personal savings rate vs the general population

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mortal
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personal savings rate vs the general population

Post by mortal » Tue Feb 23, 2016 12:28 am

Another post here brought to memory something I read in William Bernstien's 'Retirement calculator from hell'

http://www.efficientfrontier.com/ef/103/hell4.htm

In it, he writes:
The X-ers, and those coming after, will have a much harder time of it. If you are currently under forty, you will shortly be traumatized by the sight of large numbers of your parents’ generation subsisting on cat food, and your generation will begin to save prodigiously. In such an environment, it will be very difficult to gain a comparative advantage over your peers.

If you want to retire early, what matters is not how much you save, but how much more than everyone else you save. In a world where everyone saves as if they’re going to retire at fifty-five, or even at sixty-five, none can.
Could someone explain what exactly he means by this? Is this a 'paradox of thrift' thing where a high savings rate lowers aggregate demand?

The Wizard
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Re: personal savings rate vs the general population

Post by The Wizard » Tue Feb 23, 2016 12:34 am

If W. Bernstein said those last two sentences, he must've been philosophizing.
They are not literally true.
There is no world where everyone saves as if to retire at 55.

And if a society DID save to this extreme, I'd have to ponder for a while what the impact on our economic system would be...
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mortal
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Re: personal savings rate vs the general population

Post by mortal » Tue Feb 23, 2016 12:42 am

Yes, at the very least I think we're a long way from it. However, it does give me pause, as I deeply respect the man for his work on 'Four Pillars' book. I didn't understand quote, and it left me wondering what I was missing?

jjface
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Re: personal savings rate vs the general population

Post by jjface » Tue Feb 23, 2016 12:54 am

I guess it only makes sense if one wants at least what everyone else has on average.
Last edited by jjface on Tue Feb 23, 2016 12:56 am, edited 1 time in total.

The Wizard
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Re: personal savings rate vs the general population

Post by The Wizard » Tue Feb 23, 2016 12:55 am

If EVERYBODY saved 25% of gross income, then interest rates would fall to zero due to no borrowers.
New car sales would plummet, at least for a while.
Real estate prices would stagnate also, one might think, since large mortgages would be less common.

But some of these trends might just be transient effects; after a full decade of the new 25% savings regime, people will still need new cars to replace old ones.

Modelling economic dynamics isn't child's play...
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petiejoe
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Re: personal savings rate vs the general population

Post by petiejoe » Tue Feb 23, 2016 1:03 am

Throughout the rest of the article, he argues generally that the ratio of workers to retirees will remain the same and that the means of exchange will devalue to naturally enforce that ratio.

I'm not sure I agree that the ratio needs to remain the same. He already admits that when social security first started, the ratio was 40 to 1 and is now 3 to 1. However, he doesn't account for the increase in worker efficiency due to technology and automation nor the increase in female participation in the work force.

The Wizard
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Re: personal savings rate vs the general population

Post by The Wizard » Tue Feb 23, 2016 1:16 am

Or maybe I'm wrong.
In the spirit of Unintended Consequences, if everyone was saving 25% of gross for early retirement, then many might have too little disposable income and be forced to borrow MORE for necessities like cars.

Nailing JELLO to a tree is rather easy compared to pondering this sort of thing...
Last edited by The Wizard on Tue Feb 23, 2016 7:24 am, edited 1 time in total.
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Valuethinker
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Re: personal savings rate vs the general population

Post by Valuethinker » Tue Feb 23, 2016 4:13 am

petiejoe wrote:Throughout the rest of the article, he argues generally that the ratio of workers to retirees will remain the same and that the means of exchange will devalue to naturally enforce that ratio.

I'm not sure I agree that the ratio needs to remain the same. He already admits that when social security first started, the ratio was 40 to 1 and is now 3 to 1. However, he doesn't account for the increase in worker efficiency due to technology and automation nor the increase in female participation in the work force.
LF participation matters, certainly. Particularly by older people.

Does technology? Not sure. Because standards of living also rise. Consider the soaring health care budgets. That's an improvement in quality of life, but it doesn't make the worker: non worker ratio any less of a problem.

Valuethinker
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Re: personal savings rate vs the general population

Post by Valuethinker » Tue Feb 23, 2016 4:17 am

mortal wrote:Another post here brought to memory something I read in William Bernstien's 'Retirement calculator from hell'

http://www.efficientfrontier.com/ef/103/hell4.htm

In it, he writes:
The X-ers, and those coming after, will have a much harder time of it. If you are currently under forty, you will shortly be traumatized by the sight of large numbers of your parents’ generation subsisting on cat food, and your generation will begin to save prodigiously. In such an environment, it will be very difficult to gain a comparative advantage over your peers.

If you want to retire early, what matters is not how much you save, but how much more than everyone else you save. In a world where everyone saves as if they’re going to retire at fifty-five, or even at sixty-five, none can.
Could someone explain what exactly he means by this? Is this a 'paradox of thrift' thing where a high savings rate lowers aggregate demand?
To have a higher standard of living than your peers, you have to have more savings pre retirement.

Either you save a higher percentage of your income OR you have a higher income (assuming same start dates for savings).

Working more years is one way to beat the system-- you won't draw down your savings until later.

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ofcmetz
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Re: personal savings rate vs the general population

Post by ofcmetz » Tue Feb 23, 2016 5:16 am

Don't worry. We are far from a world where everyone saves like they are going to retire at 55 or 65. Once you get past about 10% of gross going towards long term investing, then you start passing most up.
Never underestimate the power of the force of low cost index funds.

wearahat
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Re: personal savings rate vs the general population

Post by wearahat » Tue Feb 23, 2016 5:43 am

mortal wrote:Could someone explain what exactly he means by this? Is this a 'paradox of thrift' thing where a high savings rate lowers aggregate demand?
Yes that's part of it. What I got from the article is that early retirement is not possible for the majority of the population. He reasons that the ratio of workers to retirees is what matters not the amount of money people save.

His reasoning is sound because money does not have intrinsic value. Money derives its value from the production of goods and services. Workers are needed to produce those goods and services. Therefore, in a world where everyone decides to retire early by saving more, the value of their savings would plummet as output drops, more dollars are chasing a smaller number of produced output which leads to massive inflation eroding their savings. The problem that comes before people actually retire is saving up money which is impossible because a higher average savings rate means deflation which means negative interest rates which means savings will erode.

What does matter for an early retirement is higher than average savings and higher than average income. Fortunately, most people don't save which makes it easier for you to retire early. An implication is that if you want to retire early encourage others to spend which will help your stock returns and they will continue to work creating output for your early retirement.

This may all change if technology increases productivity to a level where a future worker can generate the output of 10 workers today, thereby allowing for a higher ratio of workers to retirees and increasing output per capita as wlel.

KlangFool
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Re: personal savings rate vs the general population

Post by KlangFool » Tue Feb 23, 2016 8:19 am

Folks,

Come on. Set your sight wider and look around the world. There are many countries in the world with gross saving rate far exceed 25%.

http://www.investopedia.com/articles/pe ... e-most.asp

Singapore is at 48%.

https://en.wikipedia.org/wiki/Central_Provident_Fund

<< Employer and employee CPF contribution rates

In September 2010, the employer's contribution to the CPF went up by 0.5% to be paid into the Medisave Account.

In March 2011, the employer's contribution went up another 0.5% to be paid into the Special Account, bringing the total employer CPF contribution to 15.5%, setting the overall employer and employee CPF contribution rate at 35.5%.

From 1 September 2011, the employers’ CPF contribution rate is increased by 0.5 percentage point. For employees who are above 35 years old and earning monthly wages of up to $1,500, the higher employer CPF contribution rate will continue to be phased in from 0% at the wage of $50 to the new full rate at the wage of $1,500. The increased contribution will be credited to the employees’ Special Account (including those above 55 years of age).

