4. Macro Analysis

The Determinants of Saving Rates in the Developed and Developing
Economies: The Impact of Social Safety Nets
Charles Yuji Horioka∗

1. Introduction
It is often asserted that social benefits (social safety nets) will have a negative impact on thehousehold saving rate because households will not feel the need to save (self-insure) if social
benefits are adequate. Similarly, it is often asserted that financial development (an increase in
the availability of credit or the relaxation of borrowing constraints) will have a negative impact on
the household saving rate because households will not feel the need to save for precautionary
purposes if they can borrow freely when necessary. This paper analyzes the determinants ofsaving rates in developed economies as well as developing economies with emphasis on theimpact of social benefits (social safety nets) and social benefits. One purpose of the analysis in
this paper is to see whether there is substitutability between social benefits and credit availability,
which is plausible since both are risk-coping mechanisms that serve as a substitute forself-insurance (saving).
The paper is organized as follows: In section 2, we briefly survey the theoretical andempirical literature on the impact of social safety nets and credit availability on the household(private) saving rate; in section 3, we discuss our analysis of the determinants of the householdsaving rate in the developed economies (the member countries of the Organisation for Economic
Co-operation and Development (OECD)); in section 4, we discuss our analysis of thedeterminants of the domestic saving rate in twelve developing economies of Asia; and section 5
concludes.
To summarize the main results of this paper, our analysis of the determinants of thehousehold saving rate in the developed countries of the OECD finds that there are considerable
and stable differences among countries in their household saving rates and social benefit ratios butthat the latter can explain the former to only a limited extent. In particular, it finds that the age
structure of the population and credit availability are more important as determinants ofcross-country differences in the household saving rate than the social benefit ratio but that there issubstitutability between credit availability and the social benefit ratio, with the impact of credit
availability on the household saving rate being negative, as expected, when changes in the social∗ Charles Yuji Horioka is Professor of the Institute of Social and Economic Research, Osaka University. He received his B.A.
and Ph.D. degrees from Harvard University in 1977 and 1985, respectively. His research focuses on household saving,
consumption, and bequest behavior in Japan, the United States, China, and India.
I am grateful to Mukul Asher, Davide Furceri, Masahiro Kawai, and the other participants of the Asian Development Bank
Institute Annual Conference on “Effects of Social Policy on Domestic Demand,” held on November 4, 2009, at the AsianDevelopment Bank Institute in Tokyo, Japan, and to Kwanho Shin for their valuable comments. Some of the results reported
here are based on collaborative research with Akiko Terada-Hagiwara and Ting Yin.

309

benefit ratio are small and positive, contrary to expectation, when changes in the social benefit
ratio are large.
Our analysis of the determinants of the domestic saving rate in developing Asia during the
1965-2007 period finds that the main determinants appear to be the aged dependency ratio,
income levels, and the level of financial development. We project future trends in domestic
saving rates in developing Asia for the 2011-2030 period based on our estimation results and findthat the aging of the population will be the main determinant of future trends in domestic saving
rates in developing Asia. However, we find that there will not be a sharp decline in saving rates
in developing Asia as a whole, at least during the next two decades, inasmuch as there will be
substantial variations across economies in the speed and timing of population aging.
2. Survey of the Previous Theoretical and Empirical Literature
In this section, we briefly summarize the theoretical and empirical literature on the impactof the age structure of the population, social safety nets and credit availability on householdsaving.
Looking first at empirical studies that use cross-country data to analyze the impact of theage structure of the population on saving, numerous studies have found that the aged dependency
ratio has a negative and significant impact on the household, private, and national saving rates(see Feldstein (1977, 1980), Modigliani and Sterling (1983), Horioka (1989), Li, Zhang, andZhang (1987), Edwards (1996), Dayal-Ghulati and Thimann (1997), Bailliu and Reisen (1998),
Loayza, et al. (2000), and Bosworth and Chodorow-Reich (2007) for recent examples).
Looking next at the theoretical literature on the impact of social saving nets on householdsaving, most of this literature has focused on the impact of public old-age pensions on householdsaving. For example, the seminal paper on this topic (Feldstein (1974) showed that the impact ofpublic old-age pensions on household saving is theoretically ambiguous. On the one hand, theintroduction of a public old-age pension system will induce households to save less because theyno longer need to rely as much on their own savings to finance living expenses during retirement(the wealth replacement effect), but on the other hand, the introduction of a public old-age
pension system will induce households to retire earlier, and this in turn will induce them to savemore (the induced retirement effect). The net impact of public old-age pensions on householdsaving will depend on the relative strengths of these two offsetting effects.

Moreover,Todo-Rovira and Perez-Amaral (1988) show that the impact of public old-age pensions on private
saving will depend on people's expected real rate of growth of retirement benefits and thatrealistic estimates of this parameter imply a smaller depressing effect on private saving than foundby Feldstein (1974).
The literature on the impact of other components of the social safety net on householdsaving rate is much scarcer but not non-existent. For example, the seminal paper on this topic(Hubbard, Skinner, and Zeldes (1995)) demonstrates theoretically that social insurance programs

310

with means tests based on assets discourage saving by households with low expected lifetime
incomes. Thus, not only public old-age pensions but also other components of the social safety
net may have a negative impact on the household saving rate.
Looking next at previous empirical studies that use cross-country data to analyze the impact
of social safety nets on household (or private) saving, the vast majority of these previous studies
have focused on the impact of public old-age pensions on household saving, and most of them
have found that public old-age pensions have a negative and significant impact on householdsaving. For example, Feldstein (1977, 1980) and Bailliu and Reisen (1998) obtain this finding
for a sample of developed economies, while Edwards (1996) and Dayal-Ghulati and Thimann(1997) obtain this finding for a sample of developing economies. The major exceptions are
Modigliani and Sterling (1983), who find that the impact of public old-age pensions on private
saving is ambiguous because a smaller than expected wealth replacement effect is more thanoffset by a larger than expected induced retirement effect, and Horioka (1989), who finds that the
impact of public old-age pensions on private saving is insignificant because neither of the two
effects is significant.
Looking finally at previous empirical studies that use cross-country data to analyze theimpact of credit availability on the saving rate, Loayza, et al. (2000) find using a sample ofdeveloped and developing economies that the ratio of domestic credit flow to gross national
disposable income has a negative and significant impact on the private saving rate.
To summarize, most previous cross-country studies have analyzed the impact of public
old-age pensions on household (or private) saving and obtain a negative and significant impact,
but few cross-country studies have analyzed the impact of other social programs, and at least one
study has found that credit availability has a negative and significant impact on saving.
3. An Analysis of the Determinants of Household Saving Behavior in the Developed
Countries of the OECDIn this section, we discuss our analysis of the determinants of the household saving behavior
in the developed countries of the OECD.
(1) Estimation ModelIn this section, we describe the estimation model we use in our analysis. The estimation
model we use is as follows:
HHSR = a0 + a1*AGE + a2*SBR + a3*CREDIT + a4*SBR*CREDIT + u,
where HHSR = the household saving rate = the ratio of household saving to household disposable
income (in percent)
AGE = the aged dependency ratio = the ratio of the aged population (the population aged 65
or older) to the working-age population (the population aged 20 to 64) (in percent)311

SBR = the social benefit ratio = the ratio of social contributions and social benefits, otherthan social transfers in kind, receivable to net household disposable income (in percent)
CREDIT = the credit availability index = the ratio of private credit by deposit moneybanks and other financial institutions to GDP (in percent).
SBR*CREDIT = the cross-product of SBR and CREDIT
CREDIT is included as a proxy for the degree of financial development (or to put it
another way, the availability of private credit or the prevalence of borrowing constraints).

(2) Data Sources
In this section, we describe the data sources of the variables used in our analysis.

(1) The source of the data on the household saving rate HHSR
The data on HHSR were taken from Annex Table 23: Household saving rates of OECD
Economic Outlook, no. 86 (November 2009).
(2) The source of the data on the aged dependency ratio AGE and population POP

The data on AGE and POP were taken from Panel 2: Detailed Data of United Nations,
Population Division (2008).
(3) The source of the data on the social benefit ratio SBR
The data used to calculate SBR were taken from Table 13: Simplified Accounts forHouseholds and NPISH (Non-profit Institutions serving Households) of Organisation for
Economic Co-operation and Development (2009) except that the 1995 data for all countries anddata on Sweden for all countries were taken from the previous edition of the same, published in2008. SBR was calculated by dividing line 10 (Social contributions and social benefits, otherthan social transfers in kind, receivable) by line 15 (Disposable income, net).
(4) The source of the data on credit availability CREDIT

The data on CREDIT were taken from Beck, Demirguc-Kunt, and Ross (1999) and the May
2009 update by the authors, available on-line at:
http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,contentMDK:206
96167~pagePK:64214825~piPK:64214943~theSitePK:469382,00.html

Of the 30 member countries of the OECD, data were available on all variables for thefollowing 23 countries: Austria, Belgium, Canada, the Czech Republic, Denmark, Finland,
France, Germany, Hungary, Ireland, Italy, Japan, the Republic of Korea, the Netherlands,
Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, the United
Kingdom, and the United States.

The necessary data were not available for Australia,

Greece, Iceland, Luxembourg, Mexico, New Zealand, and Turkey.

312

Moreover, data on

saving rates and social benefit ratios were not available for Ireland (1995 and 2000) anddata on social benefit ratios were not available for Hungary (1995), Ireland (1995 and2000), Japan (1995) and Spain (1995).

Thus, the total number of observations was 64 or

67, depending on which explanatory variables were included.

(3) Descriptive Statistics
This section presents descriptive statistics on the variables used in our analysis. The
descriptive statistics are shown in Table 1, and as can be seen from this table, there is enormous
variation in all of the variables used in our analysis. HHSR, the household saving rate, averaged
7.74 percent and ranged from -1.90 percent (in Denmark in 2000) to 17.00 percent (in Italy in1995). AGE, the age dependency ratio, averaged 24.11 percent and ranged from 9.43 percent (inthe Republic of Korea in 1995) to 32.59 percent (in Japan in 2005). SBR, the social benefit ratio,
averaged 27.74 percent and ranged from 8.40 percent (in the Republic of Korea in 2000) to 43.90
percent (in Denmark in 1995). Finally, CREDIT, our proxy for credit availability, averaged
96.15 percent and ranged from 14.87 percent (in Poland in 1995) to 195.29 percent (in Japan in2000).
Table 1: Descriptive Statistics
Mean Std. Dev. Minimum Maximum
HHSR
7.74
4.41
-1.90
17.00
AGE
24.11
4.35
9.43
32.59
SBR
27.74
8.22
8.40
43.90
CREDIT
96.15
44.76
14.87
195.29Note: Refer to the main text for variable definitions anddata sources.

(4) Estimation Results
In this section, we present the estimation results. The results of the Hausman test indicatedthat the fixed-effects model was the correct model, and thus we present the results of the
fixed-effects model, with the observations being weighted by the population of each country in
1995.
The results are shown in Table 3, and as can be seen from this table, the coefficient of AGE
is negative (in the -0.85 to -1.00 range) and statistically significant at at least the 5 percent
significance level, as expected, indicating that a one percentage point increase in AGE reduces thehousehold saving rate by 0.85 to 1.00 percentage points. The coefficient of CREDIT is negative(in the -0.033 to -0.036 range) and statistically significant at at least the 10 percent significancelevel, as expected, indicating that a one percentage point increase in CREDIT lowers thehousehold saving rate by 0.033 to 0.036 percentage points (if the cross-product of CREDIT and313

Table 2: The Determinants of the Household Saving Rate
Model ConstantAGE
SBR CREDIT SBR*CREDIT R-squared F-stat. No. of obs.
1
27.573 -0.846
0.408 22.590
67
4.250
0.178
0.028
0.000
6.49
-4.75
0.000
0.000
0.000
2
22.789 -0.847 0.197
0.258
2.770
64
8.339
0.371 0.331
0.044
0.075
2.73
-2.28
0.59
0.007
0.009
0.028 0.556
335.721 -1.003-0.036
0.523
7.660
67
7.189
0.263
0.016
0.021
0.002
4.97
-3.81
-2.16
0.000
0.000
0.000
0.036
4
31.079 -0.980 0.151 -0.033
0.388
2.230
64
11.3760.449 0.266
0.018
0.025
0.099
2.73
-2.18
0.57
-1.81
0.002
0.010
0.035 0.575
0.079
539.772 -0.993 -0.232 -0.103
0.0033
0.437
3.020
64
12.2250.444 0.371
0.039
0.0018
0.006
0.030
3.25
-2.24
-0.62
-2.66
1.89
0.001
0.002
0.031 0.537
0.012
0.067
Note: The first figure indicates the estimated coefficient, the second figure indicates thestandard error, the third figure indicates the z-value, and the fourth figure indicates the pvalue. The first R-squared is within, the second R-squared is between, and the third Rsquared is overall. The figure below the F-statistic is the p-value.

