Much has been made of recent news that in 2005, for the first time since the Great Depression, Americans registered a negative annual personal savings rate. We are spending more than we are earning and accumulating greater debt. Experts cite a number of possible causes including rising housing and health care costs, a consumer culture that relies heavily on credit, and the historically low interest rates which have prevailed for the past several years (and provided less of an incentive to put money away).
Boston University economics professor Laurence Kotlikoff has spent decades studying spending and saving habits. In his book The Coming Generational Storm, co-authored with Scott Burns, he warns of the potentially disastrous fiscal crisis that awaits the U.S. as a result of the widening gap between total projected federal expenditures and total projected federal taxes. He is also the co-developer of ESPlanner, financial planning software that calculates a household's highest sustainable living standard and the savings and insurance needed to maintain that living standard. Despite the consensus opinion that we collectively will be in dire fiscal straits upon retirement, Kotlikoff considers the possibility that financial planning calculators such as ESPlanner are advising people to save too much. In the June 5th edition of Forbes, Kotlikoff argues that the estimates exceed anticipated retirement spending habits, thus causing consumers to take more risks with their current investing and savings plans. The full article is available here.