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Tuesday 10 April 2012

Be Kind To An Old Person – Start With Yourself

No One Will Care When You’re Old

Around the globe governments  struggling with budget deficits have been making sure that they target the true villains of the financial crisis. Admittedly, it's slightly surprising that treasury ministers seem to have decided that their money problems weren’t caused by errant and badly incentivised bankers but by old age pensioners rushing about terrorising people with their zimmer frames and incontinence bags.

The evidence is clear – low interest rates and high underlying rates of inflation disadvantage people who aren’t in paid employment, while the increasing focus on raising state pension ages and restricting government health spending clearly impacts old people more than young. This is all a bit odd, you might think, but is perfectly rational from the perspective of politicians. Something for the young to remember – no one will care when you get old, so you'd better start thinking of your future self, whoever they are.

Stationary Assets

Governments thrive on money – our money – and the general lesson is that they’ll tax everything that they can. Unfortunately for them, and us, capital is flighty and multi-national corporations and the very rich are apt to up sticks and depart if they don’t like the tax regime. Increasingly this means that to raise the revenues to which they’re addicted politicians are turning to things like property, infrastructure and old age pensioners. Presumably the idea is to target things which don’t tend to move very much.

Soaking the old isn’t any more of a vote-winner than stealing candy from babies or stomping on puppies, so it’s not something anyone goes around boasting about, but the trend is pretty clear. The astoundingly low levels of interest rates that have been in place over the past few years reward borrowers and banks at the expense of savers and advantage people in employment over those in retirement. This is partially an unintended, if inevitable, consequence of the emergency measures deemed necessary to avoid a complete economic meltdown, but it’s a deeply inequitable scheme nonetheless.

Meanwhile, as governments seek ways of reducing deficits we’re seeing retirement ages raised across the developed world: the UK, France, Greece, Hungary, Italy, the Netherlands, Taiwan, Germany, Poland, Spain and the USA have changes in the pipeline. This is also inevitable as demographic trends indicate increasingly long lifespans – a 3 year old in the UK is now more likely to see 100 than a 96 year old. While increasing healthcare costs, and decreasing healthcare budgets, may alter this equation the recent decision in the UK to “index” retirement ages to the average lifespan suggests that this particular government is only expecting this trend to continue. Expect others to follow suit.

Busted Boomers

There’s a brutal economic logic behind these trends: countries can’t simply cut spending but need to earn their way out of their financial woes, and pensioners don’t earn anything. Consumption by pensioners does boost the economy but low interest rates tend to discourage discretionary spending – and keeping the money in a bank account doesn’t help the country when the banks refuse to lend it to anyone. Worse still, pensioners tend to have vast quantities of capital tied up in property which they’re reluctant to pass on to the next generation and which is essentially a deadweight cost to the economy.  Of course, the people who have savings are the lucky ones according to this poll:
“Generationally, one-in-four (25%) Baby Boomers (aged 46-64) have no retirement savings, with 22% of Matures (aged 65 and over) stating the same. Gen Xers (aged 34-45) are struggling with more immediate issues; 32% have no personal savings”
There’s no helping the retiring Boomers without pensions, but the preceding generations need to be heeding the prevailing winds; governments aren’t going to bail you out in your old age and may even see you as an easy mark when times get tough. While some of the Gen Xers may genuinely be struggling to meet day-to-day spending needs the evidence is that more simply keep procrastinating and engaging in hyperbolic discounting – by and large they’d rather spend today and worry about tomorrow when it comes.