SBR is not included).

The coefficient of SBR is positive and totally insignificant,indicating that it does not have a significant impact on the household saving rate. Finally, if thecross-product of CREDIT and SBR are included, the coefficient of CREDIT is negative andstatistically significant, as before, but it increases in absolute magnitude (to -0.103) and its
significance level also increases (to close to the 1 percent level), while the coefficient of thecross-product term CREDIT*SBR is positive (0.0033) and statistically significant at the 10
percent significance level. This implies that, in economies with no social benefits whatsoever, a
one percentage point increase in CREDIT lowers the household saving rate by 0.103 percentage
points and that a one percentage point increase in SBR reduces the impact of CREDIT (inabsolute magnitude) by 0.33 percentage points. This implies that the impact of CREDIT will be
zero when SBR changes by 0.103/0.33 = 3.12 percentage points, negative, as expected, when
SBR changes by less than 3.12 percentage points, and positive, contrary to expectation, when
SBR changes by more than 3.12 percentage points.
Thus, it appears that the age structure of the population and credit availability are more
important as determinants of cross-country differences in the household saving rate than the social
benefit ratio but that there is substitutability between credit availability and the social benefit ratio,with the impact of credit availability on the household saving rate being negative, as expected,
when changes in the social benefit ratio are small and positive, contrary to expectation, whenchanges in the social benefit ratio are large.
Our results concerning CREDIT are consistent with the findings of Loayza, et al. (2000),314

who find using a sample of developed and developing economies that the ratio of domestic credit
flow to gross national disposable income has a negative and significant impact on the private
saving rate.
(5) Conclusion
In this section, we presented cross-country data on household saving rates and social safety
nets in the developed countries of the OECD and analyze the determinants of cross-country
differences in household saving rates with emphasis on the impact of social safety nets, the age
structure of the population, and borrowing constraints thereon. To summarize the main findingsof this section, we found that there are considerable and stable differences among economies intheir household saving rates and social benefit ratios but that the latter can explain the former only
to a limited extent, with the age structure of the population and borrowing constraints being more
important as determinants of cross-country differences in household saving rates.
Perhaps one reason for our failure to detect a significant impact of social safety nets on thehousehold saving rate is that we did not take account of the breakdown of social safety nets
among the various categories. For example, social assistance aimed at the poor might have avery different impact on household saving than a universal health insurance or public pension
system. One avenue for further research is to try breaking down social benefits into its various
components.
4. An Analysis of the Determinants of the Domestic Saving Rate in the Developing
Economies of Asia
In this section, we discuss our analysis of the determinants of the domestic saving rate in thedeveloping economies of Asia.
Developing Asia has been characterized by high domestic and national saving rates almost
across the board in recent years, and these high saving rates have made possible not only highlevels of domestic investment but also large capital outflows (current account surpluses) (see, forexample, the data presented in Park and Shin (2009)). To put it another way, the developing
economies of Asia have oversaved and underinvested, leading to large current account imbalances(surpluses), as asserted by Bernanke (2005) and others.
However, population aging is projected to occur at a rapid rate in developing Asia, which
will presumably lead to a sharp decline in saving rates.

If so, the large current accountimbalances (surpluses) that currently exist will go away by themselves without any need forgovernment intervention． However, if other factors, such as culture, financial sector development,
or corporate sector saving, are the dominant determinants of saving rates, it is possible that saving
rates will remain high in developing Asia despite the rapid aging of its population.
The purpose of this section is to present data on trends over time in domestic saving rates in
twelve economies in developing Asia during the 1960-2008 period, to analyze the determinants of
those trends, and to project trends in domestic saving rates in these same economies during the315

next twenty years (2010-2030 period). The twelve economies included in our analysis include
the People’s Republic of China (PRC); Hong Kong, China; India; Indonesia; Republic of Korea;
Malaysia; Pakistan; Philippines; Singapore; Chinese Taipei; Thailand, and Vietnam, which
comprise 95 percent of developing Asia.
(1) A Survey of Previous Empirical Studies and Determinants of Saving
There have been many previous empirical analyses of the determinants of national anddomestic saving rates using cross-section or panel cross-country data or time series data for
individual economies, among them Modigliani (1970), Feldstein (1977, 1980), Modigliani andSterling (1983), Horioka (1989), Edwards (1996), Dayal-Ghulati and Thimann (1997), Bailliu andReisen (1998), Higgins (1998), Loayza, et al. (2000), Chinn and Prasad (2003), Luhrman (2003),
International Monetary Fund (2005), Bosworth and Chodorow-Reich (2007), Ito and Chinn(2007), Kim and Lee (2008), Park and Shin (2009), and Horioka and Yin (2010). The present
study is based most closely on Higgins (1998), Bosworth and Chodorow-Reich (2007), and Parkand Shin (2009).
These studies suggest an important role for demographic variables based on the life cycle
model. Looking first at the impact of the age structure of the population, since the aged typicallyfinance their living expenses by drawing down their previously accumulated savings, the aged
dependency ratio (the ratio of the aged population to the working-age population) should have anegative impact on the saving rate, and similarly, since children typically consume without
earning income, the child dependency ratio (the ratio of children to the working-age population)
should also have a negative impact on the saving rate. However, a lower child dependency ratiomeans fewer children to provide care and financial assistance during old age and hence the childdependency ratio could have a positive impact on the saving rate. Park and Shin (2009) andmost other studies find that the aged dependency ratio and the youth dependency ratio bothdecrease the national saving rate, as expected. Moreover, they also find that life expectancy has
a positive impact on the saving rate because a lengthening of life expectancy increases people’s
retirement spans and necessitates more saving for retirement and that the labor force participation
rate of aged has a negative impact on the saving rate because an increase in the labor force
participation rate of the aged shortens people’s retirement spans and reduces the amount of saving
needed for retirement.
A high growth rate of real GDP is another important factor, creating a virtuous cycle inwhich rapid income growth makes it easy to save, and high saving feeds back through capital
accumulation to promote further growth. Bosworth and Chodorow-Reich (2007) as well as Parkand Shin (2009) find that both contemporaneous and lagged real per capita GDP growth rates
increase the national saving rate. Moreover, Park and Shin (2009) also find that the level of percapita income has a significant nonlinear or more precisely convex relationship with the savingrate in Asia, but Bosworth and Chodorow-Reich (2007) do not find a significant effect.
Aside from the demographic and GDP-related variables, financial development is also316considered to be a crucial factor, but the direction of its impact is ambiguous theoretically as wellas empirically. For example, Loayza, et al. (2000) as well as Horioka and Yin (2010) find that it
has a negative impact, while Park and Shin (2009) find that its impact is insignificant.
Anecdotal evidence suggests that the relationship between financial development and saving rate
can be nonlinear depending on the level of financial development. For example, Jha, et al.
(2009) suggest that the greater availability of saving instruments and better accessibility to banks
may promote higher saving, contrary to the negative impact found by Loayza, et al. (2000) andHorioka and Yin (2010). This paper investigates this possible nonlinear relationship between
financial development and the saving rate.
Others argue that many of the developing Asian economies have underdeveloped public
pension systems and social insurance systems more generally and that this encourages
precautionary saving by households. Jha, et al. (2009) argue that the underdeveloped social
insurance system is one of the factors that contributed to the recent rise in household saving in the
PRC. Moreover, Horioka and Yin (2010) argue for a complementary relationship between thesocial benefit ratio and the level of financial development by analyzing the determinants of thehousehold saving rate using panel data on 23 member countries of the OECD for the years 1995,
2000, and 2005, with a higher social benefit ratio reducing the negative impact of the level offinancial development on the household saving rate.
Finally, the surge in corporate saving has gained increasing attention since the early 2000s,
for example by ADB (2009) and others. Since households, particularly in Asia, have not reduced
their saving enough to offset the increase in corporate saving, it has often been claimed that theincrease in corporate saving has become an important determinant of private saving in recent
years.
(2) Trends in the Domestic Saving Rate in Developing Asia
In this section, we discuss past trends in the domestic saving rate and in the determinants
thereof in developing Asia. Throughout this paper, we use the real domestic saving rate, whichis computed by subtracting the consumption and government shares of real GDP per capita from100.
Figure 1 shows trends over time in the domestic saving rate, and as can be seen from thisfigure, trends over time vary substantially among the twelve economies considered here, but mosteconomies in the region have saved substantial amounts during the past 40 years.
Singapore, Malaysia, Thailand, and Chinese Taipei are the best examples.

Korea,The domestic saving

rates in these five economies rose sharply during the 1970s and 80s, exceeding or reaching close
to 40% of GDP by the early 1990s. While the domestic saving rates of the economies ofdeveloping Asia declined in the late 1990s due to the Asian financial crisis, they then resumed
their upward climb in the 2000s, reaching a new high except in the Philippines and Pakistan.
A milder but steady upward trend in domestic saving rates was observed in the PRC andIndia between 1970 and 2000, after which both countries experienced surges in their domestic

317

saving rates, partially driven by soaring corporate savings.1

The sharp increase in domestic

saving rates, particularly in the PRC, in the 2000s has been blamed for the soaring global current
account imbalances and hence for the global financial crisis that occurred in 2008. Meanwhile, a
few economies in developing Asia (such as Hong Kong (China), China, Indonesia, and thePhilippines) have shown a moderate downward trend in their domestic saving rates since the early
1980s. While domestic saving rates are still above 20% in Hong Kong (China), China andIndonesia, the already low saving rate in the Philippines declined to below 6% in 2003 before
edging up slightly.2

Moreover, a few economies with very low domestic saving rates arenoteworthy. Vietnam, for example, showed negative domestic saving rates throughout the 1970s
and 80s, until the country transitioned to a market economy in the 1990s. Similarly, Pakistan’s
domestic saving rate was negative until the mid-1980s.
Figure 1: Real Domestic Saving Rate (% of GDP)
IND

INO

KOR

70 75 80 85 90 95 00 07

70 75 80 85 90 95 00 07

70 75 80 85 90 95 00 07

70 75 80 85 90 95 00 07

MAL

PAK

PHI

PRC

70 75 80 85 90 95 00 07

70 75 80 85 90 95 00 07

70 75 80 85 90 95 00 07

70 75 80 85 90 95 00 07

SIN

TAP

THA

VIE

70 75 80 85 90 95 00 07

70 75 80 85 90 95 00 07

70 75 80 85 90 95 00 07

70 75 80 85 90 95 00 07

0
60
40
20
0
60
0

20

40

Average Domestic Saving Rate

20

40

60

HKG

Graphs by ADBcode

Source: Penn World Table version 6.2, authors’ calculation (see Appendix Table 1)
Note: HKG=Hong Kong, China, IND=India, INO=Indonesia, KOR=Korea, MAL=Malaysia,
PAK=Pakistan, PHI=Philippines, PRC=People's Republic of China, SIN=Singapore,
TAP=Chinese Taipei, THA=Thailand, and VIE=Vietnam.
Various factors affected the trends in domestic saving rates described above. First of all,1

The saving rates of India and the PRC are greater in magnitude if one looks at a nominal measure.
This declining trend is reversed for Indonesia if we look at a nominal measure such as that from World Development
Indicators of the World Bank. This is probably due to the high inflation rate Indonesia was experiencing during this period.
2318

many of the economies in our sample experienced rapid demographic transition.

