Discussion Paper No. 1042

THE WEALTH DECUMULATION BEHAVIOR
OF THE RETIRED ELDERLY IN JAPAN:
THE RELATIVE IMPORTANCEOF PRECAUTIONARY SAVING
AND BEQUEST MOTIVES

Yoko Niimi
Charles Yuji Horioka

October 2018

The Institute of Social and Economic Research
Osaka University
6-1 Mihogaoka, Ibaraki, Osaka 567-0047, Japan

The Wealth Decumulation Behavior of the Retired Elderly in Japan:
The Relative Importance of Precautionary Saving and Bequest Motives i

Yoko Niimi
Asian Growth Research Institute and Kyushu University
andCharles Yuji Horioka ii
Asian Growth Research Institute; National Bureau of Economic Research, and Instituteof Social and Economic Research, Osaka University

October 2018

Abstract
This paper analyzes the determinants of the wealth decumulation behavior of the retired
elderly in Japan using unique information from two household surveys, and by so doing,
attempts to assess the relative importance of precautionary saving and bequest motives in
explaining the lower than expected rates of wealth decumulation of the retired elderly.
Taken together, our analyses of these two datasets show that precautionary saving plays
a relatively important role in explaining the lower than expected wealth decumulation rateof the retired elderly, at least in the case of Japan, even though both precautionary saving
and bequest motives are important drivers behind this puzzle. Our results also suggest thepossibility that financial burden of parental care may also affect the wealth decumulation
behavior of the retired elderly in Japan. Given that parental care responsibilities tend to
i The empirical work undertaken in this paper utilizes micro data from the Preference Parameters Study ofOsaka University’s 21st Century Center of Excellence (COE) Program “Behavioral Macrodynamics Basedon Surveys and Experiments” and its Global COE Project “Human Behavior and Socioeconomic Dynamics.”
We acknowledge the program/project’s contributors─Yoshiro Tsutsui, Fumio Ohtake, and Shinsuke Ikeda.
We also use data from the Survey on Households and Saving for our empirical analysis. We are grateful to
the Yu-cho Foundation for providing us with these data. We are also grateful to Anton Braun, Jim Been,
Isaac Ehrlich, Jong-Wha Lee, Kathleen McGarry, Colin R. McKenzie, Masao Ogaki, Kwanho Shin, andother participants of the 1st Meeting of the Society of Economics of the Household; the 92nd Annual
Conference of the Western Economic Association International; the Applied Economics Workshop andSpecial Workshop at the Institute of Economic Studies, Keio University; the Seminar at the College of
Political Science and Economics, Korea University; the ADBI-AGI Workshop on “Public and Private
Investment in Human Capital and Intergenerational Transfers”; the Rokko Forum at the Graduate Schoolof Economics, Kobe University; and the Asian Growth Research Institute Staff Seminar for their valuablecomments. This work was supported by JSPS (Japan Society for the Promotion of Science) KAKENHI
Grant Numbers 15H01950 and 18H00870, a project grant from the Asian Growth Research Institute, andfinancial support from the Joint Usage/Research Center at the Institute of Social and Economic Research,
Osaka University.
ii Corresponding author. Address: 11-4 Ohtemachi, Kokurakita-ku, Kitakyushu, Fukuoka 803-0814, Japan,
E-mail: horioka@agi.or.jp, Tel: +81-93-583-6202, Fax: +81-93-583-6576.

arise relatively late in life, often after retirement, in the case of Japan, our results suggestthat the financial burden of parental care may be a relevant issue when analyzing thewealth decumulation behavior of the elderly.
Keywords: Aged, bequests, dissaving, Japan, life-cycle model, precautionary saving,
retired elderly, saving, wealth decumulation
JEL classification codes: D14, D15, D64, E21, J14

1. Introduction

Japan had one of the highest household saving rates among the member countries of theOrganisation for Economic Co-operation and Development (OECD) until the mid1980s, 1 but her household saving rate has been declining steadily since the mid-1970s
and has been very low (sometimes even negative) during the last 15 years (Horioka, 2017).
One of the main driving forces behind this observed trend in the household saving rate ispopulation aging (e.g., Horioka, 1997). According to the simplest version of the life-cycle
model, people accumulate wealth during their working lives and decumulate their wealthafter retirement in order to smooth consumption over the life cycle. Thus, theory predicts
that saving rates should decline as population aging progresses, and Japan’s recent
experience is fully consistent with this theoretical prediction.

However, what is puzzling is that, although the link between population aging andaggregate trends in household saving rates predicted by the life-cycle model has beenverified empirically in the case of Japan (e.g., Horioka, 1997), the wealth decumulation
rates (the ratios of dissaving to the stock of wealth) of the retired elderly in Japan arelower than those implied by the basic life-cycle model with no bequest motives and nolongevity risk. For example, Horioka (2010) and Horioka and Niimi (2017) find that thewealth decumulation rates of the retired elderly in Japan have been only 1 to 3% per year
during the last 15 years when wealth is measured as financial net worth, even though they
have shown a slight upward trend over time. These low wealth decumulation rates imply
that many die with significant wealth. Moreover, almost 70% of total financial wealth isheld by households whose heads are aged 60 or above in Japan, 2 and more than 90% of
financial net worth is held by such households. These figures show that the lion’s shareof financial assets in Japan is held by the elderly and underscore the importance ofunderstanding the wealth decumulation behavior of this age group.

1

Based on data on household saving rates from OECD, OECD Economic Outlook (Statistical Annex),
various issues (http://www.oecd-ilibrary.org/economics/oecd-economic-outlook_16097408).
2
Based on data on two-or-more-person households from Statistics Bureau, Ministry of Internal Affairs andCommunications, Annual Report on the Family Income and Expenditure Survey, Volume II: Savings andLiabilities, 2017 edition (http://www.stat.go.jp/data/sav/2017np/index.html).

