Another Reason Why Workers Aren’t Saving

And it has to do with my Uncle Harry used to say: “Rich or poor, it’s always good to have money.” Noah Smith recently wrote a piece for The Atlantic, in which he argues that, to reduce the wealth gap, we need to encourage the middle class and the poor to save more:

As I mentioned, income redistribution helps these things a bit, but it doesn’t account for the whole difference. The rich probably save more than the poor for many more reasons besides the simple fact that they’re rich. In fact, being willing to save more is probably a big part of how the rich got rich in the first place. “Cheap” is an insult, but being cheap is how you get rich. If you consume everything you earn, your consumption will be higher today, but lower twenty years down the road; in our consumption-focused society, a lot of people are caught in this trap. And government can and should help them get out….

Instead, the answer is to change America’s culture of (not) saving. This sounds hard, but actually it is probably very doable. For years, behavioral economists such as Richard Thaler have been studying ways to “nudge” people to save more. The most famous “nudge,” which has been endorsed by President Obama, is to make employee pension plans “opt-out” instead of “opt-in”. But there are plenty of others. In lab experiments, just giving people information on how to save money makes them save a lot more.

Look, getting people to save more would be a good thing (sensu Uncle Harry). And personally, I’ve never been an extravagant spender–you don’t survive grad school and a couple of post-docs in expensive areas without being frugal (ah, half of my post-tax and benefits income to live in a crappy apartment 75 yards from the LIRR. Those were the days…). So, when I’m feeling all moralistic and shit, I’m perfectly happy to rail against those damn profligates.

And then data smacks me upside the head. Here’s how a living breaks down in Massachusetts:

MAexpenses

Hunh. “But Mad Biologist! Massachusetts is really expensive!” True enough, so let’s look at Alabama (because we like Alabama-Massachusetts comparisons):

ALexpenses

I don’t see how many middle class and poor families are going to be able to save–that is, lock up cash in long-term investments. If somehow they are currently managing to do this, there’s no way in hell they can afford to save more on these sorts of incomes.

They don’t have the money.

Here are hourly wages from Massachusetts–the red indicates an average wage at which a single parent is unable to support one child:

MAhourlywages

Alabama:

ALwages

What would help are tighter labor markets and a serious push for a minimum wage that reflects the increase in GDP*. Transfer some more wealth from employers to employees. Because that’s where saving starts, especially when you’re already cut to the bone. Don’t put the cart in front of the horse.

And, as the kids used to say, because I can:

*For the record, I would like to see an immediate raise to $9/hr followed by $1/hr increase per year until we hit $17/hr.

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5 Responses to Another Reason Why Workers Aren’t Saving

  1. bluefoot says:

    I’d like to know how they calculated those numbers. Who only spends $140 on medical in MA? I am currently looking into getting insurance since I am working as a contract employee, and the plans I’m seeing run about $400/mo (minimum) for a single adult, not including things like copays for doctor visits or prescriptions.
    Back in the dark ages (80s/90s), I lived on ~12K/yr as a grad student, but things like insurance were part of my stipend.

    This whole subject makes me deeply angry. When you think about profits, that’s essentially the aggregate surplus value created by all the employees of a company. Why should nearly all the employees (i.e. non-C-level) see little to no share of that? In most companies, you don’t get a cost-of-living increase every year, so you have to be at the top of the merit pool (assuming one’s company gives merit raises) just to stay in place…..though merit percentages have become smaller and smaller since 2008.
    But then you’re in the C-suite and the *floor* of your year end bonus is typically 15%, and if you don’t wreck the company, you typically get the full bonus….anywhere from 40% to 100% depending on what sector. That’s on top of your merit increase and any additional equity the board may see fit to award management.

  2. Bayesian Bouffant, FCD says:

    The cost of food is supposedly the same in Massachusetts and Alabama, but I’ll bet they didn’t take account of the greater availability of roadkill in the latter.

  3. I have an issue with the assumption that childcare costs are $0 if there are two adults in the household? Subsidize childcare (which is supremely expensive in MA due to licensing constraints) to enable dual income earners (who bring in more taxes!) and much of this goes away.

  4. Joe Shelby says:

    Well, even as one who is upper middle class (not that I feel like it some times, and we’re only that way because of being double-income-no-kids for the first ten years of our marriage), I have one problem with “saving”.

    Saving isn’t. Unless you go into a low-yield credit union, saving has nothing to do with saving.

    Saving is making a loan to the rich that they can use your money to make themselves richer provided you get a piece of it 10-40 years down the road. As anybody who ‘saved’ with Enron or needed to pull their money out in 2002 or 2008 knows, the rich don’t hold up to their part of the bargain…and there is no way to punish them for losing MY money. I have no recourse, and the government has obviously shown that they’ll take no action.

    So to many who should save, the question is obvious: why trust the Rich to manage *my* money when they’ve shown themselves to be so often inept at managing their own, or if the only way to make it bigger is to cut costs by firing people like me, meaning the money I get back is at the expense of my fellow workers?

  5. kaleberg says:

    The poor would save more, but they don’t have enough money to save with. Perhaps everyone should get a few bucks to put by from the Federal Spare Change program or something. The Federal Reserve provides spare change for the big banks and brokerage houses. Why not the little guy? Too small to fail anyone?

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