Saving and Investment

Medicare And Social Security Reduce Savings Rate

The fall in U.S. savings and investment rates over the last generation is mainly due to government programs -- principally Medicare and Social Security -- that transfer income from the young to the elderly, according to a new study from the Brookings Institution. If not for the effects of these programs, the study estimates that the national savings rate would be roughly three-and-a-half times as large.

  • The elderly now hold a much bigger share of total wealth -- which includes government benefits -- and spend a larger share of it than they did a generation ago.

  • In the early 1960s the typical 70-year-old consumed only 71 percent as much as a 30-year-old; but by the late 1980s, the typical 70-year-old consumed 20 percent more.

  • Even excluding medical services, spending by a typical 70-year-old was 63 percent of a 30-year-old's in the early 1960s, but more than 90 percent in the late 1980s.

The authors of the study, Jagadeesh Gokhale of the Federal Reserve Bank of Cleveland, Laurence Kotlikoff of Boston University and John Sabelhaus of the Congressional Budget Office, reason that in the past the elderly consumed less so that they would not outlive their wealth, and because they could leave the remainder to their children.

But due to government-guaranteed benefits, and because they cannot pass any unspent benefits (particularly for medical care) on to their children, the elderly save less and spend more.

The authors also found that younger and middle-aged people are saving more of their wealth than their elders.

The long-term decline in the country's rates of investment and savings is blamed by many for the slower rate of growth in output per worker today -- less than half as fast as it was a generation ago.

  • U.S. investment (net of capital depreciation) has fallen more than 50 percent since the 1950s, from 8.2 percent of output to less than 4 percent today.

  • Savings -- total national output minus household and government consumption -- has fallen from 9.1 percent in the 1950s to 2.7 percent in the 1990s.
Source: "Growing Old Expensively," Economist, September 7, 1996.

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