1

The wealth decumulation rates of the elderly have been found to be lower than predictedby the basic life-cycle model not only in Japan but in other countries as well, and several
alternative explanations have been put forward to explain this puzzle, including
precautionary saving and bequest motives. However, the empirical literature has not yet
reached a consensus on the relative importance of the different explanations, and there is
scope for more work to disentangle precautionary saving motives from other motives,
including bequest motives (De Nardi, French, and Jones, 2016). Furthermore, previous
work on the wealth decumulation behavior of the elderly has been conducted
predominantly using data on the United States (US), and there are only a handful studies
that look at the case of Japan.

Using micro data from two household surveys, this paper analyzes the determinants of
the wealth decumulation behavior of the retired elderly in Japan with the goal ofidentifying possible explanations for why their rate of wealth decumulation is lower than
predicted by the basic life-cycle model. In so doing, our paper attempts to fill theaforementioned gaps in the literature by making three key contributions. First, it attempts
to assess the relative importance of precautionary saving and bequest motives in
explaining the wealth decumulation behavior of the retired elderly. Despite growing
efforts to overcome the challenge of assessing the relative importance of precautionarysaving and bequest motives in recent years, more work remains to be done (De Nardi,
French, and Jones, 2016). Moreover, we also examine the implications of different typesof bequest motives for the wealth decumulation behavior of the retired elderly by
exploiting detailed information on the nature of bequest motives that these households
have.

Second, this paper looks at the case of Japan where empirical work on the reasons behindthe low wealth decumulation rate of the elderly remains limited. It would be interesting
to see whether previous findings obtained mostly for the US and European countries also
hold in the case of Japan where the institutional setting and social norms differ from those2

in these countries. Japan has a universal mandatory health insurance program 3 and also
introduced a mandatory long-term care insurance (LTCI) program 4 with universal andrelatively generous coverage in 2000. Another unique feature of Japan is that elderly carehas traditionally taken place within the family setting. While there is some evidence thatperceived filial obligations have been declining among adult children since the launch of
the LTCI program (e.g., Tsutsui, Muramatsu, and Higashino, 2014), some studies findthat informal care by adult children continues to be the most common source of caregiving
for the elderly in Japan (Hanaoka and Norton, 2008; Long, Campbell, and Nishimura,2009).

Third, this paper investigates the implications of the financial burden of parental care forthe wealth decumulation behavior of the retired elderly. While much attention has so far
been paid in the literature to the implications of their own long-term care needs for thewealth decumulation rate of the elderly, there has not been any previous research thattakes into account the financial burden of parental care when analyzing the wealthdecumulation behavior of the elderly. This is a particularly relevant issue in Japan whereparental care needs tend to arise relatively late in people’s lives because of the high life
expectancy in the country. The share of cases in which both the care recipient and his/her
main family caregiver are aged 65 or above is as high as about 55%, and the share ofcases in which both are aged 75 or above is about 30%. 5 As far as we know, this is thefirst paper to analyze the implications of the financial burden of parental care for the3Everyone in Japan is covered by one health insurance program or another, and the health insurance system
for the elderly aged 75 or above is especially generous. Under the current health care system for this age
group, which was enacted in April 2008, those in this age group can access necessary health care subject toa 10% co-payment (30% in the case of those with an income comparable to the current workforce). By
contrast the co-payment rate is, in principle, 20% for those under the age of 6, 30% for those aged 6 to 69,
and 20% for those aged 70 to 74 (30% in the case of those with an income comparable to the current
workforce).
4
This program has universal coverage and everyone aged 65 or above as well as those under 65 but withaging-related disabilities are entitled to receive necessary care services regardless of their income level orthe availability of family caregivers as long as they are certified as requiring support or long-term care. It
does not provide cash allowances to family caregivers, but it covers the cost of services purchased from theformal sector once they are certified as requiring care or support subject to a 10% co-payment (Tsutsui and
Muramatsu, 2005). The amount of services for which care recipients are eligible is determined by the degreeof their disability. The cost of the services that care recipients receive above this amount must be covered
entirely by care recipients themselves.
5
Based on data from Ministry of Health, Labour and Welfare, An Overview of the 2016 Comprehensive
Survey of Living Conditions (http://www.mhlw.go.jp/toukei/saikin/hw/k-tyosa/k-tyosa16/index.html).

3

wealth decumulation behavior of the retired elderly.

We use two different datasets for our empirical analysis―the Survey on Households andSaving conducted by the Yu-cho Foundation and the Preference Parameters Study
conducted by Osaka University. Both datasets contain unique information that will allow
us to shed light on the relative importance of the alternative explanations for the lower
than expected wealth decumulation rate of the retired elderly.

The rest of the paper is organized as follows. Section 2 reviews the relevant literature.
Section 3 describes the two datasets used for our empirical analysis. Section 4 explains
the estimation strategy as well as the empirical specification. Section 5 presents theestimation results. Section 6 summarizes the main findings and discusses some policy
implications.

2. Literature Survey

The life-cycle model, first formalized by Modigliani and Brumberg (1954), still serves as
the workhorse for analyzing the saving behavior of households. According to the simplest
version of the life-cycle model, people accumulate wealth during their working lives anddecumulate their wealth after retirement to smooth consumption over the life cycle.
However, such a pattern is often not verified empirically as the elderly are found to
decumulate their wealth much more slowly than implied by the basic life-cycle model.