Life

expectancy rose sharply from an average of about 53 in the early 1960s to 73 in the late 2000s in
the sample as a whole. Consequently, the aged dependency rate also increased from 6.5 to 10.2
percent on average during the same period. Population aging has been particularly significant inHong Kong, China; Korea; Singapore; and Chinese Taipei. Meanwhile, the aged dependency
rate has been declining somewhat in Pakistan and Vietnam.

The youth dependency rate shows auniform picture, declining in all of the economies in our sample, though to a lesser extent inPakistan. The labor participation rate of the aged has generally been declining throughout the
sample period while domestic saving rates have been increasing. While population aging has
been progressing steadily, other factors have also come into play, obscuring the relationshipbetween demographics and the domestic saving rate (Figure 2, Panels A and B).
Financial sector development, in particular, played a significant role in developing Asia.
James, et al. (1989) discuss the role played by financial incentives such as raising interest rates ontime and saving deposits in increasing the domestic saving rate when the financial system was stillshallow in the 1970s in Korea and Singapore, for example. Financial deepening accelerated after
the mid-1980s, driven by financial liberalization in many economies. The developing Asian
economies in our sample recorded deepening of their credit markets exceeding 100% of GDP
except in India, Indonesia, Pakistan, the Philippines, and Vietnam.

As opposed to earlier

financial incentives, financial deepening would be expected to contribute toward reducing theneed for precautionary saving. Panel C in Figure 2 shows a possible nonlinearity. Moreover,these demographic and financial developments were accompanied by the continuing but unevenincrease in per capita GDP and its growth rate, as shown in panels D and E in Figure 2.
Public spending such as social and/or pension benefits are also important as a factor driving
up precautionary savings if they are insufficient and households are worried about their future
livelihoods. Public expenditures on social services including spending on pensions as well as
education and health services have generally been low in developing Asia, averaging less than 5%of gross national disposable income during the sample period, which is far lower than in theOECD countries where most economies spent more than 15% of GDP on social services andpensions as of 2005.3

Moreover, expenditures on social services and pensions have not shown

an obvious upward trend in most economies in developing Asia. Panel F in Figure 2 suggeststhat higher social services expenditures are associated with lower domestic saving rates. The
next section tries to disentangle the impact of these various factors driving domestic saving rates
in developing Asia.
(3) Estimation Results concerning the Determinants of Domestic Saving Rates
In this section, we present our estimation results concerning the determinants of domestic
saving rates in developing Asia during the 1965-2007 period. We estimated both a country3

The sole exceptions are Mexico, Korea, and Turkey, whose ratios of public expenditures on social services and pensions to
GDP are equivalent to those in developing Asia.

319

fixed-effects model and a random-effects model with robust standard errors, andfollowing past studies such as Bosworth and Chodorow-Reich (2007) and Park and Shin (2009),

the observations are five-year averages except for the most recent period which includes the years
between 2000 and 2007.

Thus, we have maximum of 8 observations per economy, and amaximum of 78 total observations. The reduced form estimating equation is given by:

SRi ,t = β 0,i + β1 * AGEi ,t + β 2 * DEPi ,t + β 3 * LNGDPi ,t + β 4 * CREDITi ,t + β 4 * X i ,t + ui ,twhere = 1, … 12 (1=PRC (PRC), 2=HKG (Hong Kong, China), 3=INO (Indonesia), 4=IND(India), 5=KOR (Republic of Korea), 6=MAL (Malaysia), 7=PAK (Pakistan),
Figure 2: Domestic Saving Rate (% of GDP) versus Its Determinants

8

10 12
AGE

14

16

60
PWTSR
20
40
20

60
DEP

80

100

6

7

8
9
LNGDP

10

11

0

.5

1
1.5
CREDIT2

2.5

F. Social service expenditure

PWTSR40
20
0

PWTSR
20
40

60

E. per capita GDP growth

0

0

PWTSR
20
40

60

D. Log per capital GDP

40

60

6

C. Private credit %GDP

0

PWTSR
20
40

60

B. Youth dependency ratio

0

0

PWTSR
20
40

60

A. Aged dependency ratio

-5

0

5
10
CHGDP

15

0

5

SSR

10

15

Source: See Appendix Table 1
Note: PWTSR = Domestic saving rate
8=PHI (Philippines), 9=SIN (Singapore), 10=THA (Thailand), 11=TAP (Chinese Taipei),and 12=VIE (Vietnam); and t=1, … 8 (1=1965-69, 2=1970-74, 3=1975-79, 4=1980-84,

SRi ,t represents the realis the aged dependency ratio (the ratio of

5=1985-1989, 6=1990-1994, 7=1995-1999, and 8=2000-2007).
domestic saving rate in an economy i at time t; AGEi ,t320

the population aged 65 or older to the population aged 15-64); DEPi ,t is a youth dependency
ratio (the ratio of the population aged 14 or younger to the population aged 15-64); LNGDPi ,t is

CREDITi ,t is the ratio of private credit from deposit moneybanks and other financial institutions to GDP; and X i ,t is a vector of the other explanatory
variables included in the estimation model. Details concerning the variables used in our analysis
can be found in Appendix Table 1.
Our estimation results are shown in Table 3 and 4. The results are shown for sevenspecifications in panels 1 through 7 for both the fixed and random-effects models. While theresults of standard tests such as the Hausman specification test suggest the use of random-effects
models, we show the results for both random and fixed-effects models. This is because omitting
country-fixed-effects seems to increase the residuals for some economies, such as the PRC, andbecause we are interested in knowing whether there are significant country-fixed-effects when
explaining domestic saving rates. When a country-fixed-effects model is estimated, thereference economy is PRC (i = 1).
All seven estimation models include the six variables, AGE and DEP, per capita real GDP(LNGDP) and its squared term (LNGDPSQ), and CREDIT and its squared term (CREDITSQ).
Other macroeconomic variables, such as the growth rate of per capita real GDP (CHGDP), theinflation rate (INFL), and the nominal interest rate (INT) (or the real interest rate, RINT) as wellas public expenditures on social services and pensions as a percent of Gross National Disposable
Income (SSR) and fiscal balance as a percent of GDP (FISC) are then added in models 2 through7.
As the tables show, our results are satisfactory and broadly consistent with those of previous
studies. Looking first at the basic models (models 1-3 in Tables 1 and 2), the coefficient of AGE(the aged dependency ratio) is negative and significant, as expected (-0.83 to -0.95 in the
fixed-effects model and -1.55 to -1.69 in the random-effects model). However, the sign of thecoefficient of DEP (the youth dependency ratio) is not stable and it is totally insignificant in boththe fixed-effects model and random-effects models, which is not surprising given the offsetting
effects mentioned earlier.
Turning to the GDP-related variables, the coefficient of LNGDP (the log of real per capitaGDP) is negative and significant, as expected, with its square term being positive and significant,suggesting a nonlinear (convex) relationship with the domestic saving rate, as was also found byPark and Shin (2009).
Turning to the financial variables, the availability of private credit exhibits a concave
relationship with the domestic saving rate, with the coefficient of CREDIT (the ratio of private
credit to GDP) being positive and significant and the coefficient of its squared term being
negative and significant. This nonlinear relationship indicates that financial development leads
to a higher domestic saving rate up to a point, after which it works to lower the domestic saving
rate, consistent with anecdotal evidence reported in Jha, et al. (2009).
the log of per capita real GDP;321

As for the coefficients of CHGDP (the rate of change of real per capita GDP), INT (thenominal interest rate), INFL (the inflation rate), and RINT (the real interest rate), they are notsignificant in any model except that the coefficient of CHGDP is positive and significant in the
random-effects version of model 5.
When FISC (the ratio of the fiscal balance to GDP) is added to the explanatory variables(models 3, 4, 6 and 7), its coefficient is positive, as expected, but it is significant only in the
random-effects version except for model 6.

Moreover, the coefficients of AGE and LNGDP

become insignificant except for the coefficient of AGE in the random-effects version of model 3,
and the coefficients of CHGDP, INT, INFL, and RINT remain insignificant except for thecoefficient of INFL in the fixed-effects and random-effects versions of model 3 and the coefficientof RINT in the fixed-effects version of model 6.
When SSR (the ratio of public expenditures on social services and pensions to Gross
National Disposable Income) is added to the explanatory variables (models 4 and 7), only thecoefficients of the two credit-related variables are significant in the fixed-effects versions ofmodels 4 and 7 while only the coefficients of the two credit-related variables and the coefficientsof FISC and SSR are significant in the random-effects versions of models 4 and 7, with thecoefficient of FISC being positive and the coefficient of SSR being negative, as expected.
Finally, the results of the fixed-effects models show that the country-fixed-effects are
significant for most economies (except for Korea, Malaysia, and Singapore) with a significant
negative sign when the PRC is taken as the reference economy, indicating a very high domestic
saving rate in the PRC.
In sum, the main determinants of the domestic saving rate in developing Asia during the
1965-2007 period appear to be the age structure of the population (especially the aged dependency
ratio), income levels, and the level of financial development except as noted above and moreover,the direction of impact of each factor is more or less as expected.

322

323

-0.03

0.25

-0.14

0.67

0.62

0.60

-0.99

0.42

0.08

0.41

0.41

-1.88

0.05

0.12

0.44

-0.40

0.05

-0.17

-0.29

-0.83

0.26

0.62

0.60

-1.34

-0.04

0.09

0.43

-0.18

0.05

0.51

-1.92

-0.57

0.12

0.46

-0.41

-2.30

0.06

0.07

0.41

-0.89

-0.03

DEP

-0.95

AGE

-0.44

25.29

-11.06

-1.55

13.42

-20.81

-2.92

12.19

-35.63

-0.83

28.57

-23.60

-1.53

13.09

-20.08

-2.82

11.93

-33.67

-4.89

8.82

-43.13

LNGDP

0.61

1.49

0.90

1.99

0.78

1.56

3.49

0.73

2.53

0.90

1.63

1.46

1.96

0.76

1.50

3.40

0.71

2.42

5.53

0.53

2.92

LNGDPSQ

2.11

7.62

16.07

2.02

6.01

12.12

2.59

5.74

14.88

2.24

8.56

19.19

1.95

6.29

12.27

2.63

5.75

15.14

2.80

5.17

14.48

CREDIT

-2.46

2.53

-6.22

-2.21

2.07

-4.58

-3.27

1.91

-6.25

-2.55

2.54

-6.48

-2.13

2.12

-4.50

-3.25

1.93

-6.26

-3.46

1.87

-6.46

CREDITSQ

0.12

0.33

0.04

1.13

0.20

0.23

0.93

0.17

0.16

0.52

0.42

0.22

0.83

0.20

0.17

0.85

0.16

0.13

CHGDP

-0.79

0.37

-0.30

0.93

0.17

0.16

-0.36

0.15

-0.05

INT

-0.84

0.24

-0.20

-2.37

0.14

-0.33

-0.16

0.15

-0.02

INFL

1.14

0.33

0.38

1.20

0.22

0.26

0.80

0.31

0.25

1.31

0.21

0.28

FISC

-1.02

0.67

-0.68

-0.97

0.69

-0.67

SSR

0.44

0.26

0.11

1.96

0.15

0.30

0.21

0.14

0.03

RINT

is within, the second R-squared is between, and the third R-squared is overall. The country fixed effects are not shown to save

Note: The figures are the estimated coefficient (first row), the robust standard error (second row), and the z-value (third row). T