However, the additional 0.5 percentage point does not apply to graduated employer and employee rates for first or second year Singapore Permanent Residents (SPR) and their employers.[1]

From September 2012, CPF contribution rates for older workers aged 50 to 65 was increased to help them better prepare for retirement. For employees aged between 50 and 55, their contribution rates will go up by 2.5 percentage points – 2 percentage points from the employer and 0.5 percentage points from the employee – to bring their total CPF contributions up to 32.5% from 30%. For those between 55 and 60, their contribution rates will go up by 2 percentage points – 1.5 percentage points from the employer and 0.5 percentage points from the employee.For workers between 60 and 65, their employer contribution rate will increase by 0.5 percentage points, with no increase in their employee contribution rate.[5]
Schemes and Services>>

In Singapore, everyone is forced to save at least around 30%.

http://www.ibtimes.com/millionaires-cap ... re-1597644

<< The oil-rich emirate of Qatar led the field with an astounding 17.5 percent of households being worth more than 1 million U.S. dollars in 2013. In Switzerland, the figure was 12.7 percent, while Singapore, Hong Kong and Kuwait were in the 9-10 percent range. The U.S., China and Japan had the most millionaires by number.>>

Singapore ranked among the highest in the world with million USD household too.

KlangFool
Last edited by KlangFool on Tue Feb 23, 2016 8:42 am, edited 1 time in total.

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Toons
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Re: personal savings rate vs the general population

Post by Toons » Tue Feb 23, 2016 8:20 am

jjface wrote:I guess it only makes sense if one wants at least what everyone else has on average.
+1 :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

Johno
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Re: personal savings rate vs the general population

Post by Johno » Tue Feb 23, 2016 10:13 am

he writes:

If you want to retire early, what matters is not how much you save, but how much more than everyone else you save. In a world where everyone saves as if they’re going to retire at fifty-five, or even at sixty-five, none can.
I also don't fully understand what the author meant by this but am pretty sure it's not of much practical significance. Obviously the retirement age affects the workforce participation rate and all else equal fewer workers means fewer goods and and services produced for all, workers and non-workers, to consume. The savings rates' effect is not as clear. It seems most average people tend focus on the cyclical effect of spending v saving because that's the part generally batted around in public policy debate, ie 'the economy will slow down because people aren't spending'. But as long as there's room for productive investment and productive (not unproductive) investment is made, more of it eventually lifts productivity and results in more goods and services to consume in total, again all else equal.

Anyway I don't see where attention to the problems of undersaving boomers in old age would cause a real explosion in savings among younger Americans. Maybe that will be the result among some subset focused on retirement (like the kind of younger people who come to this forum), but implausible IMO it would be enough to cause a dramatic macro effect. For one thing the author seems to assume people will be convinced it's up to them alone to solve their own problems. But the reaction is just as likely (or more IMO) to be that the public (the govt) needs to give more aid to poorer seniors including themselves when they become seniors, not to save a lot more. And that might have the effect of increasing national *dis*savings through larger fiscal deficits if the increased aid was not fully paid for by higher taxes. Also a lot of people just don't focus on other people's or even their own future problems.

Anyway in general this reminds me somewhat of the perennial question 'what if everyone indexed?'. Not everyone is going to.

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tainted-meat
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Re: personal savings rate vs the general population

Post by tainted-meat » Tue Feb 23, 2016 10:20 am

He lost me at "large numbers of your parents’ generation subsisting on cat food". That is so unrealistic that it discredits the article.

Save 15-20% if you can and enjoy life. The rest is all article fodder meant to sell internet ads.

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Re: personal savings rate vs the general population

Post by The Wizard » Tue Feb 23, 2016 10:25 am

Johno wrote:
he writes:

If you want to retire early, what matters is not how much you save, but how much more than everyone else you save. In a world where everyone saves as if they’re going to retire at fifty-five, or even at sixty-five, none can.
I also don't fully understand what the author meant by this but am pretty sure it's not of much practical significance. Obviously the retirement age affects the workforce participation rate and all else equal fewer workers means fewer goods and and services produced for all, workers and non-workers, to consume...
It doesn't really mean fewer workers.
Earlier retirement over a society means fewer older workers but more opportunity for younger workers, hence lower unemployment.

I think this was one reason that SS was invented: to allow older workers to retire and get younger ones employed!
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Johno
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Re: personal savings rate vs the general population

Post by Johno » Tue Feb 23, 2016 10:57 am

The Wizard wrote:
Johno wrote:
he writes:

If you want to retire early, what matters is not how much you save, but how much more than everyone else you save. In a world where everyone saves as if they’re going to retire at fifty-five, or even at sixty-five, none can.
I also don't fully understand what the author meant by this but am pretty sure it's not of much practical significance. Obviously the retirement age affects the workforce participation rate and all else equal fewer workers means fewer goods and and services produced for all, workers and non-workers, to consume...
It doesn't really mean fewer workers.
Earlier retirement over a society means fewer older workers but more opportunity for younger workers, hence lower unemployment.

I think this was one reason that SS was invented: to allow older workers to retire and get younger ones employed!
Lack of a robust public old age pension system does not reduce labor force participation rate of young workers, as is clear from past history in countries which now have such systems or ones which still don't. This might again be cyclical v secular view: in the 1930's a lot of the labor force was unemployed temporarily, doesn't mean there's any evidence that keeping older workers in the force longer would reduce the labor force participation rate of younger workers over the whole business cycle. Even now in the US it's clear that one major reason for the multi-decade low labor force participation rate is that the population is older. If you assume labor force participation rate is as usual historically for different age groups then account for the greater proportion in older age groups, that explains a lot of the decline. Not all of it, and the reasons for the additional decline and what to do about them is an important though contentious issue. But there's also no evidence in the current situation that lowering workforce participation rate further among older people would raise it among younger people.

Basically if retirement age falls, the workforce shrinks. But it's all 'all else equal'. If that occurs in context of big increases in productivity, then it doesn't mean less output. But it's very doubtful to assume that for constant productivity it would do anything other than reduce growth to encourage more older people not to work.

garlandwhizzer
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Re: personal savings rate vs the general population

Post by garlandwhizzer » Tue Feb 23, 2016 2:57 pm

From Bill Bernstein's article referenced in the original post:

In an era when a small number of people lived past sixty-five, society could easily support them for the very few years they survived beyond that point. Now that citizens are routinely living two decades longer, it is simply not mathematically possible, let alone politically feasible, to expect each worker to support 0.67 retirees, no matter how many coconuts, dollar bills, stock certificates, or Krugerrands they save up in the meantime. It is also not reasonable to expect productive younger individuals to support large numbers of healthy older non-workers.

As Arnott and Casscells succinctly conclude, what we have is not a savings crisis, but rather a demographic crisis. We will not be rescued by increased voluntary or enforced savings.
I think that Bill's concerns are on target. As he explains it is only simple arithmetic when one looks at the economy, demographics, and life expectancy. Most Americans in the 60 - 65 age group, at or nearing the traditional retirement age, have an average total of about 25K in their retirement accounts. If they retire at 65 what kind of life will that be for an average life expectancy of 78.7 years? Life on SS plus 25 K for 13+ years on average? Not a pretty picture, and it is compounded by the expected lower returns on both stocks and bonds over the next decade. Our society will have to make some hard choices before long, choices that do not include easy solutions. The money to support this huge unprepared aging population must come from somewhere, else we will abandon them. Higher taxes at least for "the rich," or greater levels of debt are among the options to maintain or even expand SS and Medicare benefits for the many poor elderly. It is not a pleasant situation to contemplate but that doesn't mean the problem isn't real. I think Bill is right to present these issues and discuss the elephant that wanders unnoticed through the cocktail party.

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Rodc
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Re: personal savings rate vs the general population

Post by Rodc » Tue Feb 23, 2016 4:10 pm

If they retire at 65 what kind of life will that be for an average life expectancy of 78.7 years? Life on SS plus 25 K for 13+ years on average?
What do you do when right out of college making lousy money?

You get an apartment with a few roommates.

Three retirees living on $25K each make a "family" of 3 living on more than the median family income.

Ala Golden Girls.

People don't seem to want to do this, but it beats eating cat food. Works at least until one gets seriously infirm.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

Jack FFR1846
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Re: personal savings rate vs the general population

Post by Jack FFR1846 » Tue Feb 23, 2016 4:22 pm

Public workers in Greece retire at 55.