To match the actual behavior of the elderly, a number of factors have been incorporated
into the life-cycle model, including bequest motives as well as precautionary saving
induced by lifespan uncertainty and/or the possibility of facing high medical expenses in
the future. 6 However, the empirical literature has not yet reached a consensus on therelative importance of the different explanations. Hurd (1987, 1989), for instance, showsthat the low rate of wealth decumulation by the elderly is likely to be due to mortality risk
6

De Nardi, French, and Jones (2016) provide a useful summary of potential reasons why the elderly
continue to hold onto a relatively large amount of wealth into very old age.

4

rather than a bequest motive. Hurd (1989) thus argues that most bequests are accidental
bequests arising from lifespan uncertainty.

In a similar vein, Dynan, Skinner, and Zeldes (2002) show that saving for precautionary
purposes is bequeathed (i.e., that the bequest motive becomes “operative”) if nounforeseen events (e.g., low earnings, living long, or high medical expenses) take place.
This may be why many households state that they plan to leave a bequest and a large
share of households do receive bequests even though a bequest motive is rarely mentioned
as a reason for saving (retirement and precautionary motives are mentioned much more
often as motives for saving) (Dynan, Skinner, and Zeldes, 2002). According to Dynan,
Skinner, and Zeldes (2002), saving therefore serves, in practice, a dual role and theimportance of both motives cannot be distinguished without additional information. Theynote that this helps explain why adding a bequest motive on top of precautionary saving
tends to have only a limited impact on wealth accumulation for nearly all households.

Lockwood (2014) attempts to solve the problem of separately identifying precautionarysaving and bequest motives by analyzing saving and long-term care insurance decisions.
While the low rate of long-term care insurance coverage is often cited as evidence against
bequest motives, he points out that the opportunity cost of precautionary saving is higher
for people without a bequest motive, who would like to consume all of their wealth, thanfor those with a bequest motive, who value the prospect of leaving wealth to their heirs.
Hence, Lockwood (2014) argues that the low rate of long-term care insurance coverage,
especially among relatively wealthy retirees and especially in combination with the slow
decumulation of wealth, is likely to be the evidence in favor of a bequest motive.

By contrast, Dobrescu (2015) develops a life-cycle model that considers the effects ofboth health and medical spending risks on the insurance and saving decisions of retirees
where health insurance can be provided either formally by the market or informally by
the family. Given that wealth holdings encourage family members to provide the elderlywith informal care, the model allows for a strategic bequest motive. Using data on
European countries, her simulation results show that health risks and potentially high5

medical spending are the main drivers of slow wealth decumulation in old age (andconsequently of large bequests). The results suggest that the absence of perfect formal
insurance markets coupled with borrowing constraints and health dynamics creates astrong incentive for the elderly to keep wealth for strategic reasons (i.e., to induce family
members to provide care).

Ameriks et al. (2015), on the other hand, design survey questions that involve
hypothetical trade-offs between consuming long-term care and leaving bequests to shedlight on the relative importance of precautionary saving and bequest motives. Theirestimation results show that precautionary saving motives associated with long-term careneeds are significantly more important than bequest motives as a driver of the saving
behavior of the elderly in the US. Using a similar survey instrument to resolve theidentification problem, Ameriks et al. (2011) also find that precautionary saving in
response to public care aversion plays a significant role in explaining the low rate ofspending of many middle-class retirees although bequest motives are found to be moreprevalent even among the middle class than previously thought. 7

This is similar to the findings of De Nardi, French, and Jones (2010), who estimate astructural model of life-cycle saving that incorporates heterogeneity in medical expenses
and lifespans along with bequest motives. Their estimation results provide limited
evidence in favor of a bequest motive while longevity and medical expense risks arefound to play a critical role in explaining the saving behavior of the elderly in the case of
the US. They find that medical expenses are much higher and more volatile thanpreviously estimated (e.g., Palumbo, 1999) largely because previous work understates theextent to which these expenses rise with both age and permanent income. They thus argue
that an important reason why the income-rich elderly decumulate wealth slowly is thehigh level of medical expenses they are likely to face later in their lives. Indeed, French
et al. (2006) show, using data for the US, that death is often preceded by a costly illness

7

Public care aversion refers to the desire to avoid simultaneously running out of wealth and needing longterm care and hence having to rely on (low-quality) publicly provided long-term care at the end of life
(Ameriks et al., 2011).

6

with a significant increase in out-of-pocket medical expenses. Their findings therefore
suggest that end-of-life expenditures such as medical expenses provide an importantreason for the elderly to retain their assets into very old age. Kopecky and Koreshkova(2014) extend the work of De Nardi, French, and Jones (2010) by separating nursing
home expenses from other medical expenses and find for the US that out-of-pocket
nursing home expenses have a disproportionately large effect on wealth decumulationlate in life.

While existing work on the wealth decumulation behavior of the elderly has been
undertaken predominantly for the US, previous studies for countries other than the US
find some interesting contrasts. For instance, Spicer, Stavrunova, and Thorp (2016) findthat, unlike in the US, the impact of health shocks on the wealth decumulation behaviorof retired households is minimal in the case of Australia. While bad health can affect theliquid asset holdings of retired households, poor health and changes in health status arefound to have only a limited impact on retirees’ wealth levels, decumulation patterns, andportfolio choices in Australia, presumably because Australian retirees are well covered
for most medical expenses (Spicer, Stavrunova, and Thorp, 2016).