7

6

5

4

3

2

1

Model

Table 3: Results of Fixed Effects Model

0.98

1.00

0.81

0.98

1.00

0.77

0.97

1.00

0.69

0.99

1.00

0.82

0.98

1.00

0.78

0.97

1.00

0.69

0.97

1.00

0.76

R-squared

35

56

70

35

56

70

78

Obs

324

-1.73

1.42

-0.91

1.16

-0.79

188.66

-0.17

-1.52

1.33

-32.11

0.52

78.37

-3.15

2.65

-0.79

0.54

64.89

104.21

-1.69

-1.25

0.16

171.931.14

189.00

-1.42

0.45

67.86

31.08

-0.78

-3.07

2.46

96.11

0.51

63.70

1.39

0.16

0.23

0.20

0.10

0.02

-0.64

0.10

-0.06

0.60

0.19

0.12

0.45

0.09

0.04

-0.27

0.10

-0.03

-0.95

0.08

-0.08

DEP

0.12

41.26

4.96

-1.52

17.08

-25.93

-2.83

14.36

-40.65

-0.07

40.26

-2.93

-1.57

14.69

-23.12

-2.61

14.30

-37.31

-4.36

10.74

-46.79

LNGDP

0.01

2.38

0.03

1.95

0.98

1.91

3.39

0.84

2.85

0.15

2.29

0.34

2.04

0.83

1.70

3.14

0.84

2.64

4.98

0.63

3.15

LNGDPSQ

4.28

8.15

34.87

2.15

5.88

12.63

2.35

6.23

14.63

3.19

9.98

31.88

2.15

5.77

12.40

2.43

6.08

14.78

2.58

5.95

15.35

CREDIT

-3.79

3.09

-11.71

-2.49

2.01

-5.00

-2.80

2.20

-6.15

-3.20

3.34

-10.68

-2.46

1.91

-4.69

-2.90

2.11

-6.12

-3.06

2.19

-6.71

CREDITSQ

0.07

0.61

0.04

1.38

0.23

0.32

1.70

0.18

0.31

-0.05

0.61

-0.03

1.06

0.20

0.21

1.28

0.19

0.24

CHGDP

-1.34

0.71

-0.94

0.66

0.18

0.12

-0.68

0.18

-0.12

INT

-0.30

0.72

-0.22

-1.92

0.16

-0.30

0.05

0.17

0.01

INFL

2.74

0.38

1.04

1.54

0.19

0.30

2.71

0.38

1.02

1.77

0.17

0.30

FISC

-1.73

0.58

-0.99

-1.87

0.50

-0.94

SSR

-0.10

0.87

-0.09

1.19

0.19

0.23

-0.22

0.18

-0.04

RINT

The first R-squared is within, the second R-squared is between, and the third R-squared is overall.

Note: The figures are the estimated coefficient (first row), the robust standard error (second row), and the z-value (third row).

7

6

5

4

3

-1.55

-3.39

4.12

156.49

0.47

49.34

2

-1.58

203.201

AGE

Const.

Model

Table 4: Results of Random Effects Model

0.79

0.89

0.52

0.70

0.70

0.76

0.78

0.75

0.66

0.82

0.87

0.65

0.70

0.70

0.78

0.77

0.73

0.67

0.74

0.68

0.75

R-sq

35

56

70

35

56

70

78

Obs

(4) Projections of Domestic Saving Rates for 2011-2030
In this section, we discuss our projections of domestic saving rates for 2011-2030.
Comparing out-of-sample projections based on the random-effects and country-fixed-effects
models suggests that the random-effects model does not perform as well as the fixed-effects
model in fitting the domestic saving rate for a number of economies such as the PRC, Singapore,
Pakistan, and the Philippines. The projections from the random-effects models underestimate
the saving rates of the former two economies while overestimating those of the latter two
economies.

This is consistently true for all seven random-effects models.

For the PRC,

omitting the country-fixed-effect would yield a far lower saving rate of about 24% of GDP for the
2000-2007 period—10 percentage points lower than the actual rate. A possible explanation forthe case of the PRC is omitted factors such as the increase in the corporate saving rate during thisperiod (IMF, 2009) and/or the distorted sex ratio of those of marrying age (Wei, 2009). Anotherexample of an obvious deviation of the fitted saving rate from the actual rate is the Philippines.
The fitted saving rate based on the random-effects model does not seem to show the decline
observed in the actual rate. The rapidly increasing coverage of the social security system has
been suggested as one of the explanations for why this might be (Terada-Hagiwara, 2009).
However, if one views these factors as being of a cyclical or temporary nature, as was apparently
the case in the recent past, the random-effects model may in fact be a more suitable model for
generating “long-term” projections. Thus, we generate projections using both models.
Our projections for the next two decades, 2011-2020 and 2021-2030, rely on the United
Nations’ (U.N.) projections of the age structure of the population (the aged and youth dependency
ratios) and the GDP projections in Lee and Hong (2010).

Since projections of financial

development are not available, we assume that financial deepening progresses according to thelevel of per capita income. We first identify the income group of the 12 economies in the next
two decades and then use the level of the credit to GDP ratio for the corresponding income groupin 2008.4
Saving rate projections are generated for the periods 2011-2020, and 2021-2030 using thecoefficients in both the fixed and random-effects variants of model 1. Table 5 and Figures 3 and4 show future projections of domestic saving rates for the twelve economies in our sample.

4

Based on this assumption, the credit to GDP ratio will deepen to 130% by the 2021-2030 period in the PRC inasmuch as thiseconomy is projected to belong to the high income group by then. Likewise, the credit to GDP ratio is assumed to deepen in
Korea, Malaysia, and Singapore to 130% in the next two decades—a slight improvement relative to the recent past. The credit
to GDP ratio is assumed to be 105% in the upper middle income group including Thailand and 46% in the lower middle income
group including Indonesia, India, Pakistan, and the Philippines.

325

Table 5: Average Domestic Saving Rate Projections

FE
RE

Country

PRC

HKG

INO

IND

KOR

MAL

PAK

PHI

SIN

THA

TAP

VIE

2011-2020

39.0

31.9

25.9

19.1

41.8

47.8

9.6

16.5

55.2

32.4

25.1

20.0

2021-2030

43.3

23.9

26.3

22.4

37.2

48.6

11.2

16.7

43.8

31.1

20.4

19.5

2011-2020

28.4

37.7

22.5

23.5

31.5

40.4

22.3

23.3

37.9

25.7

27.2

21.8

2021-2030

29.2

20.5

20.8

25.6

19.5

38.9

23.5

22.3

14.9

20.2

15.1

17.9

So urce: Authors’ calculation, Lee and Hong (2010), United Nations. World Population
Prospects, The 2008 Revision, available at http://esa.un.org/unpp

Figure 3: Past and Future Domestic Saving Rates based on Fixed-Effects Model
2000-2007 (left bar, actual), 2011-2020 (middle bar, projection),and 2021-2030 (right bar, projection)
Fixed Effe cts Mode l
60
50
40
30
20
10
0
PRC

HKG

INO

IND

KOR

MAL

PAK

PHI

SIN

THA

TAP

VIE

Source: Authors’ calculation, Lee and Hong (2010), United Nations. World Population Prospects,
The 2008 Revision, available at http://esa.un.org/unpp

326

Figure 4: Past and Future Domestic Saving Rates based on Random-Effects Model
2000-2007 (left bar, actual), 2011-2020 (middle bar, projection),and 2021-2030 (right bar, projection)
Random Effects Model
60
50
40
30
20
10
0
PRC

HKG

INO

IND

KOR

MAL

PAK

PHI

SIN

THA

TAP

VIE

Source: Authors’ calculation, Lee and Hong (2010), United Nations. World Population Prospects,
The 2008 Revision, available at http://esa.un.org/unpp
The aging of the population appears to be the dominant determinant of future trends indomestic saving rates, and financial deepening to a lesser extent. As expected, domestic saving
rates are expected to show a downturn by 2030 in the economies in which the aging of the
population is expected to proceed the most rapidly.

The projections based on the fixed-effects

model show that the rapidly aging economies (Hong Kong, China; Korea; Singapore; and Chinese
Taipei), where the aged dependency ratio is projected to reach close to or above 40% by 2030,
will show a 6 to 12 percentage point decline in their domestic saving rates during the next two
decades. The saving rate is projected to show a slight downturn by 2030 in economies in which
the aging of the population is expected to proceed at a slower pace (Thailand), and it is projected
to continue increasing or level off until 2030 in those economies in which the aging of the
population is expected to proceed at the slowest pace (the PRC, Indonesia, India, Malaysia,
Pakistan, Philippines, and Vietnam).
There are two economies, the PRC and Malaysia, which show opposite trends depending on
which model we use. The domestic saving rates of these two countries are projected to decline
from the 2000s to the 2020s if a random-effects model is used but are projected to continue
increasing if a fixed-effects model is used. This is due to differences in the estimated coefficientof AGE, which is much larger in absolute terms when the random-effects model is used eventhough the coefficients of the other explanatory variables are relatively similar.

Thus, theincrease in the aged dependency ratio in these two economies is projected to cause a much larger
decline in their domestic saving rates when the random-effects model is used than when the327

fixed-effects model is used.
Our projections are broadly similar even if we assume that financial deepening does notprogress as assumed, which confirms the importance of the demographic variables.5
The dramatic differences among economies in developing Asia in projected future trends intheir domestic saving rates are not surprising because there is a 30 to 40 year gap in the timing of
population aging in the 12 economies in the sample, as can be seen from Table 6. As a result of
these dramatic differences in the timing of the demographic transition in the coming decades, thedecline in domestic saving rates will not occur simultaneously in the economies of developing
Asia but will rather be spread out over a half-century, with the decline in domestic saving rates insome economies being offset by the increase in domestic saving rates in other economies until atleast 2040.
Table 6: Average Domestic Saving Rate Projections
The Year in which the Population

Aged 65 or

The Year in which the

EconomyOlder in the Total Population Reaches 14 percent

Demographic Bonus Ends

PRC

2020-25

2015

HKG

2010-15

2010

INO

2040-45

2030

IND

2050-552035

KOR

2015-202015

MAL

2040-45

2020

PAK

After 2055

After 2055

PHI

2050-55

2040

SIN

2015-20

2010

THA

2020-252010

TAP

2015-202018

VIE

2030-35

2020

Japan

1990-95

1990

Note: The demographic bonus is defined as the period during which the proportion of those aged
14 or younger falls below 30 per cent and the proportion of those aged 65 years or older remains
below 15 per cent.
Source: The United Nations’ (U.N.) projections available at http://esa.un.org/unpp, and theStatistical Yearbook for Taipei, China, available at http://www.cepd.gov.tw/
encontent/m1.aspx?sNo=0000063.
5

If financial deepening does not progress and remains at the average level of 2000-2007 , the domestic saving rates of anumber of economies such as Indonesia, India, Pakistan, and the Philippines will be higher than our projections by 1 to 3
percentage points, while the domestic saving rates in the PRC and Malaysia will be lower than our projections by 0.2
percentage points.

328

Moreover, the projected decline in domestic saving rates from the 2000s until the 2030s in
the rapidly aging economies ranges from 6.0 percentage points (Chinese Taipei) to 12.9
percentage points (Singapore), which is about the same or larger than what other already aging
economies such as Japan have experienced over the last 20 years. In Japan, the domestic savingrate declined from its peak of 39% in the late 1980s to 33% in the early 2000s, during which time
the aged dependency ratio rose from 16% to 29%. The more pronounced decline in developing
Asia’s domestic saving rate might be due to the fact that aging is expected to progress more
rapidly. Nonetheless, the fact that more than half (seven) of the economies in developing Asia
are projected to show increases in their domestic saving rates suggests that the decline in domestic
saving rates in developing Asia as a whole will proceed only gradually, at least until 2040,
meaning, for better or worse, that global imbalances are not likely to be eliminated any time soon.
(5) Summary and Conclusions
In this section, we conducted an econometric analysis of the determinants of domestic
saving rates in developing Asia during the 1960-2007 period and found that the main determinantsof the domestic saving rate in developing Asia during the 1960-2007 period appear to be the age
structure of the population (especially the aged dependency ratio), income levels, and the level offinancial development, and moreover, that the direction of impact of each factor is more or less as
expected.
We then projected future trends in domestic saving rates in developing Asia during the
2011-2030 period and found that the aging of the population will be the main determinant of
future trends in domestic saving rates. However, we found that there will be substantial variationfrom economy to economy, with the rapidly aging economies showing a sharp downturn in theirdomestic saving rates by 2030 and the less rapidly aging economies showing only a moderate
downturn or no downturn by 2030. Thus, it does not appear that there will be a sharp decline insaving rates in developing Asia as a whole, at least during the next two decades, meaning, forbetter or worse, that global imbalances are not likely to be eliminated any time soon.
5. Overall Conclusions and Policy Implications
In this paper, we found that the age structure of the population (especially the aged
dependency ratio) and financial development (credit availability) are the most important
determinants of saving rates in both developed and developing economies and that thedevelopment of the social safety net and income levels are also important in some cases.
Turning to the policy implications of our findings, our finding that there is not a clear
relationship between social safety nets and saving rates implies that improving social safety nets
will not necessarily reduce household saving rates and stimulate consumption, but doing so may
be desirable in any case because it will obviate the need for households to worry about unexpected
contingencies, retirement security, etc., thereby enhancing household welfare. Moreover, ourfinding that financial development is more important as a determinant of saving rates implies that329

the development of capital markets (and the relaxation of borrowing constraints) will alleviate theneed for precautionary saving (self-insurance), which is very inefficient, and serve as a partial
substitute for the development of social safety nets, especially in economies with underdevelopedsocial safety nets, leading to lower saving, higher consumption, and higher household welfare.
Thus, a two-pronged approach of simultaneously developing social safety nets and private capital
markets may be the most effective way to enhance household consumption and welfare.