How are they doing these days?
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wolf359
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Re: personal savings rate vs the general population

Post by wolf359 » Tue Feb 23, 2016 4:51 pm

Did he write this in 2003? It is copyrighted 2003 at the bottom of the page.

If so, then this phrase was referring to the tech crash:

"In the past few years, millions rudely awakened to the fact that they weren’t going to retire at forty. Over the next few decades, most of the remainder will discover they won’t be doing so at sixty-five, either."

After 2008, there was in fact a general increase in the US household personal savings rate. However, it only went to about 8% (up from about 2% in 2003). It's currently around 5.5%.

He's primarily talking about Social Security, but there's a big underfunded pension problem looming as well.

The last boomer hits full retirement age in 2030. That's also the point when the Social Security Administration exhausts its reserves and starts reducing payments (if nothing were done to fix it prior to that point.)

BW1985
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Re: personal savings rate vs the general population

Post by BW1985 » Tue Feb 23, 2016 5:19 pm

wearahat wrote:
mortal wrote: This may all change if technology increases productivity to a level where a future worker can generate the output of 10 workers today, thereby allowing for a higher ratio of workers to retirees and increasing output per capita as wlel.
I think this is inevitable, only question is how long until this gets here.
"Squirrels figured out how to save eons ago. They buried acorns. Some, they dug up, for food. Others, they let to sprout, in new oak trees. We could learn from squirrels." -john94549

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zaboomafoozarg
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Re: personal savings rate vs the general population

Post by zaboomafoozarg » Tue Feb 23, 2016 5:41 pm

If you want to retire early, what matters is not how much you save, but how much more than everyone else you save. In a world where everyone saves as if they’re going to retire at fifty-five, or even at sixty-five, none can.
Those very words are what caused me to start saving 50% of gross income for retirement - to stay ahead of the curve.

alex_686
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Re: personal savings rate vs the general population

Post by alex_686 » Tue Feb 23, 2016 5:44 pm

mortal wrote: Could someone explain what exactly he means by this? Is this a 'paradox of thrift' thing where a high savings rate lowers aggregate demand?
The Paradox of Thrift comes from John Maynard Keynes.
https://en.wikipedia.org/wiki/Paradox_of_thrift

Assume:
The rate of return is going to be based on the supply of savings and the demand on investments.
You have a choice of spending today or investing for tomorrow.
So if you want to save more for today, you consume less today.

So..
1. If you save more today, and the demand on investments is fixed, than the rate of return will fall.
2. If the rate of return falls than you need to save more to meet your future goals.
3. So everybody saves more. This depresses aggregate demand.
4. Lower aggregate demand means the demand for new investments fall.
5. As demand for investments fall, the rate of return falls.
Start back at the top.

We can debate how true this is.
It was true during the Great Depression. Was that a special case or not?

We are currently facing 2 weird situations.
1. We have lots of almost old people who are saving right now. So a weird demographic hump.
2. We are seeing net outflows of capital from high growth but politically risky emerging markets into low growth but politically safe develop markets, in particular the US.

randomguy
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Re: personal savings rate vs the general population

Post by randomguy » Tue Feb 23, 2016 6:07 pm

KlangFool wrote:Folks,

Come on. Set your sight wider and look around the world. There are many countries in the world with gross saving rate far exceed 25%.

http://www.investopedia.com/articles/pe ... e-most.asp

Singapore is at 48%.

https://en.wikipedia.org/wiki/Central_Provident_Fund

<< Employer and employee CPF contribution rates

In September 2010, the employer's contribution to the CPF went up by 0.5% to be paid into the Medisave Account.

In March 2011, the employer's contribution went up another 0.5% to be paid into the Special Account, bringing the total employer CPF contribution to 15.5%, setting the overall employer and employee CPF contribution rate at 35.5%.

From 1 September 2011, the employers’ CPF contribution rate is increased by 0.5 percentage point. For employees who are above 35 years old and earning monthly wages of up to $1,500, the higher employer CPF contribution rate will continue to be phased in from 0% at the wage of $50 to the new full rate at the wage of $1,500. The increased contribution will be credited to the employees’ Special Account (including those above 55 years of age).

However, the additional 0.5 percentage point does not apply to graduated employer and employee rates for first or second year Singapore Permanent Residents (SPR) and their employers.[1]

From September 2012, CPF contribution rates for older workers aged 50 to 65 was increased to help them better prepare for retirement. For employees aged between 50 and 55, their contribution rates will go up by 2.5 percentage points – 2 percentage points from the employer and 0.5 percentage points from the employee – to bring their total CPF contributions up to 32.5% from 30%. For those between 55 and 60, their contribution rates will go up by 2 percentage points – 1.5 percentage points from the employer and 0.5 percentage points from the employee.For workers between 60 and 65, their employer contribution rate will increase by 0.5 percentage points, with no increase in their employee contribution rate.[5]
Schemes and Services>>

In Singapore, everyone is forced to save at least around 30%.

http://www.ibtimes.com/millionaires-cap ... re-1597644

<< The oil-rich emirate of Qatar led the field with an astounding 17.5 percent of households being worth more than 1 million U.S. dollars in 2013. In Switzerland, the figure was 12.7 percent, while Singapore, Hong Kong and Kuwait were in the 9-10 percent range. The U.S., China and Japan had the most millionaires by number.>>

Singapore ranked among the highest in the world with million USD household too.

KlangFool
Sinagpore has 5.4 million people. Nobody is saying tiny groups can't save a lot. What Bernstein is saying is that if the other 7 billion people on earth behave that way, the results might not be pretty.

And with all numbers it gets tough to compare countries. Imagine 2 countries
a) puts 15% of their income into private accounts
b) puts 15% of their income into an annuity for life

a) will have a higher network. B) gets income. We do b in the US. You can debate how well it works (well high earners get screwed, low earners do ok) but it drastically changes wealth numbers.

KlangFool
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Re: personal savings rate vs the general population

Post by KlangFool » Tue Feb 23, 2016 6:23 pm

randomguy wrote:
KlangFool wrote:Folks,

Come on. Set your sight wider and look around the world. There are many countries in the world with gross saving rate far exceed 25%.

http://www.investopedia.com/articles/pe ... e-most.asp

Singapore is at 48%.

https://en.wikipedia.org/wiki/Central_Provident_Fund

<< Employer and employee CPF contribution rates

In September 2010, the employer's contribution to the CPF went up by 0.5% to be paid into the Medisave Account.

In March 2011, the employer's contribution went up another 0.5% to be paid into the Special Account, bringing the total employer CPF contribution to 15.5%, setting the overall employer and employee CPF contribution rate at 35.5%.

From 1 September 2011, the employers’ CPF contribution rate is increased by 0.5 percentage point. For employees who are above 35 years old and earning monthly wages of up to $1,500, the higher employer CPF contribution rate will continue to be phased in from 0% at the wage of $50 to the new full rate at the wage of $1,500. The increased contribution will be credited to the employees’ Special Account (including those above 55 years of age).

However, the additional 0.5 percentage point does not apply to graduated employer and employee rates for first or second year Singapore Permanent Residents (SPR) and their employers.[1]

From September 2012, CPF contribution rates for older workers aged 50 to 65 was increased to help them better prepare for retirement. For employees aged between 50 and 55, their contribution rates will go up by 2.5 percentage points – 2 percentage points from the employer and 0.5 percentage points from the employee – to bring their total CPF contributions up to 32.5% from 30%. For those between 55 and 60, their contribution rates will go up by 2 percentage points – 1.5 percentage points from the employer and 0.5 percentage points from the employee.For workers between 60 and 65, their employer contribution rate will increase by 0.5 percentage points, with no increase in their employee contribution rate.[5]
Schemes and Services>>

In Singapore, everyone is forced to save at least around 30%.

http://www.ibtimes.com/millionaires-cap ... re-1597644

<< The oil-rich emirate of Qatar led the field with an astounding 17.5 percent of households being worth more than 1 million U.S. dollars in 2013. In Switzerland, the figure was 12.7 percent, while Singapore, Hong Kong and Kuwait were in the 9-10 percent range. The U.S., China and Japan had the most millionaires by number.>>

Singapore ranked among the highest in the world with million USD household too.

