>From: hanson@hss.caltech.edu (Robin Hanson) >Date: Tue, 1 Oct 96 14:28:03 PDT >Subject: Low U.S. Savings - Entitlements to the Elderly did it This paper suggests that the growth in Social Security, Medicare and Medicaid benefits are to blame for the decreased U.S. savings rate. ------- Start of forwarded message ------- From: Wayne Marr Sender: Economics Research Network Reply-To: ADMIN@ssrn.com To: Multiple recipients of list ERN2 Message-Id: <9610011321.AB14967@hss.caltech.edu> Date: Tue, 1 Oct 1996 08:44:53 -0500 Subject: PUBLIC-WPS: ERN Public Economics Abstracts, 10/01/96 "Understanding the Post-War Decline in U.S. Saving: A Cohort Analysis" BY: JAGADEESH GOKHALE Federal Reserve Bank of Cleveland LAURENCE J. KOTLIKOFF Boston University and NBER JOHN SABELHAUS Congressional Budget Office Paper ID: NBER Working Paper 5571 Date: May 1996 Contact: Laurence J. Kotlikoff E-Mail: MAILTO:kotlikof@bu.edu Postal: Department of Economics, Boston University, 270 Bay State Road, Boston, MA 02215 Phone: (617) 353-4002 Fax: (617) 353-4449 Co-Auth: Gokhale: MAILTO:73002.137@Compuserve.Com ERN Ref: PUBLIC:WPS96-155 PAPER REQUESTS: Papers are $5.00 (plus $10.00/order outside the United States). Prepayment is required. NBER accepts checks, Mastercard, Visa and American Express. E-Mail: MAILTO:orders@nber.harvard.edu Postal: 1050 Massachusetts Ave., Cambridge MA 02138. Phone: (617) 868-3900. Fax: (617) 868-2742. Subscriptions: E-Mail MAILTO:subs@nber.harvard.edu or write to "Subscriptions" at the address above. Since 1980, the U.S. net national saving rate has averaged less than half the rate observed in the 1950s and 60s. This paper develops a unique cohort data set to study the decline in U.S. national saving. It decomposes post-war changes in U.S. saving into those due to changes in cohort-specific consumption propensities, those due to changes in the intergenerational distribution of resources, those due to changes in government spending on goods and services, and those due to changes in demographics. Our findings are striking. The decline in U.S. saving can be traced to two factors: the redistribution of resources from young and unborn generations with low or zero propensities to consume toward older generations with high consumption propensities, and a significant increase in the consumption propensities of older Americans. Most of the redistribution to the elderly reflects the growth in Social Security, Medicare and Medicaid benefits. The increase in the elderly's consumption propensities may also reflect government policy, namely the fact that Social Security, Medicare and Medicaid benefits are paid in the form of annuities and that, in the case of Medicare and Medicaid, the annuities are in-kind and must, therefore, be consumed. JEL Classification: D91, E21 __________________ ------- End of forwarded message ------- ============================================================================ >Date: Tue, 1 Oct 1996 23:40:48 -0700 >From: ddfr@best.com (david friedman) A more general explanation for a falling savings rate is that property rights have become gradually less secure over time. One reason is that they have shifted from private to public--and politicians have insecure property rights over what they currently control. The less secure property rights are, the less it pays to try to transfer consumption from present to future--because of the risk that the property will be lost before you consume it. David Friedman Professor of Law Santa Clara University ddfr@best.com ============================================================================ >From: kurt@wickman.pp.se >Date: Wed, 2 Oct 1996 10:04:32 +0100 The findings in the study should not come as a surprise. The welfare state means that the government builds a "social infrastructure" - and takes the resposibility for necessary savings (normally fees for those government-organized social insurances are considered as taxes by the public, but they are not: they are government-managed private savings). And for a long time they have worked as substitutes for pure private savings - in Europe the savings rates have fallen dramatically as the welfare states have expanded. And you can see the reverse happening in the 1990s in Europe. Large segments of the European citizenry have lost faith in the future stability of the government-run social security, so the savings rates have generally started to rise - only that we now have to do both: first pay government social security savings that we no longer expect to get back, second organize our own private social security. I used to think of this adjustment as a practical illustration of the Ricardo equivalence principle - but I was convinced that this term is more ambiguous than I had first realized, so it is easier just to see a "substitution effect" between private and public/private savings. Does the study say any more than that? All the best Kurt Wickman ============================================================================ >From: hanson@hss.caltech.edu (Robin Hanson) >Date: Wed, 2 Oct 96 12:55:10 PDT kurt@wickman.pp.se writes: >see a "substitution effect" between private and public/private savings. Does >the study say any more than that? I thought the puzzle was to explain a decline in *total* savings, public + prviate. David Friedman writes: >A more general explanation for a falling savings rate is that property >rights have become gradually less secure over time. One reason is that they >have shifted from private to public--and politicians have insecure property >rights over what they currently control. Do subgroups whose total property rights, public + private, are more secure have a smaller recent decline in their total savings rate? That would be a nice empirical test of your theory. Robin D. Hanson hanson@hss.caltech.edu http://hss.caltech.edu/~hanson/ ============================================================================ >From: kurt@wickman.pp.se >Date: Wed, 2 Oct 1996 21:13:55 +0100 Total savings will fall as an effect when government/the state stops building up the social security savings funds - in Europe, normally because they have developed their activities in too many directions (a form of "overload", or maybe better "partial government bankruptcy" - I wish the institution existed in the public sector). Still no real news in the study? All the best Kurt Wickman ============================================================================ >Date: Wed, 2 Oct 1996 17:57:03 -0700 >From: rwb@daka.com (R.W. Bradford) I suspect that there is at least one other factor that contributes to this decline in the savigs rate in the U.S., besides those pointed out by Friedman and the Fed study: the fact that after-tax yields on savings have frequently been negative after taking inflation into account (assuming that changes in the CPI are somehow tantamount to inflation). According to today's Wall St Journal, for example, the return on T-Bills is 5.01%. This yield is subject to income tax, the marginal rate of which for most investors in T-Bills is 39.6%, which reduces the yield to 3.03% - a figure pretty close to the latest CPI figure for inflation - leaving the investor with no return at all. (Of course, there are alternatives to T-Bills which have slightly higher yields. But these are subject to state income tax, except for the fortunate few who live in Washington, Alaska, Nevada, Texas, Wyoming, South Dakota, Tennessee, Florida and New Hampshire). During the 1970s, when I tracked the after tax, after-CPI yield on money market funds and T-Bills, the yields generally were negative. They went positive for a while in the early 80s. I've only checked them sporadically since; my recollection is that they generally stayed positive, though not very significantly so, during until sometime around 1988 or so, and have been negligible or negative since then. ============================================================================