Household Saving Behavior Research Articles

Household and Individual Decision-Making Over the Life Cycle: A First Look at Evidence from Peruvian Cohorts

Peruvian society has achieved significant improvements in terms of lower fertility and mortality over the last forty years, which has brought down population growth rates to less than 1. 2% a year. These improvements have led, on average, to a demographic transition with lower dependency ratios. In general, this transition increases the ability of the society to take proper care of its non-working population groups, children and the elderly, which may be reflected in changes in household structure. We identify stylized facts about the implications of these changes at the micro level through the use of pseudo-panels from household-level data for Peru. We calculate age, cohort and year effects for variables related to household structure, educational attainment, labor force participation and savings. We find some evidence that suggests differences, by educational level, in the Peruvian demographic transition. Household size is smaller for the younger cohorts in all households but those with less educated heads. We argue that these different profiles are explained by the fact that reductions in fertility have not reached the less educated. On the one hand, these differences in household size patterns are similar to those in the number of children. On the other hand, cohort patterns in family living arrangements—i. e. , households with extended families—are similar across educational groups. However, family living arrangements change throughout the life cycle, in the sense that extended families are more common for households with very young (under 25) and elderly (over 60) heads. These changes in family arrangements over the life cycle add confusion to the meaning of headship, since in some cases the household reports as its head the older member and in other cases the main income earner. We also find that younger cohorts are more educated, are larger than older ones, and show lower returns to education. This is consistent with an increase in relative supply of educated workers that outpaces the increase in relative demand induced by economic growth, under the assumption of imperfect substitutability between equally educated workers of different cohorts. Finally, we show that intergenerational family arrangements over the life cycle limit the ability of the life cycle hypothesis (LCH) to explain household savings behavior. We find evidence that Peruvian households, especially the less educated, smooth consumption over the life cycle, not only through the typical saving-dissaving mechanism, but also by smoothing income. Net cash transfers, or living arrangements between parents and their offspring, play an important role in this income smoothing.

The determinants of household and private savings in Thailand

A broad set of possible determinants of household and private savings behaviour is examined through an in-depth case study of Thailand during the period 1960 to 2004. Results suggest that an increase in economic growth, inflation and terms of trade all have a significant positive impact on household and private saving rates. In contrast, the availability of bank credit tends to reduce household and private saving rates. While an increase in both old and young dependency has a negative impact on household and private saving rates, the magnitude of the impact on the former is far greater than that on the latter. Furthermore, public saving seems to crowd out household and private saving, but less than proportionately. This reflects a possible role of fiscal policy in increasing national savings in the economy. Over and above these variables, corporate saving is another important determinant of household saving. An increase in the former brings about a significant reduction in the latter.

What Determines Household Saving Behavior

Summary Saving decisions are complex, since there are many concurrent motives for saving a portion of one’s income. However, while the existing literature covers all of these motives, most contributions select only one of them as a focus and relegate the others to the background by making simplifying assumptions about them. While the focus on only one saving motive is vital for many insights on aggregate saving behavior, this paper argues that further insights relevant to policy can be gained by relaxing this assumption. Using data from a random sample of German households and from federal official statistics, I explain how much people save under the explicit assumption that various different saving motives co-exist. The findings show that heterogeneity in saving behavior is systematically related to the importance that households attach to different co-existing saving motives. This suggests that policy reforms that change the importance of certain saving motives in the eyes of private households might influence their saving decisions.

Household Saving Behaviour in an Extended Life Cycle Model: A Comparative Study of China and India

This paper examines the determinants of household saving in China and India over the last few decades using the life cycle model, with appropriate modifications to account for the expected benefits of pension saving. Consistent with the predictions made in the life cycle model, higher income growth promotes more household saving, and higher age dependency does the opposite. An increase in the inflation rate appears to encourage household saving. Interestingly, the evidence suggests that an increase in expected pension benefits tends to discourage household saving in China in the long run, but the reverse is found in India.

