Happiness research and the "pensions crisis"

There's one aspect of the happiness research programme that hasn't got the attention it deserves. It casts doubt on the idea that we're not saving enough for retirement.
One established finding is that older people are happier than younger ones - and retired people are happier (pdf) than workers.
This in itself shows that we were saving enough for retirement many years ago - because today's pensioners, generally speaking, aren't so poor that they're miserable.
But it also suggests young people should spend more than old ones.
Start from the pemise that rational, risk-averse people want to avoid peaks and troughs of euphoria and misery, in favour of a smoother path of well-being. Properly understood, the life-cycle consumption hypothesis says we smooth utility, not spending.
This means we should spend most when we are unhappiest. You can think of the logic here in two ways:
1. When we're unhappy, the marginal utility of consumption is high. There's diminishing marginal utility.
2. Buying stuff makes us happy. Spending is therefore a hedge against unhappiness.
Whichever, young people should spend more than old ones simply because they are unhappier. Our spending should fall as we age; as we get happier anyway, there's less need to spend money.
It's not just the high abstraction of life-cycle utility smoothing that yields this result. So does common sense.
Young women get a bigger kick from buying clothes than do older ones; older women are beyond repair caring so much about their appearance. And older men find it harder to get over hangovers and so don't drink as much.
Rational, forward-looking young people should therefore spend lots of money. They need the kick more than older ones.
Now, you might object here that this doesn't explain young people's actual high spending and lack of saving, because they don't actually anticipate their happiness rising as they get older.
But this isn't the point. In spending heavily, young people act as if they are rationally anticipating a lower marginal utility of consumption in old age.
Indeed, the very fact that there is an age-slope of happiness is evidence that younger people aren't spending enough. Smoothing happiness might require that we transfer more spending from our old age to our youth*.
This, I think, is yet another argument against the idea that there's a looming pensions crisis. The idea that we're not saving enough for our retirement is just a scare story drummed up by a corrupt and incompetent "financial services" industry in an effort to rip off even more people.
* This doesn't, of course, mean transferring wealth from old people to young ones.

Comments

[Rob Hayward]

I really like the argument, but it does suggest taxing older people to enhance the consumption of younger. When they already have the looks, the energy and the lack of worry, I find it hard to bring myself round to supporting that.

[Bird Dog]

haha.
Youth is wasted on the old, I mean age is wasted on the youth, I mean - oh, never mind.

[dearieme]

I don't enjoy spending except, I find, on wine. Unfortunately, as you suggest, our capacity for same has shrunk. We'll just have to carry on trying to clear our debts before we retire. The Council Tax will mop up our income thereafter.

[Maynard Handley]

You say that spending makes us happy.

True to a point, but the reality is that it is more the act of spending than the amount spent that makes us happy. In other words, the wise man spends his $5000 on a thousand $5 purchases, and gets a thousand little jolts of happiness, rather than splurging on a single $5000 set of golf clubs or plasma TV or whatever. (There are other issues here, of course. Your TV gives you continuing utility, but the point is that you'd still get pretty much the same utility by buying a smaller $250 CRT TV or a larger $1000 LCD TV. The plasma mainly gives you bragging rights which are soon used up.)

So what's the point? The point is that the young are idiots who know very little including, in particular, how to spend money wisely. Encouraging them to spend, without educating them on how to spend, is simply encouraging them to splurge on gold-plated cell-phones. [The point is not that gold-plated cell phones are evil or a waste of money; it's that they do not do a good job of the actual goal here which is maximizing utility. Kahnemann, behavioral economics, all that stuff.]
Not that I think educating them will do any good in general, though it's better than nothing. Personally I'd put them all on weekly allowances until they're 30, but I understand that this is widely considered to be impractical.

[Matthew]

"This doesn't, of course, mean transferring wealth from old people to young ones"

It doesn't mean it, of course, but it does suggest it, surely?

[james C]

Why do you believe that the marginal utility of money is greatest when we are unhappiest?

James C