Trends in household saving don't justify tax incentives to boost saving

Abstract

Household saving Analysing the saving behaviour of different generations Despite diverse trends in household saving in OECD countries, many governments are introducing tax incentives designed to boost saving by particular groups. Such schemes have been justified by many trends, including increasing income inequality, ageing populations, and greater cross‐border competition. It is dangerous, however, to base policy on what is happening to aggregate household saving alone. First, personal saving should be viewed within a lifecycle context. Saving may look inadequate today, but households may already have made plans to redress this in future. Second, data on aggregate saving conceal significant differences between different household groups. Only disaggregation yields reliable inferences on which policy can be based. In particular, it is impossible to assess the consequences of demographic changes without analysis that distinguishes between different generations. We reassess household saving by computing the evolution of lifetime profiles of consumption, income and saving of different cohorts over time, and then analyse the effect of demographic and other changes. We find little evidence for the assertion that tax incentives to promote national saving are needed now to stave off a future drought in household saving. — Orazio Attanasio and James Banks