Similarly, Van Ooijen, Alessie, and Kalwij (2015) find, using data on the Netherlands,
that health shocks even result in higher household saving in old age because health careexpenditures are almost completely insured (and probably because deteriorating healthconstrains non-health-care consumption), which makes precautionary saving lessnecessary in the Netherlands. This is consistent with the findings obtained for Germany
by Börsch-Supan (1992). Rather than wondering why the elderly save so much, BörschSupan (1992) investigates why the elderly consume so little to explain the U-shaped
profile of the wealth accumulation behavior of the elderly―a decline in wealth until about
age 70 followed by a strong increase past that age―in Germany. He explains that becauseof the generous pension system and the almost complete coverage of health expenses by
the mandatory health insurance system in Germany, the declining consumption in very
old age arises because the elderly cannot consume all of their annuity income, as a resultof which wealth is accumulated.

7

Unfortunately, the literature on the wealth decumulation behavior of the elderly in Japanremains relatively limited. Previous studies find, as predicted by the life-cycle model, thatthe elderly decumulate wealth once they retire/stop working (e.g., Horioka, 2010;
Horioka et al., 1996; Usuki, Kitamura, and Nakajima, 2016). However, the few studies
that look at the wealth decumulation rate of the elderly show that, as in many othercountries, the elderly decumulate wealth more slowly than predicted by the basic lifecycle model (e.g., Horioka, 2010; Horioka and Niimi, 2017; Murata, 2018).

Nevertheless, the reasons for the slow decumulation of wealth by the elderly have beenrarely examined with few exceptions. Horioka et al. (1996) and Horioka et al. (2002) findthat households with a bequest motive show a lower rate of wealth decumulation (a higher
rate of wealth accumulation) than those without such a motive, indicating the importanceof bequest motives in explaining the wealth decumulation behavior of the elderly in Japan.
Similarly, Murata (2018) finds that having a bequest motive is an important explanation
for why the dissaving rate of the elderly is lower than predicted by the simple life-cycle
model. By contrast, she finds that precautionary saving does not play a key role inexplaining the dissaving behavior of the elderly except for those without a bequest motive.
On the other hand, Horioka and Niimi (2017) find both precautionary saving and bequest
motives to be key determinants of the wealth decumulation behavior of the elderly, but
their analysis shows that precautionary saving plays a bigger role in explaining therelatively slow decumulation of wealth by the elderly. The limited empirical studies on
Japan therefore obtain mixed results regarding the relative importance of precautionarysaving and bequest motives in explaining the wealth decumulation behavior of the elderly
in Japan, as in other countries.

The main purpose of this paper is to fill these gaps in the literature by making three key
contributions. First, it aims to assess the relative importance of precautionary saving andbequest motives in explaining the wealth decumulation behavior of the retired elderly.
Second, it looks at the case of Japan, where empirical work on the reasons for the slow
decumulation of wealth by the elderly remains limited. Third, it investigates the8implications of the financial burden of parental care for the wealth decumulation behaviorof the retired elderly, which has not been examined previously.
3. Data

We conduct two separate regression analyses using two different datasets to shed light on
the relative importance of precautionary saving and bequest motives in explaining thewealth decumulation behavior of the retired elderly in Japan. These two datasetscomplement each other well: the first dataset allows us to examine the determinants ofthe probability of decumulating wealth while the second dataset allows us to examine thedeterminants of the rate of wealth decumulation. Both datasets contain uniqueinformation on precautionary saving and bequest motives, which helps us to assess theirrelative importance for the wealth decumulation behavior of the retired elderly, as
explained in detail in Section 4.

3.1 Survey on Households and Saving

The first dataset we use for our analysis is the Survey on Households and Saving (Kakei
to Chochiku nikansuru Chousa), which has been conducted biennially since 2013 in Japanby the Yu-cho Foundation. In this survey, a sample of households with two or more
persons and with a household head who is 20 years old or above was drawn to benationally representative using a two-stage stratified random sampling procedure. We use
data from the 2013 and 2015 waves of this survey. In 2013 and 2015, 1,734 and 1,691
households completed the questionnaire, respectively. Since the data from this survey are
unfortunately not a panel, we pool the data collected in 2013 and 2015 and conduct across-sectional analysis using these data.

The Survey on Households and Saving is conducted with the aim of better understanding
households’ livelihood and saving behavior. It collects detailed information on, among
other things, saving, housing, wealth, labor supply, consumption, pensions, and bequests.
One of the key questions that the survey asks households is whether they are currently (i)9accumulating their financial wealth, (ii) keeping the level of their financial wealth moreor less constant, or (iii) decumulating their financial wealth. Using the answers to thisquestion, it is possible to examine the determinants of the probability of decumulating
financial wealth. The survey also asks households about the share of saving for different
motives, including precautionary motives and bequest motives, in total saving. Anotherunique piece of information we use for our analysis is the amount of the financial burdenof parental care that is borne by households. By exploiting such information, it is possible
to shed light on the relevance of competing hypotheses regarding the wealth decumulation
behavior of the retired elderly.

Since we would like to analyze the wealth decumulation behavior of the elderly who are
retired, we restrict our estimation sample to those households whose household heads andtheir spouses are both aged 60 or above and are both retired (i.e., neither working nor
looking for work). Given that the data on wealth are collected at the household level andthat this survey is conducted only for households with two or more persons, we restrict
our estimation sample to couple households only in order to eliminate any possible effectsof having other household members on the wealth decumulation pattern of the household.