The Risk of Divorce and Household Saving Behavior

We analyze the impact of an increase in the risk of divorce on the saving behaviour of married couples. From a theoretical perspective, the expected sign of the effect is ambiguous. We take advantage of the legalization of divorce in Ireland in 1996 as an exogenous increase in the likelihood of marital dissolution. We analyze the saving behaviour over time of couples who were married before the law was passed. We propose a difference-in-differences approach where we use as comparison groups either married couples in other European countries (not affected by the law change), or Irish families who did not experience a significant increase in the expected risk of divorce (such as very religious families, or single individuals). Our results suggest that the increase in the risk of divorce brought about by the law was followed by an increase in the propensity to save of married couples, consistent with a rise in precautionary savings interpretation. An increase in the risk of marital dissolution of about 40 percent led to a 7 to 13 percent rise in the proportion of married couples reporting positive savings.

Household Saving Behavior: The Role of Financial Literacy, Information, and Financial Education Programs

Individuals are increasingly in charge of their own financial security after retirement. But how well-equipped are individuals to make saving decisions; do they possess adequate financial literacy, are they informed about the most important components of saving plans, do they even plan for retirement? This paper shows that financial illiteracy is widespread among the U.S. population and particularly acute among specific demographic groups, such as those with low education, women, African-Americans, and Hispanics. Moreover, close to half of older workers do not know which type of pensions they have and the large majority of workers know little about the rules governing Social Security benefits. Notwithstanding the low levels of literacy that many individuals display, very few rely on the help of experts or financial advisors to make saving and investment decisions. Low literacy and lack of information affect the ability to save and to secure a comfortable retirement; ignorance about basic financial concepts can be linked to lack of retirement planning and lack of wealth. Financial education programs can help improve saving and financial decision-making, but much more can be done to improve the effectiveness of these programs.

The Risk of Divorce and Household Saving Behavior

We analyze the impact of an increase in the risk of divorce on the saving behaviour of married couples. From a theoretical perspective, the expected sign of the effect is ambiguous. We take advantage of the legalization of divorce in Ireland in 1996 as an exogenous increase in the likelihood of marital dissolution. We analyze the saving behaviour over time of couples who were married before the law was passed. We propose a difference-in-differences approach where we use as comparison groups either married couples in other European countries (not affected by the law change), or Irish families who did not experience a significant increase in the expected risk of divorce (such as very religious families, or single individuals). Our results suggest that the increase in the risk of divorce brought about by the law was followed by an increase in the propensity to save of married couples, consistent with a rise in precautionary savings interpretation. An increase in the risk of marital dissolution of about 40 percent led to a 7 to 13 percent rise in the proportion of married couples reporting positive savings.

Comment on “Aging, Savings, and Public Pensions in Japan”

A good policy paper is, in general, either written well before any policy action is required, or is written well after everything is settled and gives a fair evaluation of the entire historical experience. Horioka et al . (2007) is a unique combination of the two. It is concerned with Japan's savings behavior in a long historical perspective and an evaluation of public pension reform and its impact on Japan's savings rate in which a real challenge will come in the middle of the twenty-first century. This paper is written in a very simple manner, but its content is very deep and complex. Many issues are yet to be solved. Horioka et al . argue that (i) Japan's high household savings rate was a temporary phenomenon during the 1955 -1995 period, and that it was not unusually high during the prewar and early postwar periods or after 1995; and (ii) the demographic structure of Japan's population can explain the level as well as the trends of the household savings rate over time. Putting these two arguments together, the authors seem to suggest that the demographic phenomenon was unusual in the 1955 -1995 period, and it was normal before 1955 and after 1995. I cannot observe a steady-state demographic structure before 1955 and after 1995. If the actual demographic phenomenon are observed, the baby boom in the 1946 -1949 period and the dramatic drops in fertility rate after the 1990s are two of the biggest demographic changes in the post-World War II period. The authors need to pay more attention to the demographic history per se. The authors' point that the rapid aging of Japan's population is likely to cause Japan's household savings rates to continue declining is well taken. But I have difficulty in finding any evidence that the demographic structure peaked out at around 1973 when Japan's household savings rate was at its highest. In 1973, the inflation rate reached its highest level in the postwar period, and generous public pension reforms and civil servants' wage structure reforms were carried out by the Tanaka government. The demographic story of household savings behavior does not seem to explain the turning point in 1973 -1975. I might expect that the demographic structure would be one of the main explanatory variables, but the rapid inflation in 1973 -1975 and other elements would explain temporal increases/decreases in the savings rates from time to time. The authors argue that existence of a pay-as-you-go public pension system increased the savings rate of the cohort born after 1965. This argument is based on simulation results from the OSU II model, which suggest that cohorts born in 1965 or later will receive less than they contribute to the public pension system. However, the OSU II model does not