KlangFool
Sinagpore has 5.4 million people. Nobody is saying tiny groups can't save a lot. What Bernstein is saying is that if the other 7 billion people on earth behave that way, the results might not be pretty.

And with all numbers it gets tough to compare countries. Imagine 2 countries
a) puts 15% of their income into private accounts
b) puts 15% of their income into an annuity for life

a) will have a higher network. B) gets income. We do b in the US. You can debate how well it works (well high earners get screwed, low earners do ok) but it drastically changes wealth numbers.
randomguy,

Come on. The saving rate for China is 50.35 percents.

http://www.investopedia.com/articles/pe ... e-most.asp

<< 5. China

China is the second largest economy in terms of its nominal GDP of $10.35 trillion, and the largest in terms of its GDP (PPP) of $17.63 trillion. China's huge population of 1.3 billion pulls down its per capita GDP (PPP) to $12,893. Mainland China is also the only “trillion-dollar” economy among the countries with the highest national savings rates. The economy has maintained an average savings rate of 50.35 percent over the five year time period.>>

The gross saving rate for India is between 29% to 31%

https://www.quandl.com/data/ODA/IND_NGS ... ngs-of-GDP

Japan's gross saving rate is between 18% to 19%

http://data.worldbank.org/indicator/NY.GDS.TOTL.ZS

Korea around 34%. Taiwan probably around that level.

So, if you take India, China, Japan, South Korea, Taiwan, Singapore, Malaysia, Hong Kong together, you have a very large portion of world population saving at very high rate.

KlangFool

Dirghatamas
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Re: personal savings rate vs the general population

Post by Dirghatamas » Tue Feb 23, 2016 10:28 pm

KlangFool wrote: So, if you take India, China, Japan, South Korea, Taiwan, Singapore, Malaysia, Hong Kong together, you have a very large portion of world population saving at very high rate.
KlangFool
This makes complete sense to me, knowing my grand parents generations. I know that debt was historically considered a dirty word. People historically didn't buy houses or farms on mortgage/credit: they saved till they had the money. Singapore stuff (people being forced to save 30%) makes a lot of sense.

Unfortunately, in the US, you can't really save like Asia even if you want to. I have only spent ~1.5%-2% of my gross income per year, if I look at the past few years. That would have given me a wonderful saving rate of ~98-98.5%. Unfortunately, US taxes (fed + state) are so high, that actual saving rate after taxes is much lower than I would like. Still, I am sure much better than the general population. The Asian saving rates of 30-50% don't sound strange to me at all. The idea of responsible adults spending 95-100% of their income and only saving 5% (US average) for the future, is the one that is completely crazy. It has nothing to do with income levels. Chinese and Indians are not exactly rich on average and yet they save 30-50%. It's just about a living within your means.

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Re: personal savings rate vs the general population

Post by wearahat » Wed Feb 24, 2016 1:54 am

KlangFool wrote:
randomguy,

Come on. The saving rate for China is 50.35 percents.

http://www.investopedia.com/articles/pe ... e-most.asp

<< 5. China

China is the second largest economy in terms of its nominal GDP of $10.35 trillion, and the largest in terms of its GDP (PPP) of $17.63 trillion. China's huge population of 1.3 billion pulls down its per capita GDP (PPP) to $12,893. Mainland China is also the only “trillion-dollar” economy among the countries with the highest national savings rates. The economy has maintained an average savings rate of 50.35 percent over the five year time period.>>

The gross saving rate for India is between 29% to 31%

https://www.quandl.com/data/ODA/IND_NGS ... ngs-of-GDP

Japan's gross saving rate is between 18% to 19%

http://data.worldbank.org/indicator/NY.GDS.TOTL.ZS

Korea around 34%. Taiwan probably around that level.

So, if you take India, China, Japan, South Korea, Taiwan, Singapore, Malaysia, Hong Kong together, you have a very large portion of world population saving at very high rate.

KlangFool
KlangFool, are the high savings rates effective? I don't think we can view countries independently because the savings of one country relies on the spending of another.

For China's savings to earn a return, there has to be consumption somewhere for banks to be able to lend their savings out and for businesses to earn a return. If USA stops consuming, what would happen to the savings of those countries?

China, Japan, South Korea, Taiwan, Singapore, Hong Kong and Malaysia have current account surpluses.
That means they are producing more than they are consuming, and earning more from overseas than they are paying to overseas.
That also means that other countries must be consuming more than they're producing to balance it out.
USA, UK, Australia, Brazil and Canada are some of the countries in deficits.
These countries are consuming and on the receiving end of investment money.

If those countries stop consuming and start saving... the surplus countries will have a hard time.
1. when consumption ends from overseas, they'll have to consume their products (spend more) and have all this production capacity, but no customers. It would blow up the value of their savings as earnings of businesses collapse.
2. where is all the savings going to go when the investment destinations don't want more capital because no one is spending?

The way I see it, countries with positive foreign investments and greater exports than imports rely on spending economies. Without the spending the value of their investments will disappear overnight.

I suppose some businesses with excess capacity can continue to produce and stockpile their goods (it will cost them) for when or if people decide to spend again. Others can't stockpile e.g. services and perishable goods.

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Re: personal savings rate vs the general population

Post by Valuethinker » Wed Feb 24, 2016 5:38 am

KlangFool wrote:
randomguy wrote:
KlangFool wrote:Folks,

Come on. Set your sight wider and look around the world. There are many countries in the world with gross saving rate far exceed 25%.

http://www.investopedia.com/articles/pe ... e-most.asp

Singapore is at 48%.

https://en.wikipedia.org/wiki/Central_Provident_Fund

<< Employer and employee CPF contribution rates

In September 2010, the employer's contribution to the CPF went up by 0.5% to be paid into the Medisave Account.

In March 2011, the employer's contribution went up another 0.5% to be paid into the Special Account, bringing the total employer CPF contribution to 15.5%, setting the overall employer and employee CPF contribution rate at 35.5%.

From 1 September 2011, the employers’ CPF contribution rate is increased by 0.5 percentage point. For employees who are above 35 years old and earning monthly wages of up to $1,500, the higher employer CPF contribution rate will continue to be phased in from 0% at the wage of $50 to the new full rate at the wage of $1,500. The increased contribution will be credited to the employees’ Special Account (including those above 55 years of age).

However, the additional 0.5 percentage point does not apply to graduated employer and employee rates for first or second year Singapore Permanent Residents (SPR) and their employers.[1]

From September 2012, CPF contribution rates for older workers aged 50 to 65 was increased to help them better prepare for retirement. For employees aged between 50 and 55, their contribution rates will go up by 2.5 percentage points – 2 percentage points from the employer and 0.5 percentage points from the employee – to bring their total CPF contributions up to 32.5% from 30%. For those between 55 and 60, their contribution rates will go up by 2 percentage points – 1.5 percentage points from the employer and 0.5 percentage points from the employee.For workers between 60 and 65, their employer contribution rate will increase by 0.5 percentage points, with no increase in their employee contribution rate.[5]
Schemes and Services>>

In Singapore, everyone is forced to save at least around 30%.

http://www.ibtimes.com/millionaires-cap ... re-1597644

<< The oil-rich emirate of Qatar led the field with an astounding 17.5 percent of households being worth more than 1 million U.S. dollars in 2013. In Switzerland, the figure was 12.7 percent, while Singapore, Hong Kong and Kuwait were in the 9-10 percent range. The U.S., China and Japan had the most millionaires by number.>>

Singapore ranked among the highest in the world with million USD household too.

KlangFool
Sinagpore has 5.4 million people. Nobody is saying tiny groups can't save a lot. What Bernstein is saying is that if the other 7 billion people on earth behave that way, the results might not be pretty.