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333Appendix: Table 1: Descriptive Statistics
Variable
Real domesticSRsaving rate

Aged dependency

AGE

ratio

Data source

Note

Computed as

kg is Government Share of Real

100-kg-kc. Heston et

GDP per capita , and kc isal., Penn World Table

Consumption Share of Real GDP

version 6.3 (PWT) 1/

per capita. Both from PWT.

“SP.POP.DPND.OL”

Ratio of the population aged 65 orfrom World

older to the population aged 15-64

Development
Indicators (WDI) of
World Bank 2/ and theStatistical Yearbook for
Taipei,China 3/Youth dependency

DEP

ratio

“SP.POP.DPND.YG”

Ratio of the population aged 0-14

from WDI and theto the population aged 15-64

Statistical Yearbook for
Taipei,China
Real per capita GDP

LNGDP“rgdpch” from Penn

Real GDP per capita (2005World Table version

Constant Prices: Laspeyres)

6.3
Real per capita GDP

CHGDP

growth“grgdpch” from Penn

Growth rate of Real GDP Chain

World Table version

per capita (rgdpch)

6.3“pcrdbofgdp” from

Private Credit by Deposit Money

deposit money

Beck andBanks and Other Financial

banks and other

Demirguc-Kunt

Institutions

financial institutions(2009) and line(% of GDP)

32D from

Private credit by

CREDITInternational Financial
Statistics (IFS) of theInternational Monetary
Fund for the PRC
Public expenditure

SSR

CEIC Data Company

Government Expenditure on

on social services

Ltd., and Department

Social services divided by Grossand pensions (% ofof Budget andNational Disposable Income

GNDI)

Management for thePhilippines. 4/334

Fiscal balance (% of

FISC

GDP)

CEIC Data Company

Surpluses are positive and deficits

Ltd., Asianare negative

Development Outlook
Database, Key
Indicators (various
issues) of AsianDevelopment Bank 5/,
Bank of Thailand 6/,
and Bank Negara
Malaysia 7/.
Interest rate

INT

IFS, and the Central

Used data on the deposit rate (lineBank of the Republic

60L of IFS) except for India,

of China

Pakistan, and Korea, for which we(Taipei,China's central

used the discount rate (line 60 ofbank) for Taipei,China.

IFS)

8/
Inflation rate

INFL

“NY.GDP.DEFL.KD.Z
G” from WDI

Real interest rate

RITN

IFS, WDI, and theComputed asCentral Bank of theln((1+INT/100)/(1+INFL/100))

Republic of China

Note:
1/ Available at http://pwt.econ.upenn.edu/php_site/pwt_index.php
2/ Available at http://devdata.worldbank.org/dataonline/
3/ Available at http://www.cepd.gov.tw/encontent/m1.aspx?sNo=0000063
4/ Available at http://www.dbm.gov.ph/index.php?id=32&pid=95/ Available at http://www.adb.org/Statistics/ki.asp
6/ Available at http://www.bot.or.th
7/ Available at http://www.bnm.gov.my
8/ Available at http://www.cbc.gov.tw/ct.asp?xItem=30010&CtNode=517&mp=2335

Appendix Table 2: Descriptive Statistics
Std.
Variable

Mean

Dev.

Min

Max

PWTSR

24.0

14.3

-8.4

61.9

AGE

7.8

2.2

3.8

16.7

DEP

60.5

19.4

17.7

91.3

CHGDP

4.4

4.2

-14.2

20.2

LNGDP

7075.48549.6435.844619.0

INFL

7.7

5.0

0.0

39.1

INT

7.8

5.2

0.0

39.1

CREDIT

0.6

0.5

0.1

2.4

FISC

-1.4

4.2

-16.7

16.1

SSR

4.8

3.4

0.7

16.9

336

Uncertainty of Public Pension and Precautionary Saving in Japan—Evidence from the Micro Data of Close-to-retirement Households
Wataru Suzuki∗ and Yanfei Zhou∗∗Introduction
The Japanese net household saving rate (national accounting base) slid to a historical
low level of 3.2% in 2006, from 11.4% in 1997. However, the savings behavior of eachindividual household, measured by the gross saving rate (also named “surplus ratio”) ofworker households, remained around 25–30% in the 2000s (see Table 1). Even retirement-age
households, with a head-of-household aged 60 or over, save nearly 10% of their disposable
income each year. Meanwhile, Japanese households’ wealth accumulation is still the highest
among the OECD countries. Elderly households, however, are the major holders of this huge
accumulation of wealth: households with heads-of-household aged 60 or over own 78.6% of
total net financial wealth, while their share of the population is only 37.4% (see Table 2). A
recent simulation study by Uemura (2008) suggests that Japanese elderly households hold atotal of 179 trillion yen of excessive savings, compared with the predicted amount based on a
typical life-cycle model.
This huge wealth holding of Japanese elderly households, however, is regarded bygovernment and business as a potential source of Japanese economic recovery. If part of theelderly households’ wealth and savings could be shifted to consumption, strong domestic
demand would be created, and the stagnant Japanese economy may then have a good chance ofrecovering. The Japanese government has already introduced policies to encourage elderly
households to spend some of their financial wealth: (1) a tax cut for inter vivos transfers (e.g.,
the tax-free cap for housing fund donation to children or grandchildren was raised from 3.3
million yen to 5.5 million yen in 2001, and then to 15 million yen in 2010), and (2) expandingsocial security expenditure in order to ease the anxieties of elderly nationals. The current
Democratic Party regime treats social security expansion not only as an antirecession measure
but also as a long-term economic growth strategy (Democratic Party Manifesto 2009). One of
their theoretical bases, however, is that social security expansion could alleviate elderly
households’ insecurity and lead to more active consumption.
∗ Wataru Suzuki is Professor of Economics at Gakushuin University. He received a Ph.D. from Osaka University in
2001.His research focuses on health economics and social security.
∗∗ Yanfei Zhou is Associate chief researcher at Japan Institute for Labour Policy and Training (JILPT). She received aPh.D. from Osaka University in 2001. Her research focuses on labor economics, social security and public policy.

337

The social security system is undoubtedly a critical source of uncertainty for nationals.
Uncertainty significantly affects household saving/consumption, because it is a universal
experience (e.g., uncertain longevity, unexpected disaster and sickness, etc.) and because
Japanese households are highly risk averse. For instance, a well-run medical care system orlong-term nursing care system could ease households’ uncertainties about medical-care or
nursing-care costs in the future, and hence reduce households’ need for excessive savings. On
the contrary, the absence of such systems could encourage excessive saving by households.

Recently, a surge in anxiety about the sustainability of the public pension system has
introduced a major uncertainty for Japanese households. As we will explain in Section 2,
public pension uncertainty is very likely to be responsible for the precautionary savings andexcessive wealth accumulation by elderly households. The essential question is as follows:
how much precautionary saving result from public pension uncertainty? Answers to thispuzzle will be critical for the evaluation of the Democratic Party’s social security expansion
policy and for the development of future growth strategies. Nevertheless, very few empiricalstudies have been conducted on this topic.
The present paper therefore uses a unique survey conducted by the Japan Institute forLabour Policy and Training (JILPT) in 2009 to tackle this problem. An important contributionof the JILPT survey is the provision of data on public pension uncertainty: the anticipatedpercentage change (APC) in public pension benefits with respect to the present benefit level,
and the ideal amount (IA) of public pension for retirement. These data enable us to construct
two indexes of public pension uncertainty: anticipated change rate in public pension benefits,
and the expected change in the value of public pension benefits (APC×IA). Additionally, toassess precautionary savings motives more precisely, we limit our samples to people close to
retirement for whom the labor income risk should be relatively small, following Lusardi(1997). Our estimates indicate that public pension uncertainty affects household wealthaccumulation significantly, and that precautionary savings make up nearly 10% of net and 5%of gross financial wealth accumulation by close-to-retirement households.
1. Research Background and Literature Review
1.1 Background(i) Households’ surplus ratio remains high
The most recent Japanese net household saving rate (national accounting base) has slid
to a historical low of 3.2% in 2006, from 11.4% in 1997. Along with population aging andcapital depreciation, the net household saving rate may reach as low as zero or even become338

negative in the long run (NIRA 2008). Accordingly, perception of Japanese household saving
behavior has changed notably. Horioka (2004) compares net household saving rates between
Japan and 13 other OECD countries and finds that Japan has not had the highest saving ratesince the mid 1980s. He thus concludes that Japan may no longer be regarded as the nation ofenthusiastic savers it once was.
Table 1 Household saving rates in Japan (1996–2008) (%)

National Accounting
Index (SNA)
Kakei Survey Index
Workers' H. : all
Workers' H. : head
aged 60 or over
Retiree's H.: head
aged 65 or over

96

97

98

99

00

01

02

03

04

05

06

07

08

10.4

11.4

10.7

10

7.9

5.2

4.6

3.9

3.4

3.5

3.2

28.0

28.0

28.7

28.5

27.9

27.9

27.0

25.9

25.7

25.3

27.5

26.9

26.6

21.8

22.4

22.5

21.0

18.4

19.6

14.5

12.8

10.5

8.5

9.0

11.1

9.0

-6.0

-6.3

-6.1

-7.4

-8.8

-13.3 -17.5 -16.8 -23.2 -20.7 -21.2 -24.9 -25.5

Source: Cabinet Office “Annual Report of National Accounting”, MIC “Annual Report ofKakei Survey”.
Notes: (1) The Kakei Survey workers’ H. data relate to two-or-more person households. (2)There is a huge gap between the SNA index and the Kakei Survey index (also named “surplus
ratio”). The SNA index is computed using macro data, and it is much lower than the Kakei
Survey index largely because it (a) includes retired and unemployed households, and (b) has
taken into account capital depreciation and imputed house rent.
However, in examining the saving behavior of each household, we get a different image.
The gross saving rate (also named “surplus ratio”) of the workers’ households has been as highas 25–30% in the 2000s (see Table 1). Even retirement-age households, withheads-of-household aged 60 or over, save nearly 10% of their disposable income each year.
Meanwhile, Japanese households’ wealth accumulation remains among the highest of OECD
countries. According to OECD statistics for 2006, the ratio of household net financial wealth todisposable income is 403.7% in Japan, which is notably higher than in the US (309.1%),
Britain (291.3%), Germany (198.3%), and other OECD countries.
Hence, a simple question arises: do Japanese households save excessively andaccumulate too much wealth? Dekle (1990) believes the answer is yes, at least for elderly
households. Using a 1983 Japanese household survey, Dekle (1990) finds an obvious absenceof dissaving among Japanese elderly households, based on there being no significant
differences in total wealth between different age groups for Japanese elderly households. A
recent simulation study by Uemura (2008) suggests that Japanese elderly households havearound 179 trillion yen of excessive savings, compared with the predicted amount based on a339

typical life-cycle model. Japanese households were estimated to hold a total of 456.9 trillion
yen in net financial wealth in 2004, which is equal to nearly one year of GDP1 in Japan (seeTable 2). Elderly households, however, are the major holders of this huge stock of financial
wealth: households with heads-of-household aged 60 or over own 78.6% of the total net
financial wealth, while their population share is only 37.4%.
Table 2 Household wealth accumulation, by age of the household head(2004, unit: 10,000 yen)
Number of Households
(A)
0–29
30–39
40–49
50–59
60–69
70 and overTotal