Comment on “Aging, Savings, and Public Pensions in Japan”

Horioka et al . (2007) is a well-researched paper focusing on the impact of aging on Japan’s net household savings rate, and on the possible impact of Japan’s public pension system on the household savings rate. The first part of the paper notes that Japan’s net household savings rate was high especially during the 1960s and 1970s, but has been quite low in recent years. Japan’s household net savings will fall to zero or become negative between 2010 and 2024 depending on the estimate chosen. This is indeed a wide range requiring some explanation. In figure 1, it would have been useful to explicitly indicate the denominator of household savings. Trends in relative share of household savings in total national savings should have been indicated. The paper asserts that both corporate and government savings have been increasing in recent years (footnote 3), but does not provide data or future trends. It is on this basis that the paper optimistically argues that no policy measures are necessary to reverse the declining trend in household savings due to aging. The analysis of the aging and net household savings is based on life-cycle hypothesis, which suggests that as the ratio of elderly people to working population increases, household savings will decline as elderly people draw down their stock of savings for consumption. The paper assumes without explanation that other factors, such as income, wealth, and a high share of the variable component in wages in Japan, which may affect household savings behavior, will remain constant. This and the mechanical use of the life-cycle hypothesis have resulted in insufficient attention to the following aspects. First, the importance of bequest motive in the Japanese context should have been briefly discussed. The currently aged may alter their savings behavior to help cushion the burden on today’s younger generation financing them. Second, 7 million people born between 1947 and 1949 are set to retire between 2007 and 2009. They will receive 50 trillion yen (US$420 billion) in lump-sum retirement payments ( The Financial Times , April 12, 2007). The corporate retirement age is 60 years, but the state pension age is 65. A discussion of the expected behavior of these retirees concerning their postretirement labor-force participation, and division of lump-sum retirement payments into consumption and savings would have been useful. Greater labor market flexibility could help mitigate the negative impact of aging on the labor supply. Third, the authors are perhaps too pessimistic about increasing Japan’s economic growth rate. Globalization and internationalization have opened up opportunities for

New Dimensions of Financial Liberalization in Japan

This article contrasts the development of Japanese financial institutions over the past 50 years to that of the United States and compares the two countries' household savings behavior. Although reform and liberalization is driving the Japanese financial sector to become more open and more sophisticated, there are powerful reasons for the Japanese system and Japanese asset-holding behavior to remain divergent from that of the United States. One major factor is that income and wealth in Japan are distributed much more evenly than in the United States. Since wealthy households are more sophisticated and better able to accommodate risk, the concentration of wealth in the United States means that, compared to Japan, there are more high income/high wealth households that are willing to take on risk from equity and bond holdings. In Japan, in contrast, there is a much heavier reliance on bank deposits. Even though financial institutions in the two countries are becoming more similar, the persistent differences in income distribution are likely to lead to persistent differences in asset holding and the composition of capital markets in the two countries.

