Saving in Life Insurance and Pension Funds: Some Problems of Economic Interpretation

Abstract

The monumental work of Raymond Goldsmith and his associates in A Study of Saving' has stimulated and made feasible a good deal of research on the components of aggregate saving and their behavior. Earlier work of Goldsmith, in fact, has led to the publication on a regular basis by the Securities and Exchange Commission of estimates of financial saving by individuals; these data are published in the SEC Statistical Bulletin and reprinted by the Department of Commerce in conjunction with the national income accounts. A similar body of data is published quarterly by the Federal Reserve Board as part of the Flow of Funds accounts. This easy availability of statistics on such an important topic makes it essential that economists be aware of any implications of the statistical definitions which limit seriously the kinds of uses to which the data can be put. As it happens, the conceptual basis of some of the components (such as currency and demand deposit accumulations) are straightforward, and should cause little or no difficulty in use. Those components representing saving through the form of life insurance and pension funds, on the other hand, rest on definitions which are statistically convenient, but have properties which render them misleading for certain kinds of analysis. The SEC series and the Flow of Funds series both adopt changes in reserves behind life insurance policies and pension funds as the appropriate measures of saving through that form. This definition is reasonable for purposes of studying the volume of saving actually done, but is not very helpful if one wishes to study the economic factors which influence the volume of saving in these forms. Irwin Friend noted that the series on life insurance saving (under SEC definitions) was the only component of individual saving which exhibited a fairly stable relationship to income in the prewar period.2 This difference between the behavior of life insurance saving as measured and other forms of saving is largely a consequence of the definition used. Saving in life insurance and pension funds can be defined in many ways; like all definitions, there are no correct ones. The choice among alternative definitions becomes complicated when as is the case in saving in life insurance or pension funds, the underlying process is complicated; subtle differences among definitions can then lead to markedly different results. Saving through life insurance and pension funds, as measured by the Flow of Funds, has accounted for more than one-third of the net acquisition of financial assets by the consumer and non-profit organization sector; similar orders of magnitude are found for these components in the SEC totals of gross financial saving by individuals. Since these components form so great a proportion of the total, it seems essential that the eco* Some of the research for this study was performed during my tenure as a Summer Research Fellow of the Travelers' Insurance Company. The paper itself was written while I was at the Johns Hopkins University. I am indebted to a number of people for helpful comments, especially Richard Leggett, Peter G. Plumley, and Scott Nielsen, all of the Travelers'; and Albert G. Whitney, James J. O'Leary, Yehuda Kotowitz, and Edwin S. Mills. Special thanks are due to the Life Insurance Agency Management Association for permission to use unpublished data. 1 Raymond W. Goldsmith, A Study of Saving in the United States, 3 vols. (Princeton, N. J.: Princeton University Press, 1955-56). 2 Irwin Friend, with Vito Natrella, Individual's Saving: Volume and Composition (New York: J oh n Wiley a nd Sons, Inc., 1954), p. 148.