Tuesday, January 6, 2009

New paper: “Why Aren't Developed Countries Saving?”

The National Bureau of Economic Research has released a new working paper by Loretti I. Dobrescu, Laurence J. Kotlikoff and Alberto F. Motta titled "Why Aren't Developed Countries Saving?" Here's the abstract:

National saving rates differ enormously across developed countries. But these differences obscure a common trend, namely a dramatic decline over time. France and Italy, for example, saved over 17 percent of national income in 1970, but less than 7 percent in 2006. Japan saved 30 percent in 1970, but only 8 percent in 2006. And the U.S. saved 9 percent in 1970, but only 2 percent in 2006. What explains these international and intertemporal differences? Is it demographics, government spending, productivity growth or preferences? Our answer is preferences. Developed societies are placing increasing weight on the welfare of those currently alive, particularly contemporaneous older generations. This conclusion emerges from estimating two models in which society makes consumption and labor supply decisions in light of uncertainty over future government spending, productivity, and social preferences. The two models differ in terms of the nature of preference uncertainty and the extent to which current society can control future societies' spending and labor supply decisions.

This paper makes a similar argument to a 1996 paper by Kotlikoff, Jagadeesh Gokhale and John Sabelhaus, titled "Understanding the Postwar Decline in U.S. Saving: A Cohort Analysis." The abstract to the older paper makes the conclusion a bit clearer:

Since 1980, the U.S. net national saving rate has averaged less than half the rate observed in the 1950s and 60s. This paper develops a unique cohort data set to study the decline in U.S. national saving. It decomposes postwar changes in U.S. saving into those due to changes in cohort-specific consumption propensities, those due to changes in the intergenerational distribution of resources, those due to changes in government spending on goods and services, and those due to changes in demographics. Our findings are striking. The decline in U.S. saving can be traced to two factors: The redistribution of resources from young and unborn generations with low or zero propensities to consume toward older generations with high consumption propensities, and a significant increase in the consumption propensities of older Americans. Most of the redistribution to the elderly reflects the growth in Social Security, Medicare, and Medicaid benefits. The increase in the elderly's consumption propensities may also reflect government policy, namely the fact that Social Security, Medicare, and Medicaid benefits are paid in the form of annuities and that, in the case of Medicare and Medicaid, the annuities are in-kind and must, therefore, be consumed.

In other words, we're saving less in large part due to entitlements, which are unfunded transfer programs from younger to older Americans. The same process is taking place abroad, the current Kotlikoff, Dobrescu, and Motta paper concludes.


 


 

3 comments:

Peter Whiteford said...

Andrew
Interesting blog.

I think an important factor not taken into account in your comment is the different ways in which households save, at least in the English-speaking countries.

See the Reserve Bank of Australia papers at http://www.rba.gov.au/rdp/RDP2006-07.pdf and http://www.rba.gov.au/PublicationsAndResearch/StatementsOnMonetaryPolicy/Boxes/2006/2006_05_d_box.pdf

Basically as the RBA points out capital gains from equities are not included in conventional measures of household savings rates - "Countries which have relatively high household saving rates as conventionally measured (e.g. countries in Europe) tend also to be those where household investments are mainly in bank deposits and fixed income, whereas in countries with low household saving on conventional measures (of which the US and Australia are examples) households hold a greater proportion of their investments in equities. Once the capital gains in these are included in saving measures, the international dispersion in saving rates is reduced"

This is not to argue that public pension systems do not have an impact on national savings rates, particularly in the longer run.
However, when you look across countries many (but not all) European countries with much higher levels of spending on retirement pensions than the US (or Australia) also have much higher levels of household savings.

I don’t know what has happened in the US, but over the 2008 year household savings as conventionally measured jumped enormously in Australia, which seems more likely to be related to the state of the stock market than to any changes in pensions policy.

Andrew G. Biggs said...

Peter,
Thanks for the comment. I've heard the argument before that capital gains should be counted toward the saving rate. I think technically it's wrong: saving is a verb, meanign something people do. Capital gains may increase wealth, the capital stock, etc., but it seems a distinct activity.

Moreover, as we've seen with recently with both equities and home values, saving predicated on capital gains are fleeting. Plus, including them can make for non-nonsensical results in times like these: in general, saving rises during recessions as people consume less and try to ride things out, but by including falling asset prices saving appears negative.

Finally, while rising stock or home prices increase the wealth of stock holders, they also increase the price of accumulating wealth for non-stock holders.

I'm not saying that asset values aren't important, or that rising asset values have no impact on saving rate: they should, since higher wealth today should imply higher consumption down the road, which allows for lower saving. But I'm not sure they should all be packed into the same measure. Thanks,

Andrew

Peter Whiteford said...

Andrew
I think that the point I would emphasise is that a potentially stronger explanation of the decline in household savings rates in some developed countries has been the reliance on capital gains, which as you say has proved problematic, and that in the last decade this has been more important than pension spending.