Why saving doesn't make sense
By Natalie Sampsell
web posted December 21, 2015
"These days, people are basically punished for saving money for college," my mom tells me on our drive home from yet another college visit. I can't help but agree with her. The fall of my senior year has been packed with not only college applications, visits, and essays, but also weekends of filling out academic scholarship applications. I say academic scholarship applications because I don't qualify for any of the financial need scholarships – not because my family is better-off than others, but because my parents have been putting away money for our college tuition since my siblings and I were children. Because my parents thought ahead, my siblings and I won't qualify for any financial aid, and my parents will take on the full burden of our expensive college tuitions. Families with similar incomes but little savings, however, will receive more money from schools. The lack of incentives for saving carries over into other financial areas, and this is what Edward Prescott covered in his 2004 Wall Street Journal article, "It's Irrational to Save."
Prescott's article was about Social Security and retirement saving. Social Security was a good idea when it was first created – our country was suffering through the Great Depression and financial security for the elderly was important. But things have changed since the Great Depression, and Social Security really hasn't. Social Security worked during the Great Depression because the people paying for it far outnumbered those receiving it. Quantity supplied was greater than quantity demanded and so there was plenty for everyone. Now, the elderly population has grown, increasing quantity demanded. In order to meet that demand, young workers of today have to work harder and pay higher taxes. And unfortunately, the growing population of elderly people isn't the only reason our current system isn't really working.
Today, there is no real incentive to save for retirement. Today, people can under-save and not face any consequences – they can rely on welfare, and the government will take care of them. They know that the government will care for them in their old age, so they spend their money today instead of saving for tomorrow. For many, it may not even be a conscious choice. People think at the margin. They buy a little here and a little there, and all the purchases add up until they don't have anything saved. They aren't penalized for this, so the pattern continues. What kind of system would stop this? Prescott suggests an idea.
According to Prescott, we need to move to a "self-funding retirement system that benefits from individual maximizing incentives." We need to make saving mandatory, and we need to reward those who plan ahead, not those who don't. People today are thinking rationally when they don't save today, because they don't benefit from saving. We need to change the system so that those who do save are rewarded. But how are we supposed to do this? That's where Prescott doesn't have all the answers. He provides plenty of examples of why the system he suggested would work, but he doesn't tell us how we are supposed to implement it. People don't like change, some even resent it. Completely rebuilding our Social Security system would be a huge challenge. So do I agree with Prescott? Yes, right now, our system doesn't reward the right people. But can we change our system? That, I'm not so sure about. Unless a lot of people get on board, I think our current system may be too ingrained into our country: the lack of incentives for saving is everywhere, from retirement savings to college funds. Unfortunately, our system may be too embedded to uproot. 
This is Natalie Sampsell's first contribution to Enter Stage Right. © 2015 Natalie Sampsell