Abstract
From 1994 to 2006, the average household saving rate in the Philippines declined by 5.2 percentage points to about a mere 5% of disposable income. Using data from income and expenditure survey at the household level, this paper explains why households’ consumption growth had been higher than income growth during this period. Tracing cohorts shows that saving declined across all demographic groups. A simple test that provides the strength of the precautionary saving motive yields a plausible explanation that households are financially constrained and less prudent in the recent years. This paper argues that these patterns are best explained by the extended coverage of social security system during the 1990s in the Philippines. Less prudent behavior may have been amplified by the severe financial constraint leading to the sharp fall in the saving rate.
Highlights
Filipino households’ saving rates have been declining
This paper finds that the Filipino age–saving rate profile fits in the standard life cycle hypothesis showing a hump-shaped age–saving rate profile, once controlled for the demographic shifts and family composition
Habit formation implies that consumption reacts slowly to declining income; this could explain why saving rates may decline during the period of stagnant income growth
Summary
Filipino households’ saving rates have been declining. This paper attempts to understand the reasons behind this stylized fact in Filipino households’ saving. There is no panel element to these data, the large number of households surveyed and the large number of cross-sections allows us to track cohorts of people through time, and to observe the evolution of their levels of income, consumption, and saving as suggested by Deaton (1985). The earliest cohort this data can capture is for those who were born in 1890 or those who were 98 years old in the 1988 survey. Liquidity constraint and precautionary behavior are considered to see how they affect saving rates of Filipino households over time This investigation naturally shifts our attention to consumption behavior with uncertainty.
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