’t save. In a RAND survey, the authors asked 6,000 Americans over age 60 in 2016 if they wish they’d saved more when they were younger. About 60% of the respondents wished they saved more, even after reflecting on all those great vacation memories and wonderful clothes they spent money on instead. Only 1% wished they saved less.

The fact that most people regret their saving choices is, in some ways, surprising. Most of the respondents, 84%, felt they’d saved enough to meet their current needs and 53% believed they had enough or “just enough” for their current needs too. And yet their savings was still not high enough to avoid regret and feel secure. The respondents, on average, think there’s a 59% chance they will run out of money and many worry about the viability of Social Security and Medicare.

Even though they wish they had more, it does not seem procrastination kept them from saving. There was no clear correlation between the surveys’ measures of procrastination (questions about motivation and putting things off) and not saving.  But retirees who experienced a negative shock to their income or wealth wish they saved more. The bad shocks include a spell of unemployment, bad health, or divorce. The results suggest low and middle income Americans need to to save more for emergencies and unforeseen life events. This is a harder policy challenge than signing people up for retirement accounts because workplace savings programs like 401(k) are illiquid. Retirement accounts penalize savers for taking money out too early, but it is hard to created incentives to prevent them from dipping into a rainy  day account for the wrong reason. Nudging workers into retirement saving may even be counter-productive if it reduces other forms of saving.

A more robust social safety net may be necessary, and better education may be helpful. People with higher reported rates of financial literacy experienced less regret, according to the survey. The study’s authors speculate people don’t form good probability estimates of a bad event happening in their lives, and more education could be helpful. For example they go into marriage underestimating the odds of divorce and don’t financially prepare for that possibility. No one ever said economists are romantics.