In his book Tragedy and Hope, Carroll Quigley argues that for a civilization to prosper, two key conditions must be met: individuals delaying gratification and their having unlimited material desires. He refers to the former as “future preference,” which will be the focus of this article in relation to personal finance.
The Role of Future Preference in Early American Culture and its Decline
According to Quigley, early American settlers, many of whom adhered to the Puritan faith, exhibited a strong future preference, which contributed significantly to the development of the United States. The values they cultivated during the 17th century including hard work, self-discipline, and cooperation, continued to shape American culture well into the late 19th century.
However, since the 20th century, cultural shifts have eroded these values. Such changes are evident in literary works like The Sun Also Rises by Ernest Hemingway. The novel centers around a group of American expatriates in Paris who, disillusioned after World War I, spend their time drinking expensive wine day after day and living leisurely. Although the book was published in the 1920s, this culture of “living for the moment” persists today.
It is evident in a significant portion of relatively high-income individuals; more than one in three individuals earning over $80,000 per year, and nearly one in four earning over $100,000 per year, are living paycheck-to-paycheck.
While inflation has diminished the value of money and increased the cost of essentials like food and housing, this phenomenon can be attributed, in part, to their choice to prioritize present enjoyment over future savings. Although their lives might seem fine now, not saving adequately can lead to serious issues in retirement.
How to Save for Retirement in Today’s Culture
Scholars in experimental economics, such as Anujit Chakraborty, offer an interesting perspective on our psychology that could provide a potential solution to this saving problem. He indicates that most people exhibit a present bias, meaning they prefer immediate rewards over future ones when given a choice. For instance, if individuals are offered $1,000 today versus $1,100 in three months, most will take the $1,000. However, when both rewards are delayed, their choices often reverse. For example, if given the option to receive $1,000 in three months or $1,100 in six months, people tend to choose the larger reward of $1,100.
Individuals can leverage this psychological tendency in their saving habits, especially if they have access to company-sponsored savings vehicles such as a 401(k). Retirement accounts grow with tax advantages, but account holders cannot withdraw without a 10% penalty until reaching the age of 59½. By enrolling in company-sponsored retirement plans, a portion of their paycheck—say, 7%—is automatically deducted and deposited into their retirement accounts. Additionally, employers may match their contributions up to a certain percentage, such as 5%. By making access to money difficult now, they can reap the reward in their retirement after their assets have grown.
Challenge for Tens of Millions of People
While those with employer-sponsored retirement accounts are fortunate, there are 56 million private sector workers who do not have access to such benefits. They can still automate contributions to IRAs and taxable investment accounts, but this requires more discipline than contributing to employer-sponsored accounts, for which employees get signed up upon joining their employers.
Given that a large number of higher-income earners are living paycheck-to-paycheck, exhibiting signs of present bias, and the majority of people are earning less with correspondingly smaller saving rate, it may be challenging for most American workers to save on their own accord. However, as we are all influenced by the zeitgeist to an extent, it may not be entirely their fault if they have difficulty to save under a culture that encourages instant gratification.
If you are in the minority of people who have future preference, you have significant advantage in preparing for, and preserving wealth after retirement. While it is outside the scope of this article, for the majority of people to save adequately for their retirement, an unlikely shift in cultural values toward forgoing pleasure now for the future may be necessary.
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The information provided in this blog post is for educational purposes only and does not constitute financial advice. It is not intended as a recommendation to buy, sell, or hold any financial product, and I do not promote any organizations.
The Well Tempered Investor 