Applying the above sample restriction rules reduces the number of observations to 364,
and excluding households with missing information on key variables reduces the numberof observations further to 210. To verify the representativeness of our sample, we compare
this estimation sample to the sample of retired couple households from the Family Income
and Expenditure Survey, which is conducted annually by the Statistics Bureau, Ministryof Internal Affairs and Communications in Japan. The comparison (shown in the
Appendix) confirms that our estimation sample from the Survey on Households andSaving is broadly comparable to the corresponding sample from the Family Income andExpenditure Survey in terms of the homeownership rate and the level of financial
liabilities although the level of financial assets (and therefore that of financial net worth)from the Survey on Households and Saving seems somewhat lower than those from theFamily Income and Expenditure Survey. Hence, we need to be cautious about making
generalizations based on data from the Survey on Households and Saving.

10

3.2 Preference Parameters Study

The second dataset we use is the Preference Parameters Study (Kurashi no Konomi to
Manzokudo nitsuiteno Anketo) of Osaka University. This survey was conducted annuallyin Japan during the 2003-13 period by the 21st Century Center of Excellence (COE)
Program “Behavioral Macrodynamics Based on Surveys and Experiments” and the
Global COE Project “Human Behavior and Socioeconomic Dynamics” of Osaka
University. A sample of individuals aged 20-69 was drawn to be nationally representative
using a two-stage stratified random sampling procedure. The sample has a panel
component although fresh observations were added in 2004, 2006, and 2009 to overcome
the problem of attrition. The survey was also conducted using the same survey instrumentin China, India, and the US though for shorter periods.

Given that not all questions were asked in every year, we have decided to use data fromthe 2012 and 2013 waves in order to ensure that we can construct the relevant variables
for our empirical analysis. In the case of the 2012 and 2013 waves, 4,588 and 4,321
respondents completed the questionnaire, respectively. In addition to basic information
on respondents and their households such as household composition, consumption,
income, wealth, and other socioeconomic characteristics, this survey collected
information on pensions that respondents receive, the type of bequest motives they have,and their preference for leaving a bequest to their children as opposed to receiving highquality long-term care based on responses to hypothetical questions à la Ameriks et al.
(2011).

Unlike in the case of the Survey on Households and Saving, the sample for the Preference
Parameters Study includes single-person households. We therefore restrict our estimation
sample to single-person or couple households in which the respondent and, if married,
his/her spouse are aged 60 or above and are retired (i.e., neither working nor looking forwork). We also restrict our estimation sample to those respondents who were surveyed inboth years. Applying the above restrictions reduces the number of observations to 227,11

and excluding respondents with missing information on key variables reduces the numberof observations further to 137. We also compare this estimation sample to thecorresponding sample from the Family Income and Expenditure Survey, and thiscomparison shows that our estimation sample is comparable to the sample from theFamily Income and Expenditure Survey in terms of the key wealth-related variables, as
shown in the Appendix.
4. Estimation Strategy and Empirical Specification

4.1 Empirical Analysis Using Data from the Survey on Households and Saving

In the first analysis, we examine the determinants of the probability of decumulating
wealth for the retired elderly. The Survey on Households and Saving asks households
whether they are currently (i) accumulating their financial wealth, (ii) keeping the levelof their financial wealth more or less constant, or (iii) decumulating their financial wealth,
as noted earlier. 8 Based on respondents’ responses to this question, we create a binary
variable that equals one if the household is currently decumulating its financial wealthand zero otherwise and estimate a probit model for the determinants of the probability ofdecumulating financial wealth among the retired elderly. 9

The Survey on Households and Saving also includes a question on the relative shares ofsaving for different motives. Our main variables of interest are those that indicate theshares of saving for bequests, precautionary purposes, and long-term care in total saving.
Note that the share of precautionary saving refers to saving for illness, disasters, and otherunexpected events. Other saving motives include children’s education expenses, marriage

8

We should note that the question uses the word “saving” (stock of saving), which some respondents may
interpret narrowly as including only bank and postal deposits. Thus, there may be some respondents who
reply that they are decumulating their financial wealth because they are decumulating their bank and postal
deposits even though their total financial net worth is constant or even increasing.
9
The behavior of households that are accumulating their financial wealth and that of households that are
keeping the level of their financial wealth more or less constant are different in nature, and thus estimating
an ordered probit model might be a more suitable estimation strategy. However, since the share ofhouseholds that are accumulating their wealth is negligible (only 8 out of 210 households) in our estimation
sample, we have decided to estimate a probit model instead.

12

expenses (either the respondent’s own marriage or his/her children’s marriage), purchaseof land/housing (including housing renovations), purchase of durable goods, leisure,retirement, and no reason in particular but for peace in mind. We would expect the sharesof saving for bequests, precautionary purposes, and long-term care in total saving to be
negatively associated with the probability of decumulating wealth.

Another key explanatory variable is the monthly financial cost of parental care borne by
the household. This variable is constructed by aggregating the long-term care expenses
that the household pays for the household head’s mother, father, mother-in-law, andfather-in-law. We would expect this variable to be positively associated with theprobability of decumulating wealth since the need to bear the financial burden of parental
care will increase the need to decumulate wealth.

Other explanatory variables include the age and educational attainment of the household
head, 10 the self-rated health assessment of the household head and his spouse, a dummy
variable for having a child (children), a homeownership dummy, and the level of financial
net worth. Financial wealth is defined as the total amount of wealth in the form of bankand postal deposits, foreign currency-denominated financial products, life insurance,
individual pensions, bonds, stocks, investment trusts, payroll saving schemes, and others.
Financial net worth is obtained by subtracting the total amount of debt from financial
wealth. Unfortunately, because of the absence of data on the value of real assets, we could
not construct a variable for net worth, but we partially compensate for this by including ahomeownership dummy.

Finally, we include a variable that indicates the share of living expenses that public
pensions cover. It is not clear a priori whether receiving relatively generous public
pensions will increase or decrease the probability of decumulating wealth. On the one
hand, the receipt of generous pensions will reduce the need for precautionary saving

10

In the case of the Survey on Households and Saving, the respondent himself/herself specifies who is thehead of his/her household. The majority of household heads are found to be male (only 3 households in ourestimation sample had a female household head).

