Venezuela’s collective memory does not forget – especially now in the middle of the worst economic crisis in its history – the famous saying “It is cheap, give me two”. It is an expression that became popular during the “Saudi Venezuela” era (1974-1979) and it was of common use again in 2006 during the boom of oil prices. Venezuelans remember it as the golden times that allowed them to spend money like if there was no tomorrow. Consumption rather than investment or savings was the norm. Having a backup plan to be prepared for the rainy days or for the future was not a priority.
But we all know that no matter how good times are, there will be a time when you need savings. How does the Venezuelan attitude towards savings correlate with other countries in Latin America and the Caribbean (LAC)? As the literature shows, Venezuela’s underestimation attitude towards savings is not the exception in the continent. Saving rates are a relevant and worrisome topic in the region. According to Cavallo & Serebrisky (2016, p.5), LAC have persistently lower saving rates when comparing with other countries in the world like high-growth countries in East Asia (less than 20% vs 35%, respectively). Moreover, household savings are of particular relevance. Carmen Pagés, chief of the Labor Market Division of the Inter American Development Bank (IDB), argues that “the progressive aging of the population makes the lack of pension savings one of the main challenges that the region will face in the future” (IDB, 2018)
A first step to boost saving rates in LAC is to understand what factors are impeding higher savings among households in the region. Cavallo & Serebrisky suggest that inefficient financial systems, broken non-contributory pension systems, lack of confidence in formal institutions, social pressures, and behavioral biases are the main determinants. In my essay “Retirement Savings in Latin America – A Behavioral Economic Approach”, I will discuss how behavioral economic theory differs from the standard theory when it comes to explaining how agents decide the amount of money they would like to save for retirement. Furthermore, I will give examples of how behavioral economics interventions can be implemented to encourage savings.
The standard economic theory explains that rational agents should estimate their income and future expenses to know how much money should they save (Thaler, 2008). However, behavioral biases like present-bias (agents value more their current consumption), inertia (preference to remain in the status quo) and limited attention (omission of important information), make it difficult for agents to make a “rational” decision (Cavallo & Serebrisky, 2016) (Thaler, 2008). According to several studies in the region, the previous biases are present. Therefore, Cavallo & Serebrisky (2016), suggest that mandatory pension plans or automatically enrollment, reminders, and reduction of transaction costs are interventions that could increase savings in LAC. In this order of ideas, in April 2018, IDB launched the Retirement Savings Laboratory which makes use behavioral economic interventions to encourage savings.
- Cavallo, E; & Serebrisky, T. (2016). Saving for Development: How Latin America and the Caribbean Can Save More and Better. Washington, DC, USA.
- Inter-American Development Bank. (2018). Retirement Savings Laboratory. Retrieved June 15, 2018, from Interamerican Development Bank website: https://www.iadb.org/en/labor-and-pensions/home-retirement-savings-laboratory
- Thaler, R. H., & Sunstein, C. R. (2008). Nudge: Improving decisions about health, wealth, and happiness. New Haven, United States: Yale University Press.