Linear Underestimation

The well-established principle that people simply aren’t very good at understanding the positive (for investing) and negative (for debt) effect of compound interest because they think it works linearly rather than exponentially, an issue known as linear underestimation, is re-emphasised in Craig MacKenzie’s paper Misunderstanding Savings Growth : Implications For Retirement Savings Behavior:
“Importantly, linear underestimation hinders people from appreciating the cost of waiting to save … They believe that it is much easier to make up for lost time than it really is. For example, in one of our scenarios, Alan saved $100/mo for a 40 year period at a 10% interest rate (compounded annually), and participants were asked how much Bill, who waits 20 years to start saving, would need to deposit each month in order to have as much money as Alan at retirement. Over half of participants judged that it would require twice Alan’s savings rate, or $200/mo, for Bill to catch up to Alan. However, Bill would actually have to save nearly eight times as much, or $773/mo.”
Unfortunately the proposed solution to this, highlighting these effects, isn’t always that successful. The basic appeal here is to self-interest – because we’re talking about making a sacrifice for ourselves now in order to be much better off in the future – and this has led a couple of laterally thinking researchers to wonder whether we actually think of our future selves not as ourselves but as another person. After all, that person I’m going to be in twenty years time is pretty hard to imagine; why the heck am I going to do anything for that stranger?

Stranger to Yourself

In You Owe It To Yourself: Boosting Retirement Saving With a Responsibility-Based Appeal Christopher Bryan and Hal Hershfield analysed this possible relationship of our current and future selves, speculating that appealing to our self-interest won’t work if we don’t see our future selves as ourselves, but that an appeal to a sense of social responsibility to help a needy stranger might succeed. They concluded:
“People who feel a close “social” connection to their future selves are more effectively motivated to save by messages appealing to their sense of social responsibility to that future self than by messages appealing to their sense of rational self-interest. Meanwhile, people who do not feel close to their future selves are relatively (and equally) unresponsive to both types of appeal.”
This is head-scratchingly bizarre: by framing the future self as another person it’s possible to invoke our moral inclination to help other people in order to persuade us to save for our futures, while simply positioning the message in terms of personal self-interest is less effective. Meanwhile people with little connection to their future selves aren't interested in any event. This adds to existing research suggesting that the degree to which we’re prepared to make sacrifices now to help our future self depends on the degree to which we feel connected to them, a view known as psychological connectedness and continuity, originating with the philosopher Derek Parfit and quoted in this paper:
“If we now care little about ourselves in the further future, our future selves are like future generations. We can affect them for the worse, and, because they do not now exist, they cannot defend themselves. Like future generations, future selves have no vote, so their interests need to be specially protected. Reconsider a boy who starts to smoke, knowing and hardly caring that this may cause him to suffer greatly fifty years later. This boy does not identify with his future self. His attitude towards this future self is in some ways like his attitude to other people.”
The Imagination Gap

The paper goes on to use digital representations of peoples’ future selves to see if the visual rendering allows them to connect more vividly with the person they’ll eventually become. The results suggests that this does promote better saving behavior, and offers an interesting and different approach to doing so – simply by helping our imaginations bridge the gap between future and current selves.

Enacting our moral obligation to help those less fortunate than ourselves should be something we all try to do, and being kind to old people is an important facet of that, however cantankerous and annoying they may be. You should start immediately – by being nice to the person you’re going to be in fifty years time. No one else will care when you’re old, governments least of all.

Related articles:
Linear underestimation, Psychological connectedness and continuity added to The Big List of Behavioral Biases

1 comment:

  1. Although I don't disagree with the theory of compound interest, I think taking in isolation from the life-cycle of a human being in a Western economy is deceptive. In practice money is far tighter when you are young, because you are paid less, you are paying proportionally more in mortgage interest, you may be considering children.

    It is far easier to save when you have discharged your mortgage, when you may be a 40% taxpayer and therefore have to forego less to get more, and yes, when you are more monitvated to save.

    I have a FS pension with 24 years' worth of contributions. Despite the very generous employer contribution, over the last three years I have saved 1/4 of the total capital behind that pension in AVCs (to avoid reducing the pension with the commencement lump sum).

    That means I saved over 1/4 of my pension pot in 1/8 of the accrued at the end of my career (I am also accruing years, hence > 1/4).

    The fact that old gits can save much more, and are incentivized to do so, is rarely acknowledged. My Dad did the same ISTR. Compound interest is not the only way, and seriously hamstrings your life in your twenties. I only started saving in a pension at 28. Acknowledged that current 20-year olds will live longer than me, but they'll probably have longer working lives too.