The ability of a society to defer consumption from the present to the future provides resources for capital accumulation, which in turn creates a basis for increasing labor productivity and improving living standards. As such, positive national saving may beneficially contribute to a country’s economic development, although many other factors—such as the state of domestic demand and the effectiveness of financial intermediation—are also involved in influencing the extent to which this potential may be realized. (See the collection of papers in Setterfield 2002 on demand-led growth.)
The total saving undertaken by a country has three components:
|a||Domestic private saving||Y – T – C||Income earned by households (Y), net of taxes they pay to the government (T), minus what they spend on goods and services (C)|
|b||Public saving||T – G||Any excess in the government’s tax revenues (T) over its expenditures (G)|
|c||International saving||X – M||Any excess in the value of the country’s exports (X) over the value of its imports (M), which implies an accumulation of wealth abroad|
Items (a) and (b) added together are known as “national saving.” To facilitate comparisons across countries and over time, saving levels are usually divided by disposable income (for domestic private saving) or national income (for public and national saving), to compute saving rates:
Domestic private saving rate: (Y – T – C)/(Y – T) × 100;
Public saving rate: (T – G)/Y × 100;
National saving rate: [(Y – T – C) + (T – G)]/Y × 100.
Changes in public saving can be expected to change private saving also because they affect expected after-tax income streams—the basis on which households make saving decisions. As a notable example, public pension programs such as U.S. Social Security generally reduce private saving, because people have less burden to accumulate their own savings to cover consumption in retirement. However, the extent to which private and public saving substitute for each other is open to debate. A contested conjecture is the idea of “Ricardian equivalence,” which holds that reductions in public saving are offset in full by increased private saving, because households will set aside resources to pay for the greater tax burden they know they will eventually face (Barro 1974). However, the empirical evidence on Ricardian equivalence is fairly mixed.
To see how a country’s saving relates to its investment, it is helpful to look at the following re-expression of the national-income accounting identity:
I = (Y – T – C) + (T – G) – (X – M)
This expression shows that funds for investment (I) can come from domestic private saving, public saving, and/or international dis saving. The last term corresponds to the country’s trade balance. Because a country that has a trade deficit (X < M) must realize a capital inflow to cover it, the inflow supplements national saving as a source of finance for domestic investment. But if its exports exceed its imports, the surplus entails a capital outflow, reducing financing available for domestic investment in favor of wealth accumulation abroad. This “open-economy” aspect of the saving/investment link has been important for the United States in recent years: The level
of domestic investment has remained healthy despite low national saving due to the willingness of other countries to supply capital to the United States.
It is important to note that saving is a flow concept; that is, it measures the excess of income over spending in a given year, which adds to the country’s stock of wealth. Thus, a decline in household saving does not necessarily imply lower ability to finance consumption in the future— just a slower pace of accumulation of resources toward that end. A related implication is that household wealth can rise, even if saving falls, as long as asset prices are rising. This has probably contributed to the decline in household saving in advanced-industrial countries in recent years (figure 1): Because housing and stock markets have been strong, increases in asset prices have enabled households to scale their saving back while still accumulating wealth.
There are substantial, persistent differences across countries in their saving rates. As shown in figure 2, national saving rates in East Asia and the Pacific tend to be very high by international standards, ranging between 20 and 30 percent in the past twenty-five years. In contrast, saving rates in high-income countries of the Organization for Economic Cooperation and Development (OECD) have drifted down from about 10 percent in 1980 to 5 to 7 percent in the mid-2000s. In Latin America and the Caribbean, saving rates tend to track those of the high-income OECD countries, whereas in South Asia they are higher (10–15%). In sub-Saharan Africa and especially the Middle East and North Africa, national saving rates fluctuate appreciably from year to year, in good part because fluctuating prices of commodity exports impart volatility to public saving.
While the causes of these cross-country differences are not well-understood, several factors are probably involved. First, the “life-cycle” theory of saving (Ando and Modigliani 1957) suggests an important role of demographic variables. The basic proposition of the life-cycle view is that people borrow against future income when young, save in their high-earning middle-age years, and spend down their assets in retirement. Thus, for example, population aging in the advanced-industrial countries might be expected to drive down private saving rates (OECD 1998). Second, periods of rapid economic growth tend to be strongly associated with increased saving, perhaps because consumption takes a while to catch up to permanently higher incomes (Carroll and Weil 1994). Third, the introduction of government social-insurance programs (e.g., unemployment, welfare, disability) alleviates people’s need to “save for a rainy day,” which may edge national saving down. Fourth, the development of credit markets also reduces precautionary motives to save, as borrowing can be used instead of dissaving to cover consumption needs (Japelli and Pagano 1989). Finally, there are also differences across cultures in the priority placed on saving for the future versus living for today, although it is difficult to disentangle effects of culture on saving from those of other variables.