And with all numbers it gets tough to compare countries. Imagine 2 countries
a) puts 15% of their income into private accounts
b) puts 15% of their income into an annuity for life

a) will have a higher network. B) gets income. We do b in the US. You can debate how well it works (well high earners get screwed, low earners do ok) but it drastically changes wealth numbers.
randomguy,

Come on. The saving rate for China is 50.35 percents.

http://www.investopedia.com/articles/pe ... e-most.asp

<< 5. China

China is the second largest economy in terms of its nominal GDP of $10.35 trillion, and the largest in terms of its GDP (PPP) of $17.63 trillion. China's huge population of 1.3 billion pulls down its per capita GDP (PPP) to $12,893. Mainland China is also the only “trillion-dollar” economy among the countries with the highest national savings rates. The economy has maintained an average savings rate of 50.35 percent over the five year time period.>>

The gross saving rate for India is between 29% to 31%

https://www.quandl.com/data/ODA/IND_NGS ... ngs-of-GDP

Japan's gross saving rate is between 18% to 19%

http://data.worldbank.org/indicator/NY.GDS.TOTL.ZS

Korea around 34%. Taiwan probably around that level.

So, if you take India, China, Japan, South Korea, Taiwan, Singapore, Malaysia, Hong Kong together, you have a very large portion of world population saving at very high rate.

KlangFool
You are confusing macro and microeconomics.

Not all countries nor people in the world can be net savers. You just wind up with huge surpluses of savings earning no or negative return.

Somebody has to consume more than they save. This is a point the Germans in Eurozone don't seem to grasp, a model where they run an export surplus with the rest of Eurozone just doesn't work, if they aren't prepared to lend those people money to keep consuming.

Look at Japan. Very high savings rate but a stock and property market collapse. Since then they have been in virtual depression for over 20 years. Savings rates have plunged with aging demographics and higher unemployment.

Also look at SE Asia. The SE Asia crash in 1997 had a lot to do with too much investment in unproductive assets. Eventually you get negative marginal product assets (their construction actually lowers productivity) and you get a smash when the market realizes that.

Consider Japan in 1990-- Japanese companies paid next to no dividends, had huge surpluses they gambled in stock and property markets, trophy assets in America, etc. All of that capital and limited marginal return to investment. And track Sony v. Apple in that time frame.

China now? Empty suburbs. Uninhabited modern cities in the desert. High speed trains that no one can afford to use. Or that fall off the tracks. Massive overbuilding in every aspect of basic industry, utilities etc. And this is a country whose GDP per capita is c. 1/4 the US.

Now however with aging demographics and rising healthcare bills, the Chinese government is trying to convert the economy into a more consumer oriented one. The same track that South Korea followed before it. In the meantime "there will be disruption".

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Re: personal savings rate vs the general population

Post by KlangFool » Wed Feb 24, 2016 7:01 am

Valuethinker wrote:
You are confusing macro and microeconomics.

Not all countries nor people in the world can be net savers. You just wind up with huge surpluses of savings earning no or negative return.

Somebody has to consume more than they save. This is a point the Germans in Eurozone don't seem to grasp, a model where they run an export surplus with the rest of Eurozone just doesn't work, if they aren't prepared to lend those people money to keep consuming.
.
Valuethinker,

I am not confused. Somebody else is. Some people believe that as long as one country / society is a an extreme saver, they are doomed. That country / society is not connected to the rest of world and it will not be impacted.

Ditto, people on this thread ask what if a whole society saves and the population is aging. I replied why do people need to wonder? There are many countries in Asia are in this stage now. Just watch...

KlangFool

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Re: personal savings rate vs the general population

Post by Valuethinker » Wed Feb 24, 2016 7:34 am

KlangFool wrote:
Valuethinker wrote:
You are confusing macro and microeconomics.

Not all countries nor people in the world can be net savers. You just wind up with huge surpluses of savings earning no or negative return.

Somebody has to consume more than they save. This is a point the Germans in Eurozone don't seem to grasp, a model where they run an export surplus with the rest of Eurozone just doesn't work, if they aren't prepared to lend those people money to keep consuming.
.
Valuethinker,

I am not confused. Somebody else is. Some people believe that as long as one country / society is a an extreme saver, they are doomed. That country / society is not connected to the rest of world and it will not be impacted.
I cannot quite parse your grammar.

Let me put it to you this way. 30% of developed world govt bonds (by one calculation) are now at a negative interest rate. Is that, prima facie, evidence for savings being too high or too low?

I am taking that you agree with me, that in aggregate the world can neither be a saver nor a borrower-- the flows have to balance out to zero each year?

What I am adding is a very Keynesian concern with marginal returns on investment. It became clear in 1997 that SE Asia had bought growth via very high investment rates. At some point, that led to an asset bubble which blew in 1997-98. Post the asset bubble crash, SE Asian growth rates have been much more pedestrian even given the rise of China.
Ditto, people on this thread ask what if a whole society saves and the population is aging. I replied why do people need to wonder? There are many countries in Asia are in this stage now. Just watch...

KlangFool
Actually the country you are referring to is Japan, and savings rates have plummeted-- a little noticed feature of their Great Stagnation. However the corporate savings rate remains high (companies keep piling up undistributed profits).

Whilst Singapore and China are on the cusp of such an aging, they haven't hit it yet. And Singapore does have meaningful immigration (although as I understand it they prevent those people from becoming permanent residents).

There isn't anywhere else in Asia (Australia and New Zealand perhaps? Hong Kong--ish) where the demographic shockwave has hit-- yet.

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Re: personal savings rate vs the general population

Post by Johno » Wed Feb 24, 2016 11:12 am

garlandwhizzer wrote:
From Bill Bernstein's article referenced in the original post:

In an era when a small number of people lived past sixty-five, society could easily support them for the very few years they survived beyond that point. Now that citizens are routinely living two decades longer, it is simply not mathematically possible, let alone politically feasible, to expect each worker to support 0.67 retirees, no matter how many coconuts, dollar bills, stock certificates, or Krugerrands they save up in the meantime. It is also not reasonable to expect productive younger individuals to support large numbers of healthy older non-workers.

As Arnott and Casscells succinctly conclude, what we have is not a savings crisis, but rather a demographic crisis. We will not be rescued by increased voluntary or enforced savings.
I think that Bill's concerns are on target. As he explains it is only simple arithmetic when one looks at the economy, demographics, and life expectancy. Most Americans in the 60 - 65 age group, at or nearing the traditional retirement age, have an average total of about 25K in their retirement accounts. If they retire at 65 what kind of life will that be for an average life expectancy of 78.7 years? Life on SS plus 25 K for 13+ years on average? Not a pretty picture, and it is compounded by the expected lower returns on both stocks and bonds over the next decade. Our society will have to make some hard choices before long, choices that do not include easy solutions. The money to support this huge unprepared aging population must come from somewhere, else we will abandon them.
The additional quote from the article clarifies that the *macro* problem is not savings rate per se. So a lot of the discussion in thread about 'paradox of thrift' etc is off point. It's not that savings rate is not important. It's just that if you reduce to the simplest terms based on an example in the quote, if a small human society gathers coconuts on a desert island and everyone is around the same age and there's a much smaller cohort of kids, at some point a few people will have to gather coconuts for a lot of people who no longer can. There is no solution to that in setting aside more coconuts now, because they won't keep. Somebody has to gather news ones. Even in the fantastically more complicated real modern post-industrial economy, somebody has to produce the new goods and services everyone consumes. Neither public policies to encourage or force savings, nor to redistribute from producers to non-producers (taxes/public assistance) do anything directly to address the changing ratio of coconut gathers to coconut consumers, macro-wise. The policies which would affect that would be ones to raise productivity, so a smaller labor force would still produce more. Those things could be connected, saving/investment which raises future productivity, but it's not more savings per se that solves that problem.

But the starting quote seemed to imply that savings rate would rise a lot as people 'saw the struggles of unprepared older people' and this would have some big negative effect. That I don't buy, especially the first half of that assumption. Again I think most people's reaction to a 'crisis' in more poor old people is 'the govt' to 'give' poorer older people more money. Obviously in the long run that means taking money from somebody else, either still active workers or retired people with more assets. But in the medium run at least it probably means larger govt fiscal deficits, a form of national dis-savings. Any effect of raised private savings of people scared by the crisis would be working against that. And as to whether a higher/lower total household/corp/public savings rate is in order in particular countries that's a much more complicated question than what personal savings rate is right for a particular person.

However I don't see any reason why saving a higher % of income, micro-wise for one person, is going to do less good relatively in the coming situation that it has in the past. That implication of the original quote I also don't get. OK expected return is low, but saving 20% still gives twice as much money at the end as saving 10% (well but, assuming the eventual solution doesn't involve public policies to take assets from better off retirees).

