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Are we saving too much?

One clue that this might be the case comes from a recent study by the Institute for Fiscal Studies of people between the age of 50 and the state retirement age. They estimate that half of these people are on course to have an income in retirement of 81 per cent or more of their current income, even considering only their state and private pensions. Even on this narrow idea of retirement income, one-third are on target to have higher incomes in retirement than they have now.

Taking into account non-pension savings - which is surely reasonable as many of us regard our Isas as a form of pension provision - 58 per cent will have a retirement income within 80 per cent of current income. Adding in half of housing wealth and expected inheritances, 78 per cent will have such an income, with only 12 per cent on course for an income of less than two-thirds their current income.

Now, this isn't as impressive as it seems. These results reflect not just the fact that many 50-somethings have high wealth, but also the fact that many have very low wages so the state pension and pension credit will replace almost all of their current meagre incomes.

You can read these numbers in one of two ways. Optimists can say that they suggest that most people don't face a big drop in their incomes when they retire. But pessimists can point to the likelihood that most face some fall.

But is this a problem? Research in the US by Susann Rohwedder and Michael Hurd suggests not. They found that while the typical American sees his income fall in retirement, the drop is on average less than he anticipated. And it causes no discomfort, because work-related expenses fall when we retire. When we give up work, we give up having to buy overpriced sandwiches for lunch, expensive work clothes, having to save for our retirement, and having to spend a fortune commuting to work; an annual season ticket from Guildford to Waterloo costs over £3,200, which is almost nine per cent of post-tax income for someone earning as much as £50,000 a year. We can, therefore, get by well on lower incomes in retirement.

Two other facts suggest that past retirees at least made more than adequate provision for their retirement.

One is that HMRC statistics show that in 2009-10 - the latest year for which we have data - over 264,000 people left bequests totalling over £65bn. Of course, many of these bequests had been planned for years. But these numbers also suggest that, for many people, their wealth outlived them and they saved more than they needed to.

A second fact is that retired people are happier than those of working age. The Office for National Statistics asks people: "how satisfied are you with your life nowadays?" and gets them to answer on a scale from 0 to 10. Among 65-69 year-olds, only 4.6 per cent gave and answer of four or less, whereas over 9 per cent of 40-45 year-olds did. And 34.5 per cent gave a score of nine or 10 - far more than younger age groups. On average, the over-65s are happier than any age group other than 16-19 year-olds.

This tells us that if people are poorer in retirement, they are certainly not so much so that they are unhappier as a result. In this sense, people on average saved more than enough to make them content in retirement.

Of course, all this only tells us that today's retirees and near-retirees made good provision, not that today's younger people are doing so. However, the household savings ratio has recently been close to its highest level since the mid-90s, which suggests that people today are saving much the same as their parents did. And today's older folk suffered years of poor equity returns recently; the All-Share index is still lower in real terms than it was 13 years ago. This should mean that many folk who are just in or near retirement should be unusually deprived. Some are, but many are not. And this should increase our confidence that working people now - who with a modicum of luck will enjoy better stock market returns - should be on course for an adequate retirement.

Now, you might reply to all this that while it's likely that many of us are on course for a decent retirement, we should surely save more just to be on the safe side.

Not necessarily. Just as it is possible to save too little, it is also possible to save too much; miserliness can be as irrational as prodigality. Think about the standard economics of the choice of whether to spend less now to save for the future. This says we should compare the cost of spending £1 less with the benefit we get from having £1 plus interest to spend in future. If the benefit of higher future incomes exceeds the cost of reducing spending now, we should save. And if it doesn't we should spend.

This basic common sense says it's possible to save too much if cutting spending now imposes a big pain now in exchange for only a small future benefit. Nobody thinks we should starve ourselves today in order to have a lavish lifestyle in our dotage.

Two other considerations speak in favour of us spending now rather than saving*.

One is that the benefits of future spending might be low if we're in poor health; if we can't get around easily, we might not enjoy holidays so much, for example.

Another lies in the idea of consumption capital, first proposed by Gary Becker and George Stigler, two Chicago economists, in the 1970s. This says that spending now can build up a stock of capital which we can enjoy in the future. Spending on holidays or nights out now can give us a stock of happy memories to look back on in our old age. And spending on books and music now can give us a love of great art which comforts us for years. As music critic David Hepworth has pointed out, we love old records by our favourite artists more than we love their newer work, even if they sound the same to a neutral listener. In saying this, he echoes William Faulkner: "The books I read are the ones I knew and loved when I was a young man and to which I return as you do to old friends". This tells us that the passage of time can increase the satisfaction we get from spending - which argues for spending more today. Would you really be happier today if you'd not bought all those Louis Armstrong records and saved the money instead?

Of course, consumption capital isn't necessarily an asset. It can be a liability; Becker and Stigler gave the example of heroin. But the same can be true for any expensive habit we acquire, such as sports cars or fine wine. The more expensive and habit-forming are your tastes, the more painful it will be to cut your spending in future, which argues for saving more now.

In this sense, what matters is not simply whether we spend or save today, but also what we spend our money on. Some of our spending creates assets that we can draw upon in our old age - such as happy memories or the love of books and music. But some creates habits which are a liability.

Now, none of this is to deny that some people are saving too little for their retirement. But then, pretty much anything is true of some people. The belief that this problem is widespread, and that the opposite problem of saving too much does not exist, is, however, deeply questionable. It probably owes more to nanny-state ideology and the vested interests of the pensions industry than it does to fact and logic.

*Actually, there's a third - the paradox of thrift. If we all try to save more now, aggregate demand falls and so we collectively end up worse off.