A Survey of Household Saving Behavior in Japan

This paper presents data on Japan's household saving rate, onsiders the reasons for Japan's high household saving rate in the past and the reasons for the recent decline therein, projects future trends in Japan's household saving rate, and consider the implications of my findings. It finds that Japan's high household saving rate was a temporary phenomenon and that it was high in both absolute and relative terms during the 1955-95 period (especially during the 1960s and 1970s) but that it was not unusually high during the prewar and early postwar periods or after 1995; second, that Japan's temporarily high household saving rate was due not to culture but to temporary economic, demographic, and institutional factors; third, that the decline in Japan's household saving rate since the mid-1970s is due to the weakening of these factors and that Japan's household saving rate can be expected to decline even further as these factors become even less applicable and that the rapid aging of Japan's population has played the most important role; and fourth, that there is nothing to worry about even if Japan's household saving rate falls to zero or even negative levels.

Fatalistic Tendencies: An Explanation of Why People Don't Save

This paper uses data from the 2001 Survey of Consumer Finances (SCF) and the 2000 World Values Survey (WVS) to analyze the role of fatalism in determining household savings behavior. SCF respondents who feel that luck has played an important role in their financial affairs are more likely to realize their need to save, but are less likely to actually do so. Cross-country evidence from the WVS shows that those who believe they have little freedom and control over their lives are also less likely to save. The results hold after controlling for a number of demographic and behavioral factors, and are consistent across income and wealth levels.

Does mandatory pension savings crowd out private savings?: The experience of Sri Lanka

The relationship between mandatory pension savings and voluntary household savings is at best uncertain. This is cold comfort for low-income countries which plan to introduce mandatory savings schemes to boost both retirement savings and total savings. More empirical work on low-income countries may help to establish some stylized facts on the savings behavior of households in response to mandatory savings. This paper attempts to shed some light on this issue based on the experience of Sri Lanka, a low-middle income country. We find a significantly negative effect of mandatory EPF savings on non-EPF private savings but suggest that this can be offset, to some degree, through the efficient management of mandatory savings to minimize waste and maximize returns to savings.

Social Security and the Retirement and Savings Behavior of Low Income Households

In this paper, we develop and estimate a model of retirement and savings incorporating limited borrowing, stochastic wage offers, health status and survival, social security benefits, Medicare and employer provided health insurance coverage, and intentional bequests. The model is estimated on sample of relatively poor households from the first three waves of the Health and Retirement Study (HRS), for whom we would expect social security income to be of particular importance. The estimated model is used to simulate the responses to several counterfactual experiments corresponding to changes in social security rules. These include changes in benefit levels, in the payroll tax, in the social security earnings tax and in early and normal retirement ages.

The effects of normative social belief systems and customer satisfaction on rural savings programs in Ghana

This study examines the effects of normative social beliefs, customer satisfaction with service quality and demographic variables on the long‐term savings behavior of rural households some 15 years after the 1981 large‐scale promotion of the rural bank program in Ghana. The results show that considerations of these influences beyond income alone provide stronger predictive power, over and above that of income. In addition, it appears that the negative effects of social beliefs on savings behavior were ameliorated significantly as a result of the promotional program. Similarly, customer satisfaction with the level of service quality was also positively correlated with the level of savings. However, the effects of the marketing approach used in Ghana differed significantly across state owned commercial banks, foreign multinational banks, and rural banks. The implications for enhancing the role of promotional marketing in changing savings attitudes in rural savings mobilization programs in Ghana and elsewhere in Africa are discussed.

Household Financial Savings Mobilisation: Empirical Evidence from Uganda

Panel data are used to examine household savings behaviour in Uganda and the part that is played by formal financial institutions in mobilising those savings. We show that the probability a household will acquire a deposit instrument from a financial institution increases significantly for both rural and urban households with improvements in several factors. Those factors include the level of information that is made available to the household, the degree of household access to the financial institution, the level of education of the head of household and the density of financial institutions in the area where the household is located. Among those households that report holding bank savings deposits, the level of net deposits is positively influenced by increases in the availability of credit facilities, lower transaction costs (as reflected by the quality of financial services provided by the institution) and higher permanent income. Relatively higher real rates of return on physical assets and higher transaction costs (due to reduced accessibility) both have significant negative effects on the level of net deposits held by households.