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Re: personal savings rate vs the general population

Post by bhsince87 » Wed Feb 24, 2016 11:49 am

I think the point is true in general, but it's too simplistic. For example, if every person made $100k per year, and every person wanted to receive $70k per year "in retirement", then yes, it doesn't matter if every person is saving 10% or 5% or 30%. They will all have to work the same amount of time in order retire at the $70k income goal. The only way to "retire" earlier is to save more than everyone else. Of course, this assumes all returns are equal also.

But we don't live in such a world. We have vastly different incomes. And we have different goals for retirement incomes. And we settle for different returns. Each of those factor into the retirement age calculations.

And I put "retire" in quotes because it might be better to say something like "stop producing" or "leave productive society". Because once you leave productive society, you are entirely dependent on the output from productive society. And it doesn't matter whether your income is from a government pension like Social Security, or your own private savings. Both are claims on productive society. One pulls the value out through interest, dividends, rents, and asset value growth. The other pulls it out through taxation. But both are wealth transfers from productive society to unproductive society.

This is where demographics can throw the entire scheme out of whack, for better or for worse. And as others have mentioned, productivity is also a factor. So it's a very complicated situation.
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Re: personal savings rate vs the general population

Post by randomguy » Wed Feb 24, 2016 11:55 am

KlangFool wrote:
Korea around 34%. Taiwan probably around that level.

So, if you take India, China, Japan, South Korea, Taiwan, Singapore, Malaysia, Hong Kong together, you have a very large portion of world population saving at very high rate.

KlangFool

You are talking about less than 50% of the worlds GDP. You can say there is no tipping point. 100% of the people can do something and nothing will change. Other people go well at some point you hit the limit. Look at things like price of oil where relatively small changes in capacity and usage lead to highly volatile price swings.

And it should be pointed out that the US savings rate is 18% when you measure it using that gdp methodology. That is about the same as japan. There have been stories on and off for the past 5 years about the dropping Japanese savings rate and the old people start to spend their money and there aren't enough new income to keep the rates high.

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Re: personal savings rate vs the general population

Post by Chadnudj » Wed Feb 24, 2016 12:29 pm

The Wizard wrote:If EVERYBODY saved 25% of gross income, then interest rates would fall to zero due to no borrowers.
New car sales would plummet, at least for a while.
Real estate prices would stagnate also, one might think, since large mortgages would be less common.
I'm not sure it's that simple. Plenty of Bogleheads save 25% of gross income, yet still borrow for cars/mortgages -- thinking that they could do better investing than the interest they pay, or to accelerate a needed purchase to the present. My spouse and I bought a condo with a mortgage because (a) it would allow us to build equity, (b) offer several benefits in terms of schools/more space/right location that were important to our family, and (c) it was cheaper than renting in our area (by several hundred dollars a month).

Small businesses and large businesses alike would still borrow, again on the theory that they could grow/achieve returns far beyond the interest rates of borrowing.

Plenty of people who save 25% of their income still have appetites for new cars (financed cars, even!) and can do so on the remaining 75% of their income.

And I'm not sure real estate prices would stagnate -- if everyone was saving 25%, that's a lot of people (eventually) with down payments who would rather own than rent (in many cases).

I think, though, your general theory is correct -- in the short term there would be some pain economically if everyone started saving 25%, as it would impact consumption spending (the largest part by far of the US economy). But it wouldn't last forever (or even very long) -- indeed, we as a nation had much higher savings rates in the past when the economy was growing far faster than it is today.

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Re: personal savings rate vs the general population

Post by garlandwhizzer » Wed Feb 24, 2016 12:44 pm

From Bill's article:

As Arnott and Casscells succinctly conclude, what we have is not a savings crisis, but rather a demographic crisis. We will not be rescued by increased voluntary or enforced savings.
The paradox of thrift is an interesting topic in itself, but it is not, as Johno points out, the main issue facing us. The main issue in a macroeconomic sense is the demographics of an aging society many of whom are inadequately prepared for retirement. That is simple math: more and more retirees needing financial assistance from relatively fewer and fewer workers. Currently the labor participation rate in 62.7% and it has been declining for 15 years but the full impact of the boomers leaving the work force has not yet arrived. I believe that unless you're wealthy, the traditional retirement age of 65 may need to be adjusted upward, well into the 70s, since life expectancy has risen so much since the 65 threshold was created in the Roosevelt administration. The cost of elderly medical care as well as long term care have consistently increased faster than either inflation or economic growth.
That money must come from somewhere and the obvious choices are: increasing taxes on productive workers or on the retired rich or the other approach, increasing debt, both of which carry macroeconomic risks.

Japan is the poster child for what happens to a highly developed, highly indebted society with a serious demographic problem. We are not Japan with their largely unsuccessful 25+ year struggle with absent economic growth and deflation. My basic optimism in America tells me that we will avoid that fate but some changes will likely be necessary in our current retirement model when the full force of the retirement tsunami hits us.

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Re: personal savings rate vs the general population

Post by SeeMoe » Wed Feb 24, 2016 1:10 pm

ofcmetz wrote:Don't worry. We are far from a world where everyone saves like they are going to retire at 55 or 65. Once you get past about 10% of gross going towards long term investing, then you start passing most up.
My older peers , between shots and beers, used to argue " it is better to spend your hard earned cash now, because later on it will devalue and be near worthless!"
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Re: personal savings rate vs the general population

Post by wolf359 » Wed Feb 24, 2016 1:37 pm

I re-read Bernstein's full article, and I agree with him to a point. There is, in fact, a big demographic shift going on with all the Baby Boomers retiring. A lot of them don't have enough savings to match their old lifestyles. However, this does not put them in the catfood stage. The unprepared have to move in with family, or keep working if they can. In general, social security is still working, and keeping the elderly out of poverty.

That may change in 2030, as the last boomers retire and the SS trust fund is depleted. By then, Gen Xers and Millennials will have either saved, or not. It would almost be too late for GenXers to start.

We are never going to be a world where everyone saves like they're going to retire at 55 or 65. The Pareto Rule applies. 20% will be disciplined and have outstanding outcomes. 80% will muddle through.

We're going to be hit by a demographic shift with all the Boomers retiring, but the effect will be low rates of return for at least 10 years, caused by lower Boomer demand for equities caused by the drawdown in their assets. That drawdown could be offset by increased demand for US assets from international sources, or from other generations finally investing more.

This is like a societal level marshmallow test, where you're asking the population in general to defer gratification.. When tested at the individual level (as toddlers), 80% of those tested can't wait for 15 minutes to consume a marshmallow. As adults, I don't believe they'd be able to wait 30-40 years to consume their savings. (Like the commercial says, "It's MY money, and I want it NOW!")

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Re: personal savings rate vs the general population

Post by Valuethinker » Wed Feb 24, 2016 1:58 pm

wolf359 wrote:I re-read Bernstein's full article, and I agree with him to a point. There is, in fact, a big demographic shift going on with all the Baby Boomers retiring. A lot of them don't have enough savings to match their old lifestyles. However, this does not put them in the catfood stage. The unprepared have to move in with family, or keep working if they can. In general, social security is still working, and keeping the elderly out of poverty.

That may change in 2030, as the last boomers retire and the SS trust fund is depleted.
That latter, btw is a mirage. The key issue is the cost of SS payments to GDP. At the worst moment, it does not look too bad (4.5% of GDP from memory-- well less than some countries are at *now*- -think Brazil, Germany, Italy). The Baby Booomers also exit out the other side by dying, which is very helpful.
By then, Gen Xers and Millennials will have either saved, or not. It would almost be too late for GenXers to start.
Again, macroeconomics, it won't matter. If they have saved, but there are fewer workers in the next generation, then the value of those financial assets will simply fall.

All that matters is the ratio of workers to non-workers in a society. Good news for the US: a relatively high fertility rate (until very recently), immigration (ditto) and a workforce that works to a relatively old age. The Baby Boomer generation is not larger than those that follow it.
We are never going to be a world where everyone saves like they're going to retire at 55 or 65. The Pareto Rule applies. 20% will be disciplined and have outstanding outcomes. 80% will muddle through.