5,271,641
7,714,522
7,570,791
10,161,606
9,034,720
9,309,250
49,062,530( 10.7% )( 15.7% )( 15.4% )( 20.7% )( 18.4% )( 19.0% )( 100.0% )NetNetshare of total
Housing& Other fixed Annual Wealth/ share of total
wealth financial
net financial
land assets
assetsincome income net wealth(B)
wealth (C)wealth
817
-8
679
146
469
1.7
2.3%
-0.1%
1,459
-212
1,514
158
597
2.4
6.1%
-3.6%
2,712
148
2,393
171
777
3.5
11.2%
2.5%
4,160
1,020
2,955
186
878
4.7
23.0%
22.7%
5,556
1,884
3,499
173
624
8.9
27.3%
37.3%
5,961
2,026
3,817
117
542
11.0
30.1%
41.3%
3,900
950
2,786
164
696
5.6
100.0%
100.0%

Source: Bureau of Statistics “National Census 2005”, “National Survey of Family Income andExpenditure 2004”.
Notes: (1) The shares are computed by the authors. Share of total net wealth =(Bi×Ai)/Σj(Bj×Aj); share of total net financial wealth = (Ci×Ai)/Σj(Cj×Aj). (2) The total
household net financial wealth (456.9 trillion yen) = Σj(Cj×Aj).
(ii) Public pension uncertainty surges
Recently, increasing concern about the sustainability of the public pension system has
made this a more important uncertainty factor for Japanese households. According to theSocial Security Survey conducted by the Japan Institute of Life Insurance (Seimei Hoken
Bunka Center) in 2007, 69.2% of respondents feel somewhat anxious about life in retirement
because they believe that the public pension cannot provide a reliable retirement income,which is 10.2 percentage points higher than the 1998 survey. Accordingly, the saving motive
for living expenses during old age (namely “retirement saving”) seems to be stronger.
A long-lasting annual survey by the Central Council for Financial Services Informationshows that the saving motive for living expenses during old age has been sharply gaining
weight since 1985, the year that Japan enacted significant reforms of its public pension system.
Figure 1 shows the proportion of respondents that admitted having a saving motive for living
expenses during old age. The retirement saving motive fluctuated around 30–40% before
1985; it then rose steadily thereafter, with an accelerated speed after the crash of the bubble
economy in 1992 and after the scandal of the missing pension records in 2007. In 2009, 61.6%
1

The total gross financial wealth of Japanese households was estimated to be as much as 1,410.4 trillion yen in 2009
(Source: Bank of Japan “Statistics of Flow-of-Fund Account”).

340

of Japanese reported that they were saving for retirement, almost a 20-percentage-point
increase from 42.5% in 1985.
Figure 1 Historical trend of saving motive for living expenses during old age (%)
65.0
60.0
55.0

Scandal of missing
pension records.

50.0
45.0

Crash of bubble
economy

40.0
35.0
30.0

Big Reform on
Pension system

25.0

Source: the Central Council for Financial Services Information (Kinyu Koho Chuo Iinkai)(ed.) “Kakei no Kinyu Kodou ni Kansuru Seron Chosa” (Public Opinion Survey on Household
Financial Choices), time series statistics from 1963 to 2009.
(iii) How can public pension uncertainty depress household consumption?
Japan’s public pension system is a two-tiered system in which the first tier (namely, the“basic pension”) is common for all nationals while the second tier is divided into three parts
according to the occupation of the insurees: the Employees’ Pension System to which private
salaried workers belong, the Mutual Aid Association Pension System to which government
workers belong, and the National Pension System2 to which the self-employed and all others
belong. All of these public pension systems are essentially operated on a pay-as-you-go basis.
Thus, in a society in which fertility is declining and the population is aging, it becomes
necessary to raise the contribution rate or cut the benefits of pensioners in order to keep abalanced budget.
Japan’s population is known to be aging at its fastest rate in human history (Horioka et al.
2007). In 2008, the ratio of the productive-age (15–64 years) population to the elderly (65 andover) population reached 33.6%, which implies that it takes three productive-age people tosupport one elderly person. This ratio is projected to reach 50.2% in 2023 and 85.7% at the age
peak of 2072. Besides this rapid aging process, the stagnation of economic growth in the past
two decades has worsened the fiscal situation of the public pension system.

2
The maximum benefit level for the “basic pension” is 66,000 yen per month. Pensioners belonging to the National
Pension System are eligible for the “basic pension” only, while pensioners belonging to the other two systems are
eligible for a second-tier benefit proportional to his/her total earnings for their working lifetime.

341

Because of the significant political power of the elderly population, until the 1994
reform, the public pension budget was balanced mainly by increasing the contribution rate.
The benefits of pensioners were protected, and few retirees felt any anxiety over their pension
benefits. Raising the contribution rate repeatedly as a budget balancing mechanism, of course,
imposed heavy burdens on working households and resulted in further distrust of the public
pension system among young generations. Accordingly, the number of dropouts and premium
defaulters within the National Pension System has increased sharply since the 1990s (Suzuki
and Zhou 2010). In 2008, the default rate for the national pension premium reached as high as
37.9%.
In the 1994 pension reform (and reforms thereafter), the Japanese government had nochoice but to begin cutting the benefits of pensioners step by step. Firstly, in the 1994 reform,
the eligible age for the basic pension benefit was postponed from 60 to 65 years in a phasedmanner. Then in the 1999 reform, the eligible age for the second-tier benefit was changed from60 to 65 in a phased manner. The 1999 reform reduced pensioner benefits by 20% inincremental steps. The 2004 reform introduced a new system named “Macro Economic Slide”(MES), whereby the benefit amount of pensioners was lowered automatically along with the
declining birth rate and the increasing longevity of the elderly.3 According to simulations by
the Japanese government, no further benefit reductions or eligible age postponing will benecessary until 2023 if the MES functions well. However, because the peak of population
aging will occur in 2075, the risk of further cuts in pension benefits will be very high over the
longer term.
In summary, for most Japanese households, including the close-to-retirement households,
public pension uncertainty arises from not only the existing MES but also the unavoidable
future reforms. As Horioka (1990) warned, uncertainty in the future provisions of the Japanesepublic pension system will cause Japanese households to discount future benefits heavily andto save excessively.
1.2 Literature review
The idea that people engage in saving as protection against income risk represents animportant innovation in the life-cycle permanent-income hypothesis in explaining excessive
household saving and wealth accumulation. Many empirical studies have been performed toevaluate the importance and magnitude of precautionary saving, but so far the findings areinconclusive. As Lusardi (1997) stresses, one of the major problems of empirical work is how
3
The public pension system was regulated by law to be reformed once every five years, based on forecasts of the futurefinancial situation of the system. After the introduction of MES in 2004, however, this “once every five years reform” isregarded as unnecessary, and it was deleted from law.

342

to construct an exogenous direct index of income risk. Some studies (e.g., Skinner 1998) use
occupation as a proxy for income risk, but this is criticized for selectivity bias, because people
may choose occupations depending upon their degree of risk aversion. Other studies (e.g.,
Guiso et al. 1992; Lusardi 1997, 1998) utilize households’ expectations about the probabilityof unemployment or nominal earnings changes as a proxy for income risk. These studies may
suffer from measurement error, because the self-reported earnings variance refers to
one-period-ahead forecasts of income and cannot be interpreted as a measure of lifetime
earnings variance. Other studies using income variance within homogeneous groups (e.g.,
Dardanoni 1991; Carroll and Samwick 1998) as a proxy for income risk. However, thismeasure of income risk is not appropriate unless the income variability of households withineach group is homogenous enough and the income variance varies significantly acrossdifferent groups.
As a whole, empirical studies that use occupation or subject earnings variance as a proxyfor income risk find little evidence in favor of the precautionary saving model. For example,
Skinner (1998) compares the saving rates across different occupations and finds that people inriskier occupations, such as farmers or the self-employed, are in fact saving less than arepeople in professions with less income variability. Guiso et al. (1992) and Lusardi (1997) both
employ households’ expected nominal earnings changes as a measure of income risk from the1989 Italian SHIW. They find that precautionary savings explain only 2–2.8% of total wealthaccumulation. Additionally, Lusardi (1998) constructs an income risk index by using
information about the subjective probability of job loss from the Health and Retirement Survey.
He then finds that although precautionary saving has a role in explaining excessive saving andwealth accumulation by people close to retirement, it explains only a small part (2–4.5% of net
financial wealth) of total wealth accumulation.
On the other hand, empirical studies using the variance of the income of homogeneousgroups as a measure of income risk have in general obtained results supportive of the
precautionary saving model. For instance, Carroll and Samwick (1998) divide the Panel
Study of Income Dynamics sample into 26 groups according to the occupation, industry,and education of the head-of-household, with the variance and log of the income within eachgroup employed as proxies for income uncertainty. As a result, they find that wealth anduncertainty are positively related, and that precautionary savings account for 45% of total net
worth and 32% of very-liquid assets for households with heads-of-household aged younger
than 50 years. Using cross-section data for Britain, Dardanoni (1991) estimates income
variances by grouping the sample into dozens of groups with respect to the industry, economic
position, and skill level of the head-of-household. His estimates indicate that more than 60% ofsavings arise as a precaution against future risk. Furthermore, Kazarosian (1997) decomposes343

individual-specific income uncertainty into permanent and transitory components using
National Longitudinal Survey. He finds that the impact of uncertainty on the ratio of wealth topermanent income is highly significant, and that a doubling of uncertainty increases the ratio
of wealth to permanent income by 29%.
Empirical studies of Japanese precautionary saving, although still limited, have become
more common since the 2000s. Zhou (2003) improves upon the methodology of Dardanoni(1991) and applies it to Japanese household-level data. Specifically, she divides arepresentative Japanese sample into 56 homogeneous groups with respect to the education, age,and occupation of the head-of-household, and regards the income variances within each groupas proxies for income risk for each household in that group. Zhou (2003) finds that
precautionary saving represents 5.6% of the total savings of salaried-worker households and64.3% of the total savings of farmers and self-employed households. Bessho and Tobita (2008)
quote job loss rates and standard deviations of income by gender, age, education, and marital
status from macro statistics, and then match this information with Japanese household-level
data to obtain proxies for income uncertainty. They find that uncertainty is positively related to
the wealth-to-income ratio, and that precautionary savings account for 6–15% of household net
financial assets.
Many recent empirical studies shed light upon the effect of uncertainties in the social
security system on household saving. The uncertainty of medical expenses, however, is one of
the hottest topics. Using data from the 1989 Survey of Consumer Finances, Starr-McCluer(1996) finds that, contrary to expectations, insured households maintain a much higher level of
wealth than comparable households without insurance do. She concludes that savings andhealth insurance are related for reasons that have little to do with certainty and precautionary
motives. In contrast, Chou et al. (2003) find supportive evidence for the hypothesis ofprecautionary saving for medical expenses uncertainty. Using a natural experiment associatedwith the 1995 introduction of the National Health Insurance program in Chinese Taipei, theyfind that the program reduced households’ savings by an average of 8.6–13.7%, with thelargest effects for households with the least savings. Additionally, Palumbo (1999) uses ahealth-uncertainty model to predict household consumption expenditures, and his simulations
imply that uncertain future out-of-pocket medical expenses reduce household annual
consumption among elderly American couples by 7%.
There have been very few empirical studies of precautionary saving with respect tosocial security uncertainty in Japan, with the exception of Suzuki et al. (2008) and Murata(2003). Using Japanese micro data, Suzuki et al. (2008) examine whether the introduction of
the Japanese Long-term Care Insurance System in 2000 has reduced households’
precautionary saving or not. Contrary to their expectations, they find that households’ gross344

financial assets remain constant or even slightly higher among elderly households. As Suzuki
et al. (2008) admit in their paper, the uncertainty reduction effect of the Long-term care
Insurance System might be cancelled out by other social changes (e.g., a sharp increase inpublic pension uncertainty, a rise in the unemployment rate, etc.).
On the other hand, Murata (2003) uses information about households’ attitudes toward
the public pension system 4 from a Japanese household survey to proxy public pension
uncertainty. Although the final result is inconclusive, she finds supportive evidence for the
precautionary saving model when limiting the sample to households where grown-up children
do not coreside with their parents. That is, households besides coresidences with higher levelsof anxiety toward the public pension system have a higher wealth-to-income ratio thancomparable households that feel comfortable with the present pension system. Given that the
average financial assets holdings of households with some anxiety about the pension system
are 2.1 million yen higher than their counterparts’, Murata (2003) suggests that precautionarysaving because of public pension uncertainty could account for 1/4 to 1/3 of household
financial wealth.
The present paper focuses on the impact of public pension uncertainty on household
wealth accumulation, but it improves upon Murata’s (2003) approach in the following ways.
First, we use more specific and quantitative measures for public pension uncertainty instead of
the abstract, four-choice dummy variable used in Murata (2003). Second, we limit our sample
to people close to retirement, for whom labor income risk should be relatively small and public
pension uncertainty should be relatively dominant, while Murata’s sample is young
households with members aged 27–37 years, for whom saving for child-rearing and housing
are so prominent that it is difficult to save for public pension uncertainty. Third, we use
econometric simulation techniques to estimate the precise magnitude of precautionary saving
because of pension uncertainty instead of depending on descriptive statistics for approximate
estimates.
2. Data and Empirical Model
2.1 Data
This study uses household data from the Survey on the Employment and Work
Conditions of Elderly People (SEWCEP), a survey that was conducted by the Japan Institutefor Labour Policy and Training in 2008. To ensure that the sample was representative of theJapanese population, the sample was selected from the Basic Residential Registers (“Jyumin
4

