Intergenerational developments in household saving behaviour

Abstract

This paper examines the saving behaviour of different generations of households in New Zealand over the period 1984–2010 using data from the Household Economic Survey. The paper employs a life-cycle framework to estimate regression models that identify the influence of age and birth year on household saving rates. The results show that household saving rates exhibit a hump shape over the life cycle and that, from the baby boomers onward, the average saving rates of each generation exceed those of the generation preceding it. These findings suggest that the movement of the baby boomers into their higher saving years has contributed positively to aggregate saving rates, but that future effects of population ageing are likely to be negative. However, it is possible that the lift in saving rates over recent generations will provide an ongoing positive contribution to aggregate saving rates throughout the projection period ending 2030.

Keywords:

• household saving
• life cycle
• age
• cohorts

Acknowledgement

The author is grateful to Hamish Low, Andrew Coleman, John Creedy, Grant Scobie, John Gibson, Oscar Parkyn, and Jeff Cope for their insightful comments and suggestions. The author would also like to thank Christopher Ball and Talosaga Talosaga for their work in preparing the data. This paper extends research originally undertaken as part of the requirements for the degree of Master of Philosophy in Economics, University of Cambridge, 2013, and it was previously released by the New Zealand Treasury as Working Paper No. 14/23. The views expressed in the paper are those of the author and do not necessarily reflect the views of the New Zealand Treasury.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. Two recent papers, Scobie and Henderson (2009) and Le, Gibson, and Stillman (2012), derived household saving rates over 2004–2006 using household-level net wealth data from the Survey of Family, Income and Employment. Given the short sample period, neither study was able to identify cohort effects on saving.

2. The dataset includes some improvements to tax calculations which serve to slightly increase household disposable income for the periods 1984–1987 and 1994–1998 compared with the data used by Gibson and Scobie (2001b).

3. Gibson and Scobie (2001b) undertook sensitivity analyses using the individual as the unit of analysis, but noted that “extreme” assumptions were required to allocate expenditure (which is only recorded at the total household level) across individuals (p. 20). They found that the age and cohort patterns in saving are similar to those found using the household as the unit of analysis.

4. Birth year = survey year − age at time of survey, where survey year is the year in which the survey ended.

5. HES does not record income tax data. The paper uses HES data adjusted by the New Zealand Treasury's non-behavioural tax-benefit micro simulation model, Taxwell, for the 2007 and 2010 surveys, and by a predecessor of Taxwell for the earlier surveys. These models estimate net tax payment and disposable income measures.

6. Population weights have not been applied in these calculations or any analysis in this paper because of the inconsistency created by the change in Statistics New Zealand's weighting method from 2001. However, applying Statistics New Zealand's (inconsistent) weights does not lead to materially different results from the unweighted analysis.

7. The sample selection, outlined in Section 2.2, has little effect on the aggregate HES measure.

8. The influence of changes in the interest rate on saving rates is theoretically ambiguous, depending on the relative strength of income and substitution effects, and most empirical work finds small or nonexistent effects.

9. Specifically, , is defined as follows , where d_t is the usual time dummy. The coefficients of give the third to final year coefficients, and the first and second coefficients can be derived from the constraint that all time effects sum to zero and are orthogonal to a time trend (Deaton 1997).

10. This relationship assumes that income has an unchanging age profile. Therefore, economic growth only affects the position of each cohort's age profile and not the age profiles themselves.

11. Real income and consumption measures are used in the estimation. Nominal data are deflated by the Reserve Bank of New Zealand's “Consumers Price Index (excluding interest rates)” measure.

12. For each cohort, the figure excludes data points for ages that are observed in two or less survey years. This censoring reduces the noise at the ends of the cohort “lines” without affecting the overall patterns.

13. Each point in Figures 3 and 4 corresponds to an estimated coefficient from a regression of Equations (5(5) ) and (6(6) ), or (7(7) ).

14. Estimates are converted from log values into percentage terms by taking the exponent of estimated coefficients and subtracting 1.

15. New Zealand Superannuation is a defined benefit public pension scheme, funded from general taxation on a pay-as-you-go basis. The scheme underwent significant reform over 1980s and 1990s (details are provided by Talosaga and Vink (2014)), but the pension was received by most of the population of eligible age over the sample period at a rate (for couples) exceeding 65% of the net average national wage.

16. The timing of these recessions is highly approximate because each HES survey is conducted over a one-year period, with income data and some expenditure components recorded for the year preceding the interview date. This means that the date pertaining to some data may vary by up to 24 months between households in the same survey.

17. A recent example of the literature discussing household saving and economic recessions is Alan, Crossley, and Low (2012).

18. More detail on the construction of these saving measures is included in the Appendix section.

19. The ideal, but unworkable, approach here would be to exclude changes in the stock of durable expenditures from consumption expenditure and to add to consumption expenditure the value of services obtained from the stock.

20. The 79 households with zero recorded income are excluded from the sample, to leave a total sample size of 56,344.

21. Questions related to educational qualifications were not available for some households in the earlier survey years. The conditioned equations are therefore estimated on a reduced sample. Estimates for cohort, age and the other conditioning variables are not materially affected by the reduced sample.

22. It is beyond the scope of this paper to explore these results in detail, which could be a fruitful avenue for future work.

23. The author thanks Andrew Coleman for this suggestion.

24. In addition to the changes announced in the 1991 Budget, the expected eligibility age variable also accounts for the more gradual increase in the New Zealand Superannuation eligibility age announced in 1989, which involved the eligibility age increasing from 60 to 65 years between 2006 and 2026. Obviously, there may be differences between individuals’ expectations in relation to the future eligibility age and actual government policy at the time.

25. The life-cycle-related calculations in Figure 16 are made using Statistics New Zealand's population-by-age estimates, not the HES survey data shown in Figure 15, because the population-by-age estimates data include future projections. There is little difference in the results of aggregate calculation using the two alternative data sets.

26. The estimated cohort effects indicate a compound average income growth rate of approximately ¾% per birth year between 1910 and 1990.

27. As discussed in Section 5.3.3, it seems likely that differences between the saving behaviour of cohorts would reverse at some point in the retirement period, but the data limitations prevent a precise estimation of how this occurs. Nevertheless, it seems reasonable to assume that the overall contribution from cohort effects will be positive for as long as both the population size and average saving rate of cohorts reaching retirement exceed those of the (older) cohort before them.