We're going to be hit by a demographic shift with all the Boomers retiring, but the effect will be low rates of return for at least 10 years, caused by lower Boomer demand for equities caused by the drawdown in their assets.
You nail the problem with that below. We live in global markets. We can get worried about the Boomers selling their houses (given the next generation doesn't look like it will have the money to pay those prices for homes-- larger student debts, lower incomes etc.), but it's very unlikely that the US equity markets could get radically cheaper just because American boomers were selling stocks.

It's a greater issue what's happening to the whole developed world (aging). So much depends on the economic growth of emerging markets, particularly Africa and the Middle East and the former 'stans- -where the populations are relatively young.
That drawdown could be offset by increased demand for US assets from international sources, or from other generations finally investing more.
Hard to imagine a world where Google say becomes radically cheaper because US fund managers are selling. It would be a no-brainer arbitrage for someone else-- $1.00 per share of Google (I mean Alphabet's) earnings is going to be on sale compared to some Korean company, say. That assumes capital mobility remains.
This is like a societal level marshmallow test, where you're asking the population in general to defer gratification.. When tested at the individual level (as toddlers), 80% of those tested can't wait for 15 minutes to consume a marshmallow. As adults, I don't believe they'd be able to wait 30-40 years to consume their savings. (Like the commercial says, "It's MY money, and I want it NOW!")
Couple of things. One is the Thaler/ Laibson work, if you make "opt in" the default choice you increase compliance in pension schemes from 35% to over 65%. And something similar for subsequent pay rises. So "nudges" work.

Since (roughly speaking) 80% of non housing equity financial assets are held by less than 20% of households, it all becomes somewhat academic- -we are really talking about the savings behaviour of a relatively small proportion of the population.

As I have said, in macroeconomic terms none of it matters for the *average* person. It's all driven by the ratio of workers to non workers (dependency ratio).

Productivity matters (as per johno) in the sense that higher productivity in theory allows more people to be supported by one worker (if that worker can be made to give up some or all of the upside from their more productive work--ie they don't change jobs to an employer who is less profitable, but pays better).

Whilst I am sure that "progress" improves our general standard of living (better medical treatments, safer cars, more entertainment gadgets etc.) I am less certain that it gets us out of our pensions jam.

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Re: personal savings rate vs the general population

Post by KlangFool » Wed Feb 24, 2016 3:27 pm

randomguy wrote:
KlangFool wrote:
Korea around 34%. Taiwan probably around that level.

So, if you take India, China, Japan, South Korea, Taiwan, Singapore, Malaysia, Hong Kong together, you have a very large portion of world population saving at very high rate.

KlangFool

You are talking about less than 50% of the worlds GDP. You can say there is no tipping point. 100% of the people can do something and nothing will change. Other people go well at some point you hit the limit. Look at things like price of oil where relatively small changes in capacity and usage lead to highly volatile price swings.

And it should be pointed out that the US savings rate is 18% when you measure it using that gdp methodology. That is about the same as japan. There have been stories on and off for the past 5 years about the dropping Japanese savings rate and the old people start to spend their money and there aren't enough new income to keep the rates high.
randomguy,

<<You are talking about less than 50% of the worlds GDP.>>

1) You are arguing the amount saved by those countries are not significant enough to affect USA?

Or,

2) You are saying that there are no countries / societies where people save tremendous amount of their income with aging demographic?

Please note that we are debating that if (2) exists, the country / society will be in trouble. My point is that we have quite a few countries / societies that done that. We can observe and learn what happened to them.

KlangFool

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Re: personal savings rate vs the general population

Post by KlangFool » Wed Feb 24, 2016 3:35 pm

https://en.wikipedia.org/wiki/Ceteris_paribus

Ceteris Paribus = "all or other things being equal or held constant"

When we have a discussion on economy, we always say this: "cerris paribus". But, the real world is a lot more complex than this. All other things could change.

Many house buyers in my neighborhood came from China. They pay cash. Due to China stock market crashes and the changing of power in China, they are moving their money out of China and invest in US real estate.

http://www.businessinsider.com/the-chin ... ket-2015-8

The short answer is I do not know and I would not be so sure that if the boomer start saving money, nobody else can take out the slack in spending. There are significant pool of money / spending outside of USA. They could impact US asset price.

KlangFool

john94549
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Re: personal savings rate vs the general population

Post by john94549 » Thu Feb 25, 2016 10:09 pm

My wife and I are both early boomers (68, pushing 69). I'm retired, my wife continues to work (her choice, as she is in a very nice position). She does the "catch-up" in her 401K ($24,000)*. As a practical matter, our tax-deferred index funds will most likely be inherited. Once you get everything paid off, and your RMDs + pension + Social Security + interest/dividends more than cover the monthly "nut", it's just keeping score.

*We joke about all those shares she's buying "on the cheap".

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dmcmahon
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Re: personal savings rate vs the general population

Post by dmcmahon » Fri Feb 26, 2016 12:31 am

Valuethinker wrote:
petiejoe wrote:Throughout the rest of the article, he argues generally that the ratio of workers to retirees will remain the same and that the means of exchange will devalue to naturally enforce that ratio.

I'm not sure I agree that the ratio needs to remain the same. He already admits that when social security first started, the ratio was 40 to 1 and is now 3 to 1. However, he doesn't account for the increase in worker efficiency due to technology and automation nor the increase in female participation in the work force.
LF participation matters, certainly. Particularly by older people.

Does technology? Not sure. Because standards of living also rise. Consider the soaring health care budgets. That's an improvement in quality of life, but it doesn't make the worker: non worker ratio any less of a problem.
Well...supposing that as time progresses we have more robots/machines/whatever taking on tasks we used to do, translating to less work hours per person over a lifetime, one could make a case for front-loading the work hours in exchange for acquiring ownership interest in said machines. I might even say that's the well-known system we've had for decades, and the only thing changing would be the change-over point.

Valuethinker
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Re: personal savings rate vs the general population

Post by Valuethinker » Fri Feb 26, 2016 4:35 am

dmcmahon wrote:
Valuethinker wrote:
petiejoe wrote:Throughout the rest of the article, he argues generally that the ratio of workers to retirees will remain the same and that the means of exchange will devalue to naturally enforce that ratio.

I'm not sure I agree that the ratio needs to remain the same. He already admits that when social security first started, the ratio was 40 to 1 and is now 3 to 1. However, he doesn't account for the increase in worker efficiency due to technology and automation nor the increase in female participation in the work force.
LF participation matters, certainly. Particularly by older people.

Does technology? Not sure. Because standards of living also rise. Consider the soaring health care budgets. That's an improvement in quality of life, but it doesn't make the worker: non worker ratio any less of a problem.
Well...supposing that as time progresses we have more robots/machines/whatever taking on tasks we used to do, translating to less work hours per person over a lifetime, one could make a case for front-loading the work hours in exchange for acquiring ownership interest in said machines. I might even say that's the well-known system we've had for decades, and the only thing changing would be the change-over point.
I still think it comes down to more technology raises standard of living, but you still have the problem of worker to non worker.

Yes a 70 year old living in poverty in Britain today is better off than the average 70 year old of 1910-- indoor plumbing, free medical care, a pension, central heating BUT that 70 year old today is still living in poverty.

And society cannot simply invest in financial assets now so as to guarantee a better future for all. Because you get the Japan or China problem: negative marginal product on fixed investments (empty cities, unused rail lines etc.).

I agree improvements in productivity help (raise standards of living across the board) but very little of that, in an advanced economy, has to do with physical assets. The US is maybe uniquely underinvested in infrastructure (for the developed world) but then Japan shows you the limits of how far that you can take that (bullet trains that aren't used, huge coastal concrete blocks that enrich construction contractors and politicians, but don't have any purpose).

