The Savings Crisis — A Microcosm for Social Security

This article about “rainy day funds” was concerning to me:

About one-fourth of Americans have no emergency savings, and that’s barely changed in the past four years.

A household’s lack of a financial cushion is pervasive across all income levels, according to a new survey from Even among high-earners—with incomes of $75,000 or more—the report found fewer than half of them have saved six month’s worth of expenses.

The age group most likely to have no savings at all are 30 to 49-year-olds. Yet, “those are the households that have a house, two cards, three kids, a dog, they need that emergency savings more than anybody else,” says Greg McBride,’s chief financial analyst.

I also found it interesting that my generation is the age group that is most likely to not have a “rainy day fund,” and that even people earning a substantial salary still do not have money set aside for emergencies.

What’s going on here?

I’ll walk through what I see as the major problems here, keeping in mind that I am certainly not a financial adviser or planner. I also can’t teach you to solve your financial problems using “this one weird trick.”

To start, I think part of the problem is what’s called the “normalcy bias.” Without butchering the term, it essentially means that people are convinced that things will generally stay the same as they have been. They will continue to have a job. Their car will run well. They won’t get sick, etc. Unfortunately, people can lose their job and unplanned expenses pop up all of the time. The normalcy bias is a dangerous thing when folks aren’t preparing for possible negative events.

Of course, I’m not suggesting that everybody hit up Alex Jones’ websites and buy MRE-type meals for the Illuminati Apocalypse. But as the Boy Scout motto goes, “Be Prepared.”

A second root cause of the lack of emergency savings for Americans is likely the fact that government policy causes price increases, which eat up disposable income for many folks. I’ve written before about how government policy weakens the dollar and causes increases in food, fuel, health care, and education costs. People who are on the border of “the middle class” are typically hardest hit, because those prices rise faster than their wages do, thus reducing their purchasing power.

Government is also doing American savers a disservice by artificially holding down interest rates, a third potential cause of the savings crisis. When your bank pays 0.06% interest on your savings account on average, where is the incentive to save? On the other side of the lending table, credit is cheap. Many people can get offers for 0% interest rate credit cards and low rates for auto loans, for example. When the government holds down interest rates on the savings side, as well as on the lending side, it can cause a distortion in terms of the likelihood of folks borrowing and saving. Such policies also, eventually, force savers (particularly those on a fixed income) to chase yield or gains in the stock market because they cannot get an ample return on Treasuries and other bonds. That’s a subject for another day.

Another potential reason for the savings crisis is the consumption mentality. There are more than a few bloggers, researchers, etc. who write all about how consumption mentality is evil and causes problems. I’m not going there. What I will say is that consumption at the expense of things like a rainy day fund is detrimental. I have no problem with Americans making purchases of products which they enjoy and which make their lives easier and more comfortable. This is one of the great results of capitalism. But I would be much more comfortable with this mentality if folks adequately protected themselves in case of an emergency.

A fifth potential cause of the savings crisis is, potentially, the government safety net. Since the financial crisis of 2007 – 2008, the safety net has gotten wider. Food stamp rules have been loosened. Here in New York City, Comrade Bill de Blasio is looking to undo welfare reform rules, which will most certainly lead to more enrollments. Obamacare has been liberating people from “job lock,” like the Red Army. I certainly hope that government is not creating a mentality that it will always be there for people, so they do not need a rainy day fund. But it is a definite concern.

Look at how Social Security has been reduced over the years as it marches steadily towards insolvency. Indeed, the disability rolls have swelled to the point that, according to the Trustees, the fund will be insolvent in 2027. Government reports tend to underestimate problems, as we all know (see Obamacare, for example). Social Security’s insolvency is likely much closer than we think–particularly if there is a downturn that the government and the Social Security Trustees haven’t planned for.

Sound familiar?

The Savings Crisis is a microcosm for the crisis we are experiencing with Social Security.

Social Security’s dysfunction is another example of the normalcy bias and “rainy day funds” being neglected because there is a focus on “the now” rather than “the future.” Moreover, government policies reducing savings yields also hurts Social Security, which invests in Treasuries. Policies like Obamacare and other regulations which hurt workers and reduce the number of available jobs also is damaging to Social Security, because it reduces the amount of tax revenue collected. Less jobs, less payroll tax.

Throwing more money at this problem won’t help, though. Allowing younger workers to opt out might.

As always, free markets are better markets.