The variable is discontinuous and includes four choices: very comfortable, anxious about benefit cuts, anxious about
the sustainability of the system, and no plan to rely on the system.

345

Kihon Daicho”), based on a two-stage stratified sampling procedure. To improve the response
rate, the questionnaires were distributed by surveyors instead of mailing. Surveyors distributedand explained the questionnaire to subjects in person, and several days later, the surveyors
visited the subjects again to collect the questionnaires. Five thousand individuals aged between
55 and 69 years received the questionnaire throughout Japan, of whom 3,602 responded. The
response rate was 72.0%.
Because of the necessity of estimating permanent income and the need to limit oursample to the close-to-retirement households, we used subjects (N=1,012) that met thefollowing three conditions: (1) presently working and earning some labor income, (2) not yet
receiving any public pension benefit, and (3) head of the household.5 We took the predictedlabor income of the head-of-household from his/her income function as a proxy for his/herpermanent income. (See Appendix I for details.)
The SEWCEP collected very detailed data on retirement plans, pension participation,
household holdings of financial assets and debts, and consumption. Most interestingly, the
SEWCEP provides unique information that can be used to construct proxies for public pension
uncertainty.
(i) Measuring public pension uncertainty
SEWCEP includes data on the anticipated percentage change (APC) in public pension
benefits with respect to the present benefit level. The anticipated percentage change isdetermined in two steps: first, the respondents are asked to predict whether they think that theirown public pension benefit will (a) rise, (b) drop, or (c) remain unchanged/unknown comparedwith the present benefit level.6 Then, those who responded (a) or (b) are requested to provide
the specific percentage (m%) change that they expect. We take the APC as 0% for “(c) remainunchanged/unknown” cases, –m% for “(b) drop” cases, and +m% for “(a) rise” cases.
Our second candidate measure of public pension uncertainty is the anticipated valuechange (AVC) of the public pension, which equals APC multiplied by the IA of the public
pension for retirement. IA, however, is constructed by multiplying the ideal amount of living
expenses in retirement by the ideal financing rate of the public pension benefit.7

5Because there is no direct information in the survey to determine whether a respondent is a head-of-household, we treat
subjects that meet any of the following two conditions as a household head: (1) total income (including unearned
income) of the respondent accounts for 50% or more of household income; (2) the biggest component of total income forthe household is the respondent’s labor income.
6
Reflecting the recent trend of pension reforms, only 1.4% of respondents expected a rise in pension benefits, and43.8% of respondents expected a drop.
7
The ideal living expenses cover both the respondent and his/her spouse (if they have one).

346

Figure 2 Distribution of anticipated pension change
(AVC)

0

0

.1

Density.05

Density

.2

.1

.3

(APC)

-100 -90 -80 -70 -60 -50 -40 -30 -20 -10
rate

0

10

20

30

40

-30

50

-25

-20

-15

-10
change

-5

0

5

10

anticipated value change of public pension (10,000 yen)

anticipated percentage change of public pension (%)

The distribution of the anticipated change in the public pension in terms of both
percentage change and value change is shown in Figure 2. Although nearly half of the
respondents expect “remain unchanged/unknown”, the percentage of respondents (43.8%)
expecting a drop is much larger than those expecting a rise (1.4%). The average anticipatedpercentage change is –9.3%, and the average anticipated value change is –21.9 thousand yen(see Table 3). In comparison with the government’s presently planned pension percentagechange (–4.8%) and value change (–11.7 thousand yen)8, households’ anticipated decline inpension benefits is much larger. This huge gap between households’ anticipation and thegovernment’s planning reflects the fact that households are discounting future pension benefits
much more heavily than the government’s planned level. This household pessimism toward
public pensions is very likely to induce households to practice excessive saving and wealthaccumulation.
(ii) Measuring wealthThree measures of wealth are used in our empirical analysis. The first measure (grossfinancial assets) is defined as the sum of all savings account balances.9 The second measure(net financial assets 1) is calculated by deducting all debts from gross financial assets. The
third measure (net financial assets 2) is computed by deducting all debts, except housing
mortgages, from gross financial assets. Because most households with a mortgage should
possess a comparable or higher value of housing assets than average, the third measure sounds
more reasonable as an index of households’ net financial assets.
Because the wealth-to-income ratio has such a wide distribution, and outliers can
8Both are simulation values computed by the authors. See Appendix II for details of the simulation.
Because it is rare for Japanese household to hold bonds, stocks, and individual retirement annuities, saving accounts
represent a major type of household financial assets.
9347

significantly affect the estimates, we trimmed the distribution and excluded the top and bottom
2.5%. For the close-to-retirement households, the average wealth-to-income ratio is 163%
according to the first measure, 50% according to the second measure, and 124% according to
the third measure (see Table 3).
Because the SEWCEP contains no data on the specific values of housing assets or otherreal assets, we could not compute total household worth or net worth. As an alternative, we
included an own-house dummy as an explanatory variable in our estimations, to control for theeffect of real assets.
2.2 Empirical model
The theoretical predictions of the precautionary saving model can be summarized withreference to the following reduced-form equation, which has been employed by many
empirical studies (e.g., Kazarosian 1997; Lusardi 1998; Murata 2003).

Wh= a0 AGE + a1σ h + X h ' β + ε h
YhP

(1)

In the above model, a0 , a1 , β are coefficients, and ε is a normally distributed
disturbance term. Wealth divided by the permanent income ( W Y P ) of household h is afunction of AGE, household characteristics (X) that reflect the preferences parameters, anduncertainty about future income, as measured by the variance of σ . Uncertainty about future
income, in this paper’s context, is uncertainty about public pension benefits, because oursample is limited to close-to-retirement households. A supportive condition of the
precautionary saving model is that uncertainty σ is positively related to the wealth-to-income
ratio. In our context, because the values of our uncertainty proxies are inversely proportional tothe degree of uncertainty, the estimated coefficient should be negative ( aˆ1 < 0 ) if the
precautionary saving model is true.
As King and Dicks-Mireaux (1982) note, when preferences are nonhomothetic, X may
include permanent income.10 Specifically, X is a vector of the following variables: gender,four-scaled educational attainment, four-scaled health condition, marital status, having afamily member in need of nursing care or not, having double income or not, coresiding with

10

Some studies (e.g., Lusardi 1997; Bessho and Tobita 2008) assume homothetic preferences and use the log of W/YP as
the dependent variable. In that case, all the observations with negative net wealth will be automatically excluded fromthe sample. Because negative net financial assets are quite common in real life, we use absolute value instead of the log
value of W/YP as the dependent variable.

348parents or not, number of family members, children’s status11 and residence (five-scaled city
size and 11 districts). Including children’s status in the estimations enables us to test the
hypothesis of a bequest motive. The descriptive statistics of the major variables are presented
in Table 3.
Table 3 Descriptive statistics of major variables

Variables

Mean

Std. Dev.

Min

Max

Gross financial assets (10,000 yen)583.64
Net financial assets 1 (10,000 yen)
218.83
Net financial assets 2 (10,000 yen)494.84
Permanent income (10,000 yen)402.47
Annual total income (10,000 yen)
482.91
Annual labor income (10,000 yen)445.45
Permanent income (10,000 yen)402.47Gross financial assets / Permanent income
1.63
Net financial assets 1 / Permanent income
0.52
Net financial assets 2 / Permanent income
1.24
Anticipated percentage change in pension (%)-9.30
Anticipated value change in pension (10,000 yen)
-2.19
Planned percentage change in pension by the government (%) -4.83
Planned value change in pension by the government (10,000 y -1.17
Age
58.53
2
34.33
Age /100Male
0.691
Junior high school
0.164
High school
0.471
Junior college
0.124College or graduate school
0.238
Excellent health
0.081Good health
0.688
Poor health
0.209
Very poor health
0.019
Family member in need of nursing care
0.178
Double income
0.424
Extended family
0.655
No children
0.097
All children independent
0.519
Not all children independent
0.384
Married0.839
Number of family members
3.252
Own house
0.854

1219.76
1527.421333.67
234.88438.38409.21
234.88
3.80
5.03
3.93
14.70
3.81
1.17
2.21
2.66
3.17
0.462
0.370
0.499
0.329
0.426
0.273
0.464
0.407
0.136
0.383
0.494
0.476
0.296
0.500
0.487
0.368
1.554
0.353

0
-10000
-4000
55.4
10.8
10.8
55.4
0.0
-34.0
-22.7
-80.00-25.63-7.65-25.32
55
30.25
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1
0

10000
10000
10000
1322.07300.07300.01322.0
47.7
47.7
29.6
50.00
10.00
-3.04
0.00
69
47.61
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
11
1

Notes: (1) The maximum number of observations is 1,012. (2) Outliers of the distribution of
the wealth-to-income ratio (the highest and lowest 2.5%) are excluded from the statistics.

11

Children’s status is defined as either one of the following three conditions: a) no child, b) all children independent, andc) not all children independent.

