Allison’s ode to the second moment: Third issue

Hello and welcome to the third edition of Allison’s Ode to the Second Moment, a newsletter that dares to wonder if the future will matter someday.

First up---Americans aren’t saving enough. The cover story of the Atlantic this month features Neal Gabler’s coming out as one of the 47% of Americans who couldn’t scrape together $400 in an emergency. His confession has provoked lots of discussion about why Americans save so little.

This week I explore what went wrong with American’s bank accounts and what we can do to increase saving. It seems we don’t value saving like we used to. That in part reflects a cultural shift, but also cues from our leaders. Policy tends to focus on retirement saving or buying a house, but offers few, if any incentives, to maintain liquid wealth.

We even discourage saving because we’ve convinced ourselves that long-term prosperity is built on Americans spending like crazy. It may feel good in the short-run—but it can come back to haunt you. Under-saving makes for financially fragile households and that trickles up to a more fragile economy.

If we want to increase saving and make the economy more resilient it will take more than behavioral tricks, it will take a radical change in our values.

At least cheap oil boosted saving

Speaking of, have you noticed that people are disappointed low oil prices increased saving instead of consumption? I also explore why that may be. Alas, it is not because Americans found the saving religion. I suspect the reason can be found in good, old fashioned life-cycle models of transitory and permanent wage shocks. If we think more carefully about how consumers respond to risky windfalls, we might understand why cheap oil didn’t boost the economy. They can also tell us what cheap oil will mean long term. I don’t expect the increase in saving to last.

Multi-employer pension reductions remind us why saving is important

There was sad news about what happens when pension funds don’t save enough. I find it frustrating that arguing for well funded-pensions is often portrayed as a plot to undermine defined benefit pensions, or even a political conspiracy. When all we want is realistic promises, so pensions aren’t cut when people are most vulnerable.

Unfortunately multi-employer pensions have reached that point. Pensioners face benefit cuts. It is terrible, but necessary at this stage. The pension fund simply does not have enough assets to pay its obligations. But check out the opening line from the Washington Post:

More than a quarter of a million active and retired truckers and their families could soon see their pension benefits severely cut — even though their pension fund is still years away from running out of money

The suggestion here is the best time to deal with a funding short-fall is when the pension fund runs totally dry. I am seeing variants of this argument more and more from major news organizations.

It’s easy to dismiss this view because it is so crazy. It is at odds with basic math. Or perhaps some people are just wildly optimistic. To be fair, we could get lucky---markets might surge and never fall, the US economy might grow 7% each and every year, or maybe lots of people will die early. In each case, cutting pensions would prove to be unnecessary.

To us pension geeks these arguments are no better than climate change denial. We’ve seen how this plays out---and it’s not pretty. The sooner you restore a pension fund to solvency the smaller cuts have to be and the less risk there is to pensioners and tax payers.

I fear the idea that pensions and entitlements don’t need reform, until there's no money to pay them, is gaining traction. It is a seductive argument if you don’t want to pay more taxes or receive a smaller income.

Can we blame individuals for underfunding their personal liabilities if pensions and governments underfund theirs?

Until next time, pension geeks.