13

associated with lifespan uncertainty, which in turn may induce the elderly to decumulate
their wealth faster. On the other hand, receiving large pensions relative to their living
expenses will reduce the need for the elderly to rely on their own wealth to finance theirliving expenses, which in turn may induce them to decumulate their wealth more slowly.
The effect of public pensions on the wealth decumulation behavior of the retired elderlyis therefore an empirical question.

Given that we pool data from the 2013 and 2015 waves, as noted earlier, the values offinancial net worth and the financial burden of parental care borne by the household areconverted to 2013 prices.

4.2 Empirical Analysis Using Data from the Preference Parameters StudyIn the second analysis, we analyze the determinants of changes in the level of wealth bytaking advantage of the panel structure of the Preference Parameters Study. Following
Spicer, Stavrunova, and Thorp (2016), our dependent variable is the percentage change
in financial net worth between 2012 and 2013 expressed as the difference in the logarithmof financial net worth, 100log(𝑤𝑤𝑖𝑖2013⁄𝑤𝑤𝑖𝑖2012 ), for household i. We regress this variable

on the values of the explanatory variables at the beginning of the wealth accumulation or
decumulation period, i.e., the year 2012, using ordinary least squares (OLS). We use thepercentage change in financial net worth rather than that in net worth because theJapanese tend to live in their own homes until they die and because “reverse mortgages”
are not very popular in Japan. 11 We would therefore expect changes in wealth holdings
to occur more with respect to financial assets than to non-financial assets in the case ofretired households. That is indeed what we find for our estimation sample: the level offinancial net worth increased, on average, by 5.1% while that of net worth increased byonly 0.4% between 2012 and 2013.

11

Nevertheless, we also tried using the percentage change in the level of net worth as our dependent
variable and our key findings remain the same. The regression results are available from the authors uponrequest.

14

One of our main explanatory variables of interest is a variable that indicates the nature of
the bequest motive that each respondent has. The Preference Parameters Study asks
respondents about their plans for bequests. Based on responses to this question, we divide
our sample into four groups: (i) those who plan to leave bequests no matter what; (ii)those who plan to leave bequests under certain conditions (e.g., if their children provide
elderly care, provide financial support, and/or take over the family business); (iii) those
who plan to leave bequests only if there is any wealth left over upon their death; and (iv)
those who have no plans to leave a bequest. In other words, this variable indicates whether
the respondent has a (altruistic) strong bequest motive, a strategic bequest motive, apassive or weak bequest motive (bequests are accidental or unintended in this case), or
no bequest motive. The inclusion of this variable allows us to investigate the implicationsof different types of bequest motives for the wealth decumulation behavior of the retired
elderly.

Another key explanatory variable is a variable that indicates the strength of one’s bequest
motive relative to one’s precautionary saving motive. Unfortunately, unlike the Survey ofHouseholds and Saving, the Preference Parameters Study did not collect information on
saving for different motives, which constitutes a direct measure of respondents’preference for saving for bequests as opposed to precautionary saving. Instead, it included
hypothetical questions that sought to capture respondents’ preference for leaving abequest to their children as opposed to receiving high-quality long-term care at the endof their lives. More specifically, the Preference Parameters Study asked respondents thefollowing question: 12

Please answer the following question concerning how you want to spend the final year of
your life. Please assume that you are currently 85 years old, have one year left to live, andhave total wealth of 20 million yen. Up to how much will you be willing to pay out-ofpocket to live in a private room in a nursing home during your last year of life? Pleasecircle the response that applies to you. Please assume that the rest of the 20 million yen
will be left to your children as an inheritance.

12

Given that this question was included only in the 2011 wave, we used information from the 2011 wave
on the assumption that such preferences did not change significantly between 2011 and 2012.

15

(1) I would like to live in a private room if I did not have to pay anything out of my own
pocket (i.e., I want to leave all of my wealth (20 million yen) to my children as aninheritance).
(2) I would be willing to pay up to 2.5 million yen out of my own pocket to live in a
private room.
(3) I would be willing to pay up to 5 million yen out of my own pocket to live in a privateroom.
(4) I would be willing to pay up to 10 million yen out of my own pocket to live in a
private room.
(5) I would be willing to pay up to 12.5 million yen out of my own pocket to live in a
private room.
(6) I would be willing to pay up to 15 million yen out of my own pocket to live in a
private room.
(7) I would be willing to pay up to 17.5 million yen out of my own pocket to live in a
private room.
(8) I would be willing to pay up to 20 million yen out of my own pocket to live in a
private room.
This question is similar to the questions designed by Ameriks et al. (2011), who used
responses to the questions to distinguish between precautionary saving and bequest
motives. Responses to this particular question essentially indicate how much respondents
care about their own wellbeing at the end of their lives relative to leaving bequests to theirchildren. Moreover, we would expect those who care more about their own wellbeing toallocate more toward precautionary saving than toward saving for bequests. We therefore
believe that responses to the question indicate, at least indirectly, how much respondents
value the prospect of leaving bequests to their children relative to saving for precautionary
purposes for their own wellbeing.

