Savings - part 4

I talked about the savings part going towards value-adding investment projects in my last blog. When we are funding our savings towards investment projects, we are under-consuming in the present to be able to consume better stuff in the future. Take for example road building. It may be a road to connect two villages - tarred roads help us travel the distance between two points faster as it enables automobiles to ply on it in a fast and smooth fashion. We may fund our savings to build roads - the building of a road requires human resources to engineer the road, to build the road-laying machines,dig out the dirt and actually lay the road. The savings used to fund the roads are used to channel the human resources available in the economy towards this effort. Once the road is built, it will lead to more opportunities between the two villages to exchange goods and services and so the savings would earn a return from that road building investment. If the road was a road to nowhere, it wouldn't have much impact to future economic activity and so will not be a good use to savings except for keep some human resources busy during the present to build the road to nowhere.

Coming back to the second use of savings to fund retirement - when we retire, we want to consume without the ability to actually work in the economy. simple enough. How do you fund the retirement years. There are a number of ways. In the olden days, the societal value called for the kids to take care of their old parents. So the parents had to just support themselves, their kids and their old parents during their work life and then depend on the kids to support them when they were old. This is like giving fish to your old parents when you were able to catch it and then expect your kids to give you fish for survival when you are old and no longer able to catch it. works well if the local societal value binds everybody in the society to do this. This is still voluntary but societal pressures will exist to support your old parents. Once people became more mobile and the neighbours didn't know each other much, this system broke down. Then the govt. came to support the cause of the older people. The govt took away a portion of every working person's salary and used it to give a pension (or social security) payment to the older people. This is very similar to the original approach of kids supporting their parents except now the govt had to come in between the kids and the old parents to enforce this support through the use of a tax (though it is not called a tax but a social security funding). The third approach is to start saving on your own every month towards retirement and hope to cash those in the retirement years. It is like putting an extra fish a day in a deep freezer. There is cost to maintain the deep freezer and the deep freezer may fail at some point and all your saved fish could turn rotten. It is much better to loan out the extra fish to somebody out there who can use it to invest in a value producing project. There is risk on this too as the loan may turn sour. Loaning out your saved fish is similar to putting money away in a 401k account that is invested in different companies around the world. These different companies are able to tap into the money to use in value adding project. We now again come back to the concept of using savings to fund value adding projects in the economy. In this scenario, we are under-consuming to consume at a much later point in life. In effect, sometimes we under-consume to consume in a shorter future period or a longer future period, depending on the reason behind our under consumption. But the under-consumption and the resulting savings must be used to fund value adding projects in the economy for us to be able to tap into it for future consumption.