349

3. Empirical Results
Table 4 presents the correlation coefficients between the wealth-to-income ratio andpublic pension uncertainty. No matter what measures are used, the correlation coefficients are
all negative, just as the precautionary saving model predicts. However, the relationshipbetween the wealth-to-income ratio and pension uncertainty seems to be quite weak withrespect to the magnitude of the coefficients (less than –0.2).
Table 4 Correlations between wealth-to-income ratio and public pension uncertainty
Anticipated pension change (percentage)

Anticipated pension change (value)

Gross financial assets / Permanent income-0.079-0.104

Net financial assets 1 / Permanent income-0.079-0.139Net financial assets 2 / Permanent income-0.104-0.123

When controlling for the other covariates, however, the estimation results show more
supportive evidence for the precautionary saving model. Table 5 presents estimates of thewealth-to-income equation by using the APC as a proxy for uncertainty. Table 6, however, uses
the alternative proxy, AVC. Both tables present estimation results when either gross financial
assets, net financial assets 1, or net financial assets 2 are used as the measure of wealth.
In accordance with the precautionary saving model, the sign of pension uncertainty is
negative and statistically significant in five of the six cases, indicating that when people feelgreater uncertainty about the public pension, they will save more and accumulate more wealth.
Table 7 presents our estimate of the magnitude of precautionary saving for public
pension uncertainty by calculating what our results imply about the share of precautionary
wealth in total wealth accumulation. We can calculate the share of precautionary saving ( λ ) in
total wealth (W) from a1, the estimated coefficient of σ , as follows:λ=W P W P / Y P OD × a1==.
W
W /Y PW /Y P(2)

Here, W P is the average precautionary wealth accumulation against public pension
uncertainty. OD is the over-discounting of future pension benefits, defined as the difference
between households’ anticipated percentage change (or value change) of the pension benefit
and the government’s planned percentage change (or value change). λ is predicted to be
9.87–9.91% when net financial assets 2 are employed as the wealth index, which means that
precautionary saving accounts for about 10% of the net financial assets of close-to-retirement350

households (see Table 7). λ is predicted to be 5.46–5.78% or 20.32–28.07% when either grossfinancial assets or net financial assets 1, respectively, are used as the index of wealth.
Table 5 Estimation results of wealth-to-income ratio (pension uncertainty=APC)
Gross FA/Yp
Coef.
Permanent income (Yp)
Anticipated percentage change of pension
Age2

Age /100
Male
High school
Junior college
College or graduate school
Excellent healthGood health
Poor healthFamily member in need of nursing care
Double income
Extended family
All children independent
Not all children independent
MarriedNumber of family members
Own house
Constant
Number of observations
2

Adjusted R-0.002-0.0201.668-1.321-1.278
1.019
1.935
2.518
1.622
1.155
0.971
0.791
0.476
-0.182-0.430-1.031
0.349-0.144
1.397-51.2

Net FA1/Yp

Std. Err.
0.001 **
0.012 *
1.676
1.370
0.495 ***
0.270 ***
0.825 **
0.520 ***
0.909 *
0.588 **
0.652
0.567
0.345
0.435
0.682
0.679
0.462
0.108
0.328 ***
51.1

619
0.1391

Coef.
0.001-0.0240.932-0.701-1.228
0.970
2.065
2.249
0.788
0.303
-0.068
1.140
0.527
0.247
-0.998-2.0311.324-0.666
0.397
-28.9
586
0.1187

Net FA 2/Yp

Std. Err.
0.001
0.015
1.995
1.633
0.684 *
0.573 *
1.177 *
0.709 ***
0.986
0.752
0.868
0.690 *
0.473
0.660
0.846
0.880 **
0.780 *
0.262 **
0.417
60.6

Coef.
-0.001-0.0280.211-0.114-1.172
0.883
0.979
2.105
1.289
0.713
0.441
0.386
0.369
0.026
-0.780-1.2570.530-0.4491.471-6.1

Std. Err.
0.001
0.013 **
1.685
1.382
0.547 **
0.334 ***
0.737
0.602 ***
0.953
0.617
0.705
0.461
0.387
0.526
0.752
0.732 *
0.536
0.209 **
0.370 ***
51.0
576
0.1285

Notes: (1) The estimation method is OLS with robust standard errors. (2) City size dummiesand district dummies are included in the covariates, but their coefficients are abbreviated tosave space. (3) “***”, “**”, and “*” indicate that the coefficient is statistically significant at
the 1, 5, and 10% level, respectively.

351

Table 6 Estimation results of wealth-to-income ratio (pension uncertainty=AVC)
Gross FA/Yp

Net FA1/Yp

Net FA 2/Yp

Coef.

Coef.

Coef. Std. Err.

Permanent income (Yp)
Anticipated value change of pension
Age
Age2/100
Male
High school
Junior college
College or graduate school
Excellent healthGood health
Poor healthFamily member in need of nursing care
Double income
Extended family
All children independent
Not all children independent
MarriedNumber of family members
Own house
Constant-0.001-0.092
1.540-1.145-1.668
1.083
1.392
2.256
1.038
0.801
0.516
0.308
0.236
-0.638-0.569-0.9280.452-0.102
1.480-47.7

Number of observations
Adjusted R2458
0.1891

Std. Err.
0.001 *
0.049 *
1.841
1.529
0.554 ***
0.341 ***
0.700 **
0.550 ***
0.807
0.745
0.769
0.466
0.380
0.527
0.856
0.818
0.586
0.149
0.395 ***
55.0

0.001
-0.142
1.498-1.158-1.410
0.784
0.953
1.754
0.649
0.142
-0.1870.635
0.485-0.352-1.045-1.5961.544-0.7350.388-44.3

Std. Err.

0.001
0.000
0.062 ** -0.119
2.287
0.366
1.895
-0.1540.789 * -1.676
0.700
0.871
1.229
0.941
0.791 ** 1.814
1.050
0.665
0.990
0.415
1.002
-0.151
0.637
0.296
0.556
0.458
0.809
-0.2941.063-0.9701.061-1.3230.983
0.750
0.332 ** -0.480
0.525
1.468
68.4
-11.7

444
0.15910.001
0.055 **
2.187
1.822
0.659 **
0.438 **
0.929
0.661 ***
0.896
0.809
0.856
0.553
0.487
0.665
0.955
0.939
0.676
0.273 *
0.441 ***
65.3
437
0.1729Note: The notes of Table 5 apply.

Table 7 Ratio of precautionary saving to close-to-retirement households’ wealthOver-discounting of
Estimate ofPrecautionary
Average Share of precautionary
future pension benefit
uncertainty (a1) component of W/YP W/YP saving to W (Lambda)(OD)
W/Yp=Gross financial assets / Yp
Pension uncertainty=APC-4.465-0.020

0.089

1.634

5.46%

Pension uncertainty=AVC-1.027-0.092

0.094

1.634

5.78%

-4.465-1.027-0.024-0.142

0.106
0.146

0.520
0.520

20.32% #28.07%-4.465-1.027-0.028-0.119

0.123
0.122

1.240
1.240

9.91%
9.87%

W/Yp=Net financial assets 1 / Yp
Pension uncertainty=APC
Pension uncertainty=AVC
W/Yp=Net financial assets 2 /Yp
Pension uncertainty=APC
Pension uncertainty=AVC

Note: “#” indicates that the estimate utilized is not statistically significant.
Precaution against future public pension uncertainty may not be the sole incentive for352

excessive wealth accumulation. The elderly may also be holding excessive wealth for thebequest motive (Dekle 1990). The estimation results in Tables 5 and 6, however, provide little
supportive evidence for the bequest motive hypothesis. Wealth holding by households is notchanged significantly by the existence of children. Rather, households with economicallyindependent children have a significantly lower wealth-to-income ratio in comparison with thehouseholds without children.
Estimates of household characteristics are in general consistent with intuition. For
example, households headed by a female or a more highly educated individual, households that
own their residences, and households with fewer family members have a relatively higher
wealth-to-income ratio than their counterparts.
4. Concluding Remarks
Using a representative and unique Japanese elderly household survey, this paper
investigated the impact of public pension uncertainty on wealth accumulation byclose-to-retirement Japanese households. Households’ anticipated percentage/value changes
in pension and future public pension benefits with respect to the present benefit level wereused to proxy pension uncertainty. Our principle econometric finding is that households’
financial wealth holdings are positively and significantly related to public pension uncertainty
for various measures of wealth and both uncertainty proxies.
We also found that households discount future pension benefits much more heavily than
the government’s planned pension cut. We use this discrepancy as an index of households’
over-discounting rate on future pension benefits and combine this information with theestimation result to predict the magnitude of precautionary saving. Our simulations suggestthat approximately 10% of net financial assets and 5% of gross financial assets of theclose-to-retirement households are held as a precaution against public pension uncertainty.
Hence, our findings are in accordance with the precautionary saving model and provide
supportive evidence for the hypothesis of excessive saving and wealth accumulation by elderly
Japanese households.
How to alleviate the public pension uncertainty of elderly households effectively,
however, remains an open question. Major possible reasons for public pension uncertainty
include (a) nationals’ distrustfulness toward the pension system management (e.g., missing
pension records, poor management of the pension fund), (b) anxiety about the sustainability ofthe public pension system because of population aging, and (c) irrational panic and gossip
because of nationals’ lack of knowledge concerning the complicated public pension systemand pension reforms. Therefore, effective strategies for easing pension uncertainty could be toprovide a reliable, easy-to-understand reform plan to nationals and to improve the353

transparency and efficiency of the pension management system.
Although encouraging dissaving by elderly households or encouraging inter vivos
transfers is a potentially efficient antirecession approach, there are some side-effects that weshould consider. A large decline in elderly households’ wealth holdings is likely to weaken thedomestic affordability of government bonds and then drive up the long-term interest rate. A
dramatic rise in the interest rate will not only have a negative impact on the economy bycrowding out equipment investment of private companies but also drive up the interest rateburden of government debt. To avoid debt default, the government would have to print moremoney, which may cause hyperinflation, raise tax rates, which will be harmful to economic
growth, or cut public spending, which is extremely painful and politically difficult. In sum,expecting elderly households to spend more to save the Japanese economy has limited
effectiveness.
An important limitation of our approach is that the subjective proxies for public pension
uncertainty we used may suffer from endogeneity. Because we could not control households’
risk aversion and time preference rates because of lack of information, estimates of uncertainty
may be upward biased if these two unobservable preference variables affect both households’
subjective uncertainty perceptions and wealth accumulation.
Acknowledgments: The authors are very grateful to Robert Dekle, Charles Yuji Horioka andDavid S. Hong for their helpful comments. Zhou is solely responsible for the processing of the
micro data.

354

Appendix I: Estimation of Permanent Income
We use the predicted labor income of the head-of-household from his/her income
function as a proxy for his/her permanent income. This income function uses explanatory
variables such as age, tenure, education, health condition, marriage status, occupation,industry, scale of workplace, size of city of residence, and district of residence. We also
include the square of the person’s age and tenure as explanatory variables to measure age ortenure based upon an inverted-U earning profile. A typical Mincerian wage function is
employed, in which the dependent variable is the log of annual labor income. The estimation
result is outlined in Table A.1.
Table A.1 Estimation result of Mincerian wage function
Coef.

Std. Err.

Tenure /100
Male
High school
Junior college
College or graduate school
Excellent healthGood health
Poor health
MarriedConstant

0.098-0.0980.028-0.031
0.527
0.044-0.009
0.235
0.025
0.034
-0.107
0.052
2.149

0.245
0.205
0.007
0.015
0.060
0.064
0.087
0.079
0.161
0.147
0.152
0.059
7.314

Occupation dummies
Industry dummies
Scale of workplace dummies
City size dummies
District dummies

Yes
Yes
Yes
Yes
Yes

Number of observations

727
0.5205Age
2

Age /100
Tenure22

Adjusted R

***
**
***

***

Note: The estimation method is OLS with robust standard errors. “***”, “**”, and “*” indicatethat the coefficient is statistically significant at the 1, 5, and 10% level, respectively.

355

Appendix II: Simulation of the Government’s Planned Pension Benefit Change
The government’s planned pension benefit change is simulated by estimating the extent
to which lifetime pension benefits will decline within the system of macroeconomic slide(MES) functions. We use the standard scenario used by the government in 2007, whichassumed the following conditions.12
Nominal wage increase rate per year (w): 2.1%
Inflation rate per year ( π ): 1.0%
Nominal interest rate (r): 3.2%
MES rate per year (k): 0.9%
Because it is planned that the MES will be functioning between 2009 and 2023, we
assume that pension benefits in other years are unchanged. Then for people aged 55 in the
JILPT 2009 survey, for instance, the MES will be applicable after they reach 65 years of age(2019) and end when they reach 69 years of age (2023). For people aged 65, however, theapplicable period will be the longest (14 years). The pension benefit for people aged 55, forinstance, in 2023 (while MES applies) will be as follows (where the pension benefit of people
aged 69 in 2009=100):(1 + w − π − k )( 69 − 65)
PBMES = 100 ×.
(1 + r − π )( 2023− 2009 )(3)

We assume that each person lives until age 85, and we sum up their lifetime public
pension benefit and compare it with the level when MES is absent to obtain the percentagechange in the government planned public pension. We then multiply this percentage with theideal retirement pension benefit obtained in the survey to get the value change in thegovernment planned public pension. These two variables are employed to estimate the ratio of
precautionary saving to total household wealth.

12Source: MHLW Pension Bureau “A Simulation of Impact on Pension Finance by the 2004 Reform”. URL:
http://www.mhlw.go.jp/topics/nenkin/zaisei/zaisei/04/index.html

356

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