Life–cycle saving patterns and pension arrangements in the U.K.

This paper provides detailed empirical evidence on household saving for the U.K. and relates the observed patterns to the institutional environment, paying special attention to pensions. As such, it contributes to an international comparison project on Household Savings and Pension Policy edited by Axel Börsch-Supan, and considerable effort is made to construct comparable measures of savings and related variables across countries. Our main data source is the Family Expenditure Survey from which we draw a 22-year long time series of cross-sections allowing us to observe different date-of-birth cohorts over a substantial time period. Given data limitations, our analysis mainly relies on measuring savings as the residual between income and consumption expenditures. In the discussion of the observed profiles we point out phenomena that are particular to the U.K., such as the “retirement savings puzzle”. We discuss in detail pension arrangements and their evolution over time, as they are likely to have a fairly strong impact on household savings behaviour which is still little understood.

An Analysis of Urban Household Saving Rate in China

The Household saving in China underwent dramatic changes over the Past two decades. There have been some pervious studies about the savings behavior of urban household in China. But neither of them is enough to answer the question of what the true saving rate of urban household is all about.To examine saving behavior in china, it is essential to separate the rural and urban sectors because, as it will be seen below, different institutions and motives apply in each case. The purpose of this paper is to present an empirical study on urban household saving behavior in China. We focus on the Chinese social security system, which may have lowered saving rate by adopting non-monetary income. Our findings support the conjecture that regime shifts do play an important role in influencing Chinese urban household savings behavior.

Consumption demand, saving behaviour and rational expectations: an application of disequilibrium modelling to China 1952-92

In explaining dramatic changes in Chinese household savings and money demand behaviour in the reform period, previous studies proposed and tested three different hypotheses. However, no effort has been made to distinguish quantitatively between forced and voluntary savings in terms of their quanta, reasons and effects; the role of rational expectations in determining household behaviour has not received proper attention; and a puzzle of high domestic savings ratio accompanied by low interest rates still remains to be solved. This paper adopts a disequilibrium framework capable of investigating these issues. Our research yields some interesting and important results. Its findings support the conjecture that both regime shifts and repressed inflation have contributed to the rapidly rising personal money balances during the reform period, with the former being a dominant factor. It is shown that household voluntary savings can be well explained by official interest rates; only forced savings and instantaneous excess demand matter in affecting market prices, and thus monetary overhang is not so unsettling as some economists would think; and expectations do play a certain role in influencing household savings behaviour.

DIFFERENCES IN HOUSEHOLD SAVINGS BEHAVIOR: EVIDENCE FROM INDUSTRIAL AND DEVELOPING COUNTRIES

‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ NDERSTANDING the nature of household savings behavior is critical in designing policies to promote savings and investment. Given the differences in the economic environment of the developing and industrial countries there should be substantial variation in the household behavior. Most of the empirical literature that analyzed cross-country savings behavior concentrated on aggregate savings due to the lack of consistent information on household behavior and possible differences in the household savings in developing versus industrial countries were disregarded. This study aims at examining the differences in household savings behavior in developing and industrial countries from a cross-country perspective. Household savings literature is based on two major hypotheses. Following the pioneering work of Keynes [21] which defines savings as a linear function of income, the first major breakthrough in savings literature is the permanent income hypothesis of Friedman [11]. This hypothesis differentiates permanent and transitory components of income as determinants of savings. Permanent income is defined in terms of the longtime income expectation over a planning period and a steady rate of consumption maintained over lifetime given the present level of wealth. Transitory income is the difference between actual and permanent income and since individuals are assumed not to consume out of this income category, marginal propensity to save on transitory income will be unity. Empirical tests of the permanent income hypothesis are mainly concerned with the effect of initial wealth on savings as well as the marginal propensities to save out of permanent and transitory components of income. However, the results of empirical studies on permanent income hypothesis are divergent for both developing and industrial countries [20] [13] [14] [15]. U