I would have no problem investing 1-2% more of US GDP in your infrastructure* (there's your gas tax) but it would be, I suggest, unproductive to do 5%.
Last edited by Valuethinker on Fri Feb 26, 2016 9:47 am, edited 1 time in total.

mac808
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Re: personal savings rate vs the general population

Post by mac808 » Fri Feb 26, 2016 5:24 am

Thanks to the knowledge gained in large part from this forum I volunteer offline helping folks with their finances and retirement planning. I've helped a few dozen people by this point, a broad selection of the population from different walks of life. I am constantly surprised by how well off many middle class, totally financially ignorant couples are. It's mostly baby boomers and their wealth comes almost exclusively from two sources: 1) they bought a house in an appreciating area many decades ago, and 2) they vested into EXTREMELY generous pensions. Last week I had lunch with a couple who were a firefighter and a teacher in California and will retire with $175k in CA state pension benefits alone (more than 1/2 of that tax free due to on the job ''injuries''), not including a small social security payment from a 2nd job as well. This was a very ordinary, middle class couple. (He was not the fire chief and she was not the school district superintendent, in other words.) In addition to the pension, they are sitting on at least $750k of equity in a very ordinary, middle class house that they purchased for about $150k ($30k down with a mortgage). Other than the housing appreciation and these pensions, people have very, very little saved. Housing appreciation was a one-trick pony, I don't think anybody expects CA or NY housing to 5x again over the next few decades. That leaves pensions. If/when these pension systems are impaired or eliminated, then I do believe the ''middle class'' retirement picture will change drastically.

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Re: personal savings rate vs the general population

Post by Valuethinker » Fri Feb 26, 2016 5:51 am

mac808 wrote: Other than the housing appreciation and these pensions, people have very, very little saved. Housing appreciation was a one-trick pony, I don't think anybody expects CA or NY housing to 5x again over the next few decades. That leaves pensions. If/when these pension systems are impaired or eliminated, then I do believe the ''middle class'' retirement picture will change drastically.
The Baby Boomers are very much split. The first half or so often have strong defined benefit pension schemes and got on the housing ladder early. Also job markets were quite strong so careers started off well. The previous generation was small so as they retired or died, the senior positions were there.

Those of us who were born later in the Boom often graduated into tough job markets in the early 1980s. That delayed us getting on the housing ladder. Final Salary (DB) pension schemes were closed when we were early to mid career. The picture is not so pretty-- I feel lucky that I made some small stabs at private saving along the way.

Given that most governments have cut staff and outsourced, and DB pension schemes are a thing of the past in the private sector for most people (and were seldom as generous anyways eg CPI indexation) the outlook for the post boomer generations is very different.

However, remember it's the worker to non-worker ratio which in the end determines it. There's no way retirees can dictate interest rates, dividends or the level of the stock market. If there are fewer workers then the standard of living of non workers can only fall *unless* there is higher productivity (I don't think it's as simple as technological progress).

That's also true for a government pension scheme of any form. If current taxpayers won't pay for it, then the benefits won't be there (if funded, you go back to the problem above ie workforce labour ratios).

wearahat
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Re: personal savings rate vs the general population

Post by wearahat » Fri Feb 26, 2016 6:43 am

Following on from the logic of the article, financial planning can help individuals become financially aware but it can't help everyone become financially aware. Because once everyone employs the same strategy to have a comfortable retirement through saving then no one will be able to retire any sooner or any more comfortably.

Good projects will find capital easily in today's world, sometimes too easily when we look at all the capital that went into shale oil. What should be encouraged is not for people to save more as there is plenty of capital available, rather people with excess savings should be encouraged to spend. Increasing the market's earnings is preferable to bidding up the earnings multiple.

Valuethinker
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Re: personal savings rate vs the general population

Post by Valuethinker » Fri Feb 26, 2016 9:30 am

wearahat wrote:Following on from the logic of the article, financial planning can help individuals become financially aware but it can't help everyone become financially aware. Because once everyone employs the same strategy to have a comfortable retirement through saving then no one will be able to retire any sooner or any more comfortably.

Good projects will find capital easily in today's world, sometimes too easily when we look at all the capital that went into shale oil. What should be encouraged is not for people to save more as there is plenty of capital available, rather people with excess savings should be encouraged to spend. Increasing the market's earnings is preferable to bidding up the earnings multiple.
If you are a Keynesian, what you just wrote makes perfect sense.

The predominant theory taught in graduate level macroeconomics takes the opposite view. The market is "efficient" and the level of investment is "right" and neither monetary nor fiscal policy can affect that meaningfully, and certainly not in a positive way. Recessions are the result of exogenous shocks (eg government raises minimum wage, causing unemployment, or a technology shift occurs-- shortform is "Sunspots").

Good macroeconomic policy in this view is therefore all about making it easier for entrepreneurs to invest (easy to set up companies, cut red tape etc.) and to harvest and reinvest the profits of entrepreneurial activities (low or no capital gains taxes, etc.).

I don't wish to take a position on this debate simply to tell you what probably 70% of graduate macroeconomics students (if not 90%) are taught.

randomguy
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Re: personal savings rate vs the general population

Post by randomguy » Fri Feb 26, 2016 10:09 am

KlangFool wrote:
randomguy,

<<You are talking about less than 50% of the worlds GDP.>>

1) You are arguing the amount saved by those countries are not significant enough to affect USA?

Or,

2) You are saying that there are no countries / societies where people save tremendous amount of their income with aging demographic?

Please note that we are debating that if (2) exists, the country / society will be in trouble. My point is that we have quite a few countries / societies that done that. We can observe and learn what happened to them.

KlangFool
I am saying neither.

1) Obviously those countries affect the US. But that affect is already factored in. It is part of our current equilibrium (heck maybe it is way returns over the past 15 years have been low as china has sucked up more money. Or maybe not). Again you have to look at the whole system and not at small parts of it. If everyone switches over to saving like mad, the equilibrium will shift around a bit and who knows where it ends up.

2) is more interesting. Have there every been countries with high savings (if the US average is 18%, lets call it 35%+) who have been able to do it for 100+ years (i.e. more than a couple generations) and how have they done. I don't have a clue. I know the chinese saving rate is really recent (the were about half the current numbers in the early 90s) and there is a ton of debate why it has changed (reaction to market changes, gender imbalances, financial insecurity,...). My guess is that most societies end up cycling. The current chinese guys are never going to be spenders. Their kids will spend a bit more. And the ones after that will blow the family fortune:)

P

KlangFool
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Re: personal savings rate vs the general population

Post by KlangFool » Fri Feb 26, 2016 10:23 am

randomguy wrote:
KlangFool wrote:
randomguy,

<<You are talking about less than 50% of the worlds GDP.>>

1) You are arguing the amount saved by those countries are not significant enough to affect USA?

Or,

2) You are saying that there are no countries / societies where people save tremendous amount of their income with aging demographic?

Please note that we are debating that if (2) exists, the country / society will be in trouble. My point is that we have quite a few countries / societies that done that. We can observe and learn what happened to them.

KlangFool
I am saying neither.

1) Obviously those countries affect the US. But that affect is already factored in. It is part of our current equilibrium (heck maybe it is way returns over the past 15 years have been low as china has sucked up more money. Or maybe not). Again you have to look at the whole system and not at small parts of it. If everyone switches over to saving like mad, the equilibrium will shift around a bit and who knows where it ends up.

2) is more interesting. Have there every been countries with high savings (if the US average is 18%, lets call it 35%+) who have been able to do it for 100+ years (i.e. more than a couple generations) and how have they done. I don't have a clue. I know the chinese saving rate is really recent (the were about half the current numbers in the early 90s) and there is a ton of debate why it has changed (reaction to market changes, gender imbalances, financial insecurity,...). My guess is that most societies end up cycling. The current chinese guys are never going to be spenders. Their kids will spend a bit more. And the ones after that will blow the family fortune:)

P
randomguy,

1) If you agree that those countries affect USA, then, you could agree that the current equilibrium may change. So, whoever is saving and financing USA's debt may shift into spending mode.

<< My guess is that most societies end up cycling. The current chinese guys are never going to be spenders. Their kids will spend a bit more. And the ones after that will blow the family fortune:) >>

2) That might be true for a few families. But, it may or may not apply at the macro level. Please note that the high saving level existed because the social welfare net does not exist in those countries. People have to save and take care of their own families.

My point is we simply do not know how things are going to turn out. It is very complex.

KlangFool

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