Saving: vice or virtue? ( 429,68 KB )

 

  In the last four decades, the household savings rate for advanced countries as a whole has dropped, on average, from 12% to 8% and, as a consequence, the pattern of growth has become more dependent on consumption. Although this figure is strongly influenced by changes in the composition of the population, mostly its ageing, the downward trend in the savings rates suggests that agents may have altered their consumption decisions. On the other hand, there are also significant differences in savings behaviour between countries. So which factors influence these differing savings patterns over time and between countries?

  Firstly, the pattern of consumption can vary with the savings capacity or potential of each country and generation. We should therefore expect a region with a higher per capita income to find it relatively easier to save, so that richer economies should save proportionally more of their income than poorer countries. Within this context, this Box evaluates to what extent this relationship between income and savings holds true in practice. On the other hand, the savings model also depends on how agents' consumption reacts to changes in a series of economic variables, such as the interest rate, the degree of financial development, fiscal policies and inflation. Cultural factors also play an important part, as they help to construct the preferences that shape this propensity to consume.

  A comparison between countries reveals that the positive association between per capita income and the savings rate of households is not very solid, as shown in the previous graph. This suggests that the level of savings might be influenced by other factors. The same conclusion is also reached if we concentrate on the most advanced economies. The graph below shows that the fall in the savings rate has been widespread and independent of the rise in wealth of each country. One determining factor could be the fact that younger generations probably economize less, although their per capita income is substantially higher than that of their predecessors. Other variables are therefore very likely to shape the propensity to consume and preferences, key factors in the savings pattern. If, on average, a country's households are relatively keener on consuming due to these factors or their tastes, then the national savings rate will be lower.

  In fact, looking at those aspects that influence the desire to consume, of note is the role played by interest rates, perceived by agents as the price of spending now. The higher the interest rate, the more expensive it is to buy in the present, as depositing money in a bank will provide a better return and this will encourage people to save more. However, there may be an income effect (you need to keep less for the same gain in the future) that dominates this mechanism of substituting consuming today with consuming tomorrow, breaking this positive association between the interest rate and savings. The following graph shows that the downward trend in interest rates might certainly have had a negative effect on the savings rate over time, at least in advanced countries.

  The degree of sophistication of financial instruments may have also contributed to the fall in the savings rate, particularly in more developed countries. On the one hand, the range of financial instruments for consumer credit has increased significantly and, in addition, the interest rate for these products has fallen over the last few decades. As a result, the year-on-year growth rate for consumer credit in the euro area between 1992 and 2010 was 5.1%, higher than the average growth rate for household consumption, which stood at 3.8%.

  Other aspects of a demographic nature may have also led to differences in savings behaviour. In this respect, most studies agree that those countries with a higher ratio of dependent people, those aged under 16 and over 64, tend to save less. Insofar as the current population trend is leading, precisely, towards more ageing, this factor is expected to push savings down further, at least in the richer regions. According to data from the United Nations Organization, the dependency rate of older people in developed regions rose from 15% in 1970 to 24% in 2010 and is expected to reach 45% by 2050.

  From the perspective of fiscal policy (see the Box «Tax incentives for saving: do they work?»), this also alters incentives to save, as it can modify agents' disposable income. An example of how fiscal policy can alter savings decisions can be seen in Germany. According to an OECD study, fiscal stimuli to take out a private pension (Riesterrente) in the last decade have had a positive effect on this country's savings rate.(1) Certainly, this kind of aid can increase (or reduce) the cost of consuming today compared with tomorrow and this can result in individuals spending less (or more) in the present.

  Lastly, agents' preferences influence how consumption reacts to different variables and thereby establish the different combinations of spending today versus tomorrow. Insofar as culture has a strong effect on shaping tastes, when this alters between generations, preferences change and consequently the consumption pattern. A society that was originally more adverse to risk and therefore more inclined to accumulate wealth might therefore no longer be so, and this would lead to a reduction in its savings rate. An example of this can be found in the case of Japan, where several studies have pointed out that the rise over time in the desire to consume today instead of tomorrow might have been a key factor in this country's falling savings rate.(2)

  In short, although there are many different factors that lead to discrepancies in the savings pattern of different generations and countries, an analysis of the data shows that income level does not seem to be so decisive, whereas changes in interest rates, in financial development and in preferences, among others, are probably more crucial in explaining differing consumption patterns.

  (1) Hüfner, F. and Koske, I. «Explaining household saving rates in G7 countries: implications for Germany», OECD, Economic Department, Working Papers, No. 754 (2010).

  (2) Katayama, K. «Why Does Japan's Saving Rate Decline So Rapidly?», Policy Research Institute, Ministry of Finance, Japan (2006).

  This box was prepared by Maria Gutiérrez-Domènech

  European Unit, Research Department, "la Caixa"

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