Dear Economist

You can’t take it with you…

Dear Economist,
My boyfriend is always encouraging me to save money or put it in a pension. (We are both in our early 30s.) I say any day could be your last, and you shouldn’t feel guilty about splashing out. Who’s right?
Yours sincerely,
Rebecca Marr, Sheffield

Dear Rebecca,

You are right, of course. Your boyfriend appears, at first glance, to be more rational.

After all, you are both likely to live for several decades to come. Your plan to spend everything you have and more as soon as possible seems a certain recipe for a penurious old age. Indeed it is.

But your boyfriend’s idea is worse. He risks saving too much. Better to die in debt than a millionaire: he can’t take it with him. He might claim that he will optimise his consumption patterns so as to avoid leaving too much money behind, but this is naive. The economists Wojciech Kopczuk and Joel Slemrod argue that people tend to deny the possibility of their own mortality, which explains why they tend not to make wills or buy enough life insurance. (Personally, I feel that people don’t buy life insurance because they realise it’s a bizarre bet that you can win only by dying young.) Because people like your boyfriend refuse to stare directly at death, they end up compulsively saving for a future they will not live to see.

Your plan is a compromise. You know that in 20 years you are likely to be saving too much, so you remove that temptation from your future self by spending all the money now. Even better would be to find ways to commit to optimal spending throughout your lifetime, but this is not easy. Perhaps you could start with a lifetime’s subscription to the Financial Times?

Also published at ft.com.

5th of November, 2005Dear Economist • Comments off