NC1172: The Complex Nature of Saving: Psychological and Economic Factors
Statement of Issues and Justification
Need: In 2006, consumers coped with dropping home prices for existing housing and large increases in energy prices. The unemployment rate remained fairly stable at around 4.7% in 2006. Credit card delinquencies were starting to creep back up from the recently lower levels. Inflation edged slightly higher but was expected to moderate in 2007 (Strauss & Engel, 2007).Continuing a decade long trend, the rate of personal saving of American households is declining. In June 2007, personal saving as a percentage of disposable personal income was 0.6 percent (Bureau of Economic Analysis, 2007). Saving from current income may be near zero or negative when outlays are financed by borrowing (including borrowing financed through credit cards or home equity loans), by selling investments or other assets, or by using savings from previous periods. Families that lack adequate savings can find it difficult, if not impossible, to achieve and maintain long-term financial stability. Without a financial cushion, families have little protection against the adverse effects of income loss due to unemployment, long-term illness, or disability or death of a primary income earner (Schuchardt, 2002). Insufficient savings can also have adverse consequences for the community. Home or business ownership, important elements in the economic viability 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.
In response to these pressing concerns for the future well-being of American families, this project was developed with a goal to better understand the complexities of savings behavior. What are specific barriers and encouragements for saving? What motivates different types of people to save? How do socialization, personality characteristics, environmental factors, knowledge, and demographic realities impact savings behavior? The research focus fits within the broader land-grant communitys educational and research priorities. USDAs Cooperative State Research, Education, and Extension Service (CSREES) includes financial security as one of its system-wide educational initiatives. The stated goal is for people to acquire the knowledge, skills, and motivation to build financial security. Programs focus on behavioral change, starting with achieving financial self-sufficiency, then stability. The ultimate goal, financial security, is the cornerstone of prosperous communities, nurturing neighborhoods, and strong families. (http://www.csrees.usda.gov/financialsecurity.cfm)
Furthermore, this study relates directly to Community Vitality, a national research priority of the Agricultural Experiment Station Committee on Organization and Policy. Financially secure families are better able to contribute to their local economy by owning homes, starting businesses, and avoiding bankruptcy. In this respect, family financial security is a cornerstone of community economic viability.
Importance: The negative savings rate raises critical issues for U.S. households. First, there are concerns about the inability of the Social Security trust fund to pay promised benefits for future retirees. Second, employers continue to shift greater responsibility for funding retirement and health care to individual households. Third, inadequate savings leaves families extremely vulnerable to economic set-backs such as illness, disability, death of a primary wage-earner, and unemployment. Therefore, it is extremely important that families save for their later years in order to have adequate resources to meet needs and achieve their desired quality of life.
The renewal of this project will support scholarship addressing this critical issue of minimal savings in specific segments of the U.S. population - low and moderate income households. While much research describes overall savings behavior of U.S. individuals and households, little is known about what motivates the decision to save. Why is it that some people, regardless of income level, current asset accumulation, education background, and other factors, are avid savers and others are challenged to set aside any money for tomorrow?
This project is also important for its potential disciplinary contributions. Specific disciplines have approached the study of savings behavior through their respective theoretical lenses. Sociological studies of money management have centered on demographic characteristics such as age, gender, family composition, and social class (Lea, Tarpy, & Webley, 1987; Livingstone & Lunt, 1993 Mullainathan & Thaler, 2000), ignoring economic or social-psychological aspects of saving. Economists have focused on observed behaviors, ignoring or minimally addressing internal motivations for savings. These disciplinary blinders have made it difficult to gain a comprehensive understanding of the multiple factors affecting 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 saver (Gutter, Wang, & Way, 2007). This study attempts such an interdisciplinary approach, examining economic, psychological, and socio-cultural factors that influence saving.
Technical Feasibility: The focus of NC1013s preliminary research was to develop an instrument to measure savings behavior that included psychological as well as economic factors that could influence savings behavior. A pilot study was conducted in 2006 during the first term of NC1013s project. The mail survey data collection instrument was tested with a small convenience sample of participants. Subsequently, the research team concluded that the length of the instrument and associated data collection costs for a national random-sample design was prohibitive. Our approach needed to be more incremental. First, we streamlined our conceptual model to include only those economic and psychological factors that were conceptually distinct and were highly salient to our outcome variable of savings behavior. Second, we agreed to begin with a focus on a particular segment of the population low and moderate income people for whom the lack of savings renders them particularly vulnerable to economic crises. Third, we added additional factors to the model, such as socialization, environment and resource considerations, that are particularly salient for low and moderate income household economic behavior. It is important to note that we are currently in negotiation with a highly probable funder to underwrite this population-focused study. While regional representation and some randomization will be pursued, this generally will constitute a convenience sample as the population is the customer base of a large financial service provider. The teams long-range goal is to pursue funding for a national random sample in order to be able to speak generally about the U.S. population savings behavior. Critical Multi-State Approach: This research can best be conducted as a multi-state project. Economies and family realities differ from state to state, from region to region, and from rural to urban. Therefore, to design a useful research study, multiple perspectives and expertise-bases must be considered. A multi-state, multi-disciplinary team greatly increases the likelihood of an effective study design. Ultimately, the involvement of researchers and Extension educators in many states fosters development of nationwide partnerships for research dissemination and the development of educational programs that promote savings behavior.
Potential Impact: This project represents the first known attempt to examine the combined effects of economic, psychological, and cultural factors on savings behavior in the United States. Including all these measures in one study will provide us with a more comprehensive understanding of savings behavior than has previously existed. 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 more comprehensive understanding of savings behavior will be a strong base from which to develop, implement, and evaluate educational initiatives designed to increase financial literacy and promote savings behavior. Educational programs delivered through the land-grant systems Cooperative Extension Service mainly focus on the development of important financial management skills. Rarely do those programs address underlying psychological factors which could be contributing much to the lack of savings behavior. Understanding which of those critical factors are salient to changing savings behaviors could lead to enhanced effectiveness of our educational initiatives.
Additionally, study results can be used to recommend public policy initiatives and suggest new or enhanced financial products and services for consumers. Finally, findings that contribute to a more comprehensive understanding of how psychological and economic factors combine to influence savings behavior will fill a major gap in the savings behavior research literature.
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