NC1013: THE ECONOMIC AND PSYCHOLOGICAL DETERMINANTS OF HOUSEHOLD SAVINGS BEHAVIOR
Statement of Issues and Justification
Between 1980 and 2001, personal savings as a percent of disposable personal income fell from 10.2 to 2.3 (Office of Management and Budget, 2004). This relatively rapid decline is cause for serious concern. In recent years, doubt has arisen regarding the ability of the Social Security trust fund to pay promised benefits to the soon-to-retire Baby Boom generation. Employers and government have shifted greater responsibility for funding such things as health care and retirement to individual households. Increasingly, households that lack adequate savings can find it difficult, if not impossible, to achieve and maintain long-term financial stability. Without a financial cushion, households have little protection against the adverse effects of income loss due to unemployment, long-term illness, or the disability or death of a primary income earner (Schuchardt, 2002) and may have to rely on extended family or various forms of public assistance to survive. Insufficient savings can also have adverse consequences for the broader economic community. Home or business ownership, important elements in the economic vitality of local communities, are difficult to achieve without savings (Schaeffer, 2002). In times of economic downturn, loan default or bankruptcy become more likely among those who have not been savers, shifting the burden of economic loss to the community.Given these concerns, motivating people to save if they are currently a non-saver or to increase their level of saving if they are a saver is an important objective. To meet this objective, it is essential to understand the specific impediments to saving and to ascertain the degree to which these impediments can be removed. Different barriers call for different intervention strategies. For example, a person unaware of the benefits of saving in an Individual Retirement Account (IRA) may be persuaded to open and use such an account after receiving financial education regarding IRAs. Alternatively, tax law changes might be needed to provide low-income individuals with a residual of income to save.
While several different social science disciplines have examined factors associated with both savings behavior and level of savings accumulated, existing studies are constrained by the specific assumptions and focus of the discipline within which they were conducted. Sociological studies of money management have centered on demographic characteristics such as differences in age, gender, family composition or social class (Lea, et al, 1987; Livingstone & Lunt, 1993), ignoring economic or psychological aspects of saving. Economists have focused on observed behavior, ignoring or addressing in only a cursory way internal motivations for savings. Further, economists generally classify savings behavior as a simple dichotomy: one either is or is not a saver, precluding consideration of a systematic, sequential decision process by which people may journey from a position of non-saver to saver. Psychologists consider attitudes and values, but typically ignore sociodemographic, economic, or public policy circumstances and constraints (Livingstone & Lunt, 1993). These disciplinary blinders make it difficult to gain complete understanding of factors affecting saving behavior. For example, economic theory suggests that individuals will not simultaneously be savers and dissavers (spending down financial reserves or borrowing money) and that saving is an activity undertaken by those in midlife, the prime income earning years, rather than the young or elderly and by those with high rather than low income. The fact that research findings contradict these expectations suggests that non-economic factors also motivate savings behavior. While psychological theory may point to some of these factors, it does not incorporate very real economic or legal constraints on or incentives for savings behavior. Consequently, there is a need for interdisciplinary research that recognizes that saving is an economic decision made within an existing social context, influenced by life cycle demands and the psychological characteristics of the potential saver.
This proposed research seeks to fill that gap. Unique contributions of this proposed cross-sectional study are characterizing saving behavior as a continuum and developing an index to measure that continuum and the use of both economic and psychological theory to examine the impact of both personality and financial resources as barriers to becoming a saver or to saving more. The impact of lifecycle stage on saving behavior and level of savings will be addressed through selection of the sample. The economic factors that will be investigated in this project include level of financial literacy, income, wealth, time preference, debt load, and bequest motive. The psychological factors that will be considered in relation to savings behavior includes self-control, self-efficacy, perfectionism, impulsivity, and materialism. Differences in demographic factors such as family size or in opportunity to save such as access to employer-sponsored retirement accounts will be controlled.
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