Accordingly, we construct a variable that measures respondents’ preference for bequests
versus precautionary saving using their responses to this hypothetical question and thenexamine whether this variable affects their wealth decumulation behavior. We express
this variable as the share of end-of-life wealth (i.e., 20 million yen) that the respondent iswilling to allocate to bequests. For example, if respondents choose (1), we assume thatthey are willing to allocate 100% of their wealth (20 million out of 20 million yen) tobequests. If they choose (2), we assume that they are willing to allocate 87.5% of theirwealth (17.5 million out of 20 million yen) to bequests, and so on. Hence, we constructthis variable by assigning the values 1, 0.875, 0.75, 0.5, 0.375, 0.25, 0.125 and 0 to16

responses (1) through (8) above, respectively.

Other explanatory variables include the age, gender, educational attainment, marital status
and self-rated health assessment of the respondent, a dummy variable for having a child(children), a homeownership dummy variable, the level of net worth, the share of living
expenses covered by public pensions, and a dummy variable that equals one if the
respondent expects to receive bequests and/or inter vivos transfers from his/her parents
and/or (if married) from his/her parents-in-law. We also include a variable that indicates
whether the household has a saving plan for the next one year.

As in the case of the Survey on Households and Saving, we express the value of net worth
in 2013 prices. Furthermore, in addition to the above explanatory variables, regionaldummies as well as a dummy variable for residing in a major (ordinance-designated) city
are included to control for geographical variations.

5. Empirical Results

5.1 Regression Results based on Data from the Survey on Households and Saving

We start by discussing the findings from our empirical analysis based on data from theSurvey on Households and Saving. We first report some basic statistics on household
wealth holdings. Table 1 summarizes the average level of financial net worth as well as
the average homeownership rate by the age, educational attainment, and self-rated healthstatus of household heads. 13 The table shows that the average level of financial net worth
declines as the household head gets older, suggesting that retired households are
decumulating their financial wealth over time. This suggests that the life-cycle modelholds in the case of Japan, at least if we measure wealth holdings in terms of financial net
13

Note that the number of observations for the 60-69 age group is smaller than that for the 70-79 age group
because we include only retired couple-households in the sample and because the employment rate for the
60-69 age group is generally higher than that for the 70-79 age group. For example, according to the 2015
Labor Force Survey (available at http://www.stat.go.jp/data/roudou/rireki/nen/ft/pdf/2015.pdf), theemployment rates for those aged 60-64, 65-69, 70-74, and 75 or above are 62.2%, 41.5%, 24.9%, and 8.3%,
respectively.

17

worth. However, note that we are not taking cohort effects into account here and a moredetailed analysis using panel data is needed to reach a definitive conclusion. As expected,
households whose heads are university graduates have a significantly larger amount offinancial net worth than those whose heads do not have a university degree. In addition,
households whose heads are in good health seem to hold a greater amount of financial net
worth than those whose heads are in poor health. Table 1 also shows that the majority ofhouseholds own a house or a condominium in Japan.

Table 1: Wealth Levels of Retired Households (in million yen)
No. ofobservations

Financial net worth
MeanStandard deviation

Homeownership(%)

Household heads’ characteristics
Age groups
60-69
70-79
80+

41
119
50

34.17
16.59
14.16

32.45
18.95
19.33

0.98
0.93
0.84

Education
University
No university

66
144

27.43
15.79

27.73
20.13

0.92
0.92

HealthGood, relatively goodNot very good, not good

141
69

21.16
15.93

25.38
18.25

0.96
0.84

Total
210
19.45
23.36
0.92
Source: Calculations based on data from the 2013 and 2015 waves of the Survey on Households and Saving.

We estimate a probit model in order to investigate the determinants of the probability ofdecumulating financial wealth among the retired elderly, as explained in Section 4.1.
Table 2 reports the summary statistics of the dependent and explanatory variables for all
households as well as separately for households that are decumulating financial wealthand those who are not. This table shows that only about 53% of households in our sample
are decumulating their financial wealth, which implies that nearly half of the retired
elderly in Japan are continuing to accumulate financial wealth or keeping the level of theirfinancial wealth constant, in violation of the prediction of the basic life-cycle model withno bequest motives or longevity risk.

18

Table 2: Summary Statistics
All households

MeanStandard
deviation

Households
decumulating
financial wealth
MeanStandard
deviation

Households notdecumulating
financial wealth
MeanStandard
deviation

74.86
56.46
0.87
0.24**

75.59
57.47
0.88
0.39

Decumulating financial wealth

0.53Household head’s age
Household head’s age2/100
Child
University degree (household
head)Good health (household head)
Good health (spouse)

75.20
56.94
0.88
0.31

Homeownership
Financial net worth(million yen)
Pensions (share of living
expenses)

0.92
19.45

23.36

0.92
14.30***

17.94

0.92
25.22

27.19

0.92

0.29

0.88**

0.24

0.98

0.33

Share of saving for bequests
Share of saving forprecautionary purposes
Share of saving for long-termcare needs

0.02
0.23

0.08
0.23

0.01**
0.21

0.04
0.22

0.03
0.25

0.10
0.23

0.15

0.22

0.16

0.21

0.15

0.23

Monthly financial cost of
long-term care forparents/parents-in-law(thousand yen)

4.67

23.43

5.57

23.43

3.65

23.52

2015 year dummy

0.47

6.23
9.46

0.67
0.70

6.56
9.91

0.57***
0.58***

0.47

5.83
8.94

0.79
0.83

0.47

No. of observations
210
111
99
Note: *** and ** indicate that the mean value of the variable is statistically different between households
that are decumulating financial wealth and those that are not at the 1% and 5% significance levels.
Source: Calculations based on data from the 2013 and 2015 waves of the Survey on Households and Saving.

