So how do savings rates of different members of a population impact society as a whole? It's an important question that is rarely if ever discussed by modern economists. We can explore this question by comparing modern day America to the island nation of Terra discussed in an earlier post.
Like the population of Terra, the population of America as a whole has no ability to save (assuming that there is a neutral balance of trade with other nations which at the moment there is not, but that will be the subject of another post). This concept will be difficult for someone to wrap his or her head around at first, but if thought about long enough and hard enough one will conclude that this is true. All of the goods that workers produce are either consumed right away, or after production go into a period of long steady decay. Even buildings require constant maintenance to prevent them from becoming worthless over a couple of decades, and even then a certain percentage are destroyed every year from natural disasters. Thus, we must come to accept that at all times production and consumption are held roughly in balance. Without the production of goods it is impossible for the population as a whole to consume. Without the consumption of goods, there is no reason to produce them, for excess production will lead to waste and eventual decay to worthlessness.
This of course does not imply that there is no savings for certain segments of the population. On Terra there were many children and elderly who could not work, but they did consume for to do otherwise would mean death. In order to provide for their consumption the active workers needed to produce more than they as a group could consume. Why would they WANT to do this? In an altruistic society the reason would be to prevent widespread misery and starvation; however, altruistic societies don't really exist. The main motivation is to work off obligations owed to the elderly and to become creditors to the younger members of the society. These credits represent future food and shelter, and anyone who can see into the future farther than the next payday will recognize the importance of having the means to eat even when the ability to work has passed. The credits less the obligations we can call the "savings" of the workers.
So what about America? Let's perform a very crude mental experiment. Currently in our country 13% of the population is over 65 and 27% is under 20. If we assume that these age groups generally don't actively work then this means that at least 40% of the population is consuming goods and services but not producing them. If we assume that each and every member of the population between the ages of 20 and 65 is actively working (a generous assumption) then 60% of the population is producing the goods that all 100% of the population is consuming. If we further assume that each individual in America consumes the same amount (some consume WAY more than others, but to keep the math simple we will assume an average consumption level). The consequence? Each worker must produce 1.67 times his/her basic needs to keep society as a whole sheltered, clothed, fed, and entertained. And if he/she doesn't? Well, it means that the goods available for consumption simply will not be available.
If each worker is producing 1.67 times his or her basic needs this means that his or her savings must be 40%! It is no coincidence that this is the same percentage as the number of people in the population who are not working! The excess production or "savings" of the working population must equal the percentage of the population who are not working in order for society to prosper.
And the personal savings rate in the U.S. currently? It is less than 5%. In fact, the highest it has ever been since 1960 was 12%. How is it America's children and elderly are not starving? It has a lot to do with the purchase of inexpensive goods produced by cheap labor outside of our borders as well as the build up of debt owed to foreigners. As long as we can count on the kindness of strangers we can maintain our current ways without experiencing much pain; however, if the world changes, as it often does, to correct imbalances then we will be facing a major problem. There will only be two solutions that will work on a societal level: 1) Our working population increases their savings rate from 5% to 40% (consume 1/3 less than present levels, or 2) We ask our underage and elderly populations to enter the labor force. I wonder, what will this look like?