A growing body of research examines how saving rates vary with household characteristics, using survey data (see Browning and Lusardi 1996 for a valuable review). Many studies find that saving tends to be higher among middle-aged households, ceteris paribus, consistent with the life-cycle view. Yet there are also lots of findings that are hard to reconcile with life-cycle theory—for example, that good-sized fractions of households hardly save at all, that older households tend to dissave “too slowly” relative to their life expectancies, and that very rich households save entirely too much for life-cycle motives to be the whole story. Thus, researchers have explored numerous extensions to the life-cycle model to see whether its fit to the data can be improved. These extensions include the possibility that liquidity constraints or asset-limits for social-insurance programs explain low saving among low-income households (Zeldes 1989; Hubbard, Skinner and Zeldes 1995); that uncertainty about time of death and/or bequest motives lie behind slow dissaving in old age (Davies 1981; Abel 1985); and that the very wealthy accumulate wealth for wealth’s sake, rather than for the future consumption it assures (Carroll 2000). Nonetheless, given uncertainties about whether intertemporal optimization is a good description of consumption and saving behavior, economic research is also branching out to explore “behavioral” views of household saving, in which households use heuristics to make informationally complex decisions and/or struggle with problems of self-control, in which they know they should be saving for the future but are unable to start doing so today (Sheffrin and Thaler 1988 and Laibson 1997). Behavioral approaches may be especially valuable for investigating whether households save adequately for retirement (Aaron 1999)—which in turn is important for evaluating proposals to shift responsibility for retirement saving back to the private domain.
Aaron, Henry, ed. 1999. Behavioral Dimensions of Retirement Economics. Washington, DC: Brookings Institution Press and Russell Sage Foundation.
Abel, Andrew. 1985. Precautionary Saving and Accidental Bequests. American Economic Review 75 (4): 777–791.
Ando, Albert, and Franco Modigliani. 1957. Tests of the Life Cycle Hypothesis of Saving: Comments and Suggestions. Oxford Institute of Statistics Bulletin 19: 99–124.
Barro, Robert. 1974. Are Government Bonds Net Wealth? Journal of Political Economy 82 (6): 1095–1117.
Browning, Martin, and Annamaria Lusardi. 1996. Household Saving: Micro Theories and Micro Facts. Journal of Economic Literature 34 (4): 1797–1855.
Carroll, Christopher. 2000. Why Do the Rich Save So Much? In Does Atlas Shrug?: The Economic Consequences of Taxing the Rich, ed. Joel Slemrod, 157–184. New York: Russell Sage Foundation and Harvard University Press.
Carroll, Christopher, and David Weil. 1994. Saving and Growth: A Reinterpretation. Carnegie-Rochester Conference Series on Public Policy 40: 133–192.
Case, Karl, John Quigley, and Robert Shiller. 2001. Comparing Wealth Effects: The Stock Market Versus the Housing Market. National Bureau of Economic Research, Working Paper No. 1335.
Davies, James. 1981. Uncertain Lifetime, Consumption, and Dissaving in Retirement. Journal of Political Economy 89 (3): 561–577.
Hubbard, R. Glenn, Jonathan Skinner, and Stephen Zeldes. 1995. Precautionary Saving and Social Insurance. Journal of Political Economy 103 (2): 360–399.
Jappelli, Tullio, and Marco Pagano. 1989. Consumption and Capital Market Imperfections: An International Comparison. American Economic Review 79 (5): 1088–1105.
Kuehlwein, Michael. 1993. Life-Cycle and Altruistic Theories of Saving with Lifetime Uncertainty. Review of Economics and Statistics 75 (1): 38–47.
Laibson, David. 1997. Golden Eggs and Hyperbolic Discounting. Quarterly Journal of Economics 112 (2): 443–477.
Organization for Economic Cooperation and Development. 1998. Maintaining Prosperity in an Ageing Society. Paris: Author.
Setterfield, Mark, ed. 2002. The Economics of Demand-Led Growth: Challenging the Supply-Side Vision of the Long Run. Northampton, MA: Edward Elgar.
Sheffrin, Hershel, and Richard Thaler. 1988. The Behavioral Life-Cycle Hypothesis. Economic Inquiry 26: 609–643.
Zeldes, Stephen. 1989. Consumption and Liquidity Constraints: An Empirical Investigation. Journal of Political Economy 97 (2): 305–346.
Martha A. Starr