Turning to the explanatory variables, Table 2 shows that the average age of the household
head is about 75 years old. The majority of households own a house or a condominium(about 92%) and have a child (children) (about 88%). We do not find a significant
difference in these characteristics between households that are decumulating financial
wealth and those that are not. By contrast, we find that households whose heads are notuniversity graduates or whose members are in poor health are more likely to be
decumulating financial wealth than those whose heads are better educated or whose19

members are in good health. We also find that the level of financial net worth issignificantly lower for households that are decumulating financial wealth than for thosethat are not. While the table shows that public pensions generally cover a relatively large
share of living expenses, this share is found to be smaller for households that are
decumulating financial wealth than for those that are not.

Table 2 also shows that the share of saving for bequests in total saving (about 2%) isextremely small. The average share of saving for bequests is only about 6% of total saving
even among the wealthiest quintile (based on financial net worth). In fact, the majority(about 94%) have no saving for bequests. This indicates that relatively few households
are saving specifically for bequests. This may not be surprising given that the bequest
motive is found to be relatively weak among the Japanese than among, for example,
Americans (Horioka, 2014). Nevertheless, the share of saving for bequests in total saving
is found to be smaller for households that are decumulating financial wealth than for thosethat are not. By contrast, the shares of saving for precautionary purposes and long-termcare needs in total saving are much larger than that for bequests. Nearly one-quarter ofsaving is for precautionary purposes while about 15% is for long-term care needs.
However, we find no statistically significant difference in these shares between
households that are decumulating financial wealth and those that are not.

Finally, while we do not find a statistically significant difference in the monthly financial
cost of parental care, it is found to be greater for households that are decumulating
financial wealth than for those that are not. Note that the average monthly financial costof parental care reported in Table 2 does not seem so high, but the mean figure for nonzero observations is about 75,000 Japanese yen (about US$680). 14 This is a non-trivial
amount even though Japan introduced a mandatory LTCI program in Japan, 15 and it
14

At the exchange rate of US$1 = 110 Japanese yen.
According to the survey on the cost of at-home care conducted by the Institute for Research on
Household Economics in 2016, households, on average, spend about 16,000 Japanese yen (about $145) per
month for formal care services (the out-of-pocket portion) and about 34,000 Japanese yen (about $310) per
month for caregiving-related expenses (such as the cost of diapers, medical expenses, etc.) other than formalcare services (Tanaka, 2017). These figures are costs per care recipient (per elderly parent) that households
bear monthly. The results from this survey also suggest that the cost of long-term care is relatively
significant despite the existence of the LTCI program in Japan. Note that these figures are just averages and15

20

would be interesting to see how the financial burden of parental care affects the wealthdecumulation behavior of retired elderly households.

Table 3: Regression Results for Probit Model
Average marginal effectStandard error

Household head’s age
Household head’s age2/100
Child
University degree (household head)-0.243***0.154**-0.061-0.143**

0.093
0.061
0.099
0.069

Good health (household head)
Good health (spouse)-0.195***-0.163**

0.073
0.076

Homeownership
Financial net worth (million yen)
Pensions (share of living expenses)

0.085-0.005***-0.232**

0.114
0.002
0.110

Share of saving for bequests
Share of saving for precautionary purposes
Share of saving for long-term care needs-0.680-0.287**
0.002

0.526
0.141
0.143

Monthly financial cost of long-term care forparents/parents-in-law (thousand yen)

0.002*

0.014

2015 year dummy

0.032

0.063

No. of observations
210
Pseudo R2
0.187
Note: ***, **, * denote statistical significance at the 1%, 5%, and 10% levels, respectively.
Source: Estimation based on data from the 2013 and 2015 waves of the Survey on Households and Saving.

Table 3 reports the regression results for the probit model for the probability ofdecumulating financial wealth in terms of average marginal effects. Given that we
conduct a cross-sectional analysis, we acknowledge that we can only determine
associations between various factors and the probability of decumulating financial wealthand that we will not be able to ascertain their causal effects.

One of the main objectives of this paper is to examine the relative importance of
precautionary saving and bequest motives as explanations for the relatively slow
decumulation of wealth by the elderly. We find that the marginal effect of the share ofthat the cost is likely to increase as the level of disability increases. In addition, the cost of institutional careis likely to be much greater than these figures for the cost of at-home care.

21

saving for precautionary purposes is negative and significant, as expected. Morespecifically, the results show that a one percentage point increase in the share of savingfor precautionary purposes is associated with a 0.3 percentage point decline in theprobability of decumulating financial wealth. However, we find that the marginal effectof the share of saving for bequest is negative but insignificant. Hence, the results indicatethat precautionary saving seems to play a larger role in explaining the wealthdecumulation behavior of the retired elderly than bequest motives, at least in the case ofJapan.

We also included the share of saving for long-term care needs, but its marginal effect is
not statistically significant either. This may reflect the fact that Japan introduced amandatory LTCI program in 2000, which is relatively generous in terms of coverage.
Table 2 shows that households allocate a relatively large share (about 15%) of their totalsaving to future long-term care needs, which suggests that the financial burden of longterm care borne by households can be significant despite the introduction of this system. 16
However, the share of saving for long-term care needs may not have a significant effecton the wealth decumulation behavior of the elderly because some parents expect theirchildren to provide care themselves or to provide financial support to pay for professionalcare when they become in need of care. In the case of Japan, elderly care has traditionallytaken place within the family setting. While such traditional norms have been changing
in Japan with perceived filial obligation norms declining since the launch of the LTCI
program (e.g., Tsutsui, Muramatsu, and Higashino, 2014), some studies find that informalcare by adult children continues to be the most common source of caregiving for elderly
parents in Japan (Hanaoka and Norton, 2008; Long, Campbell and Nishimura, 2009). As
a result, saving for long-term care needs may be less urgent than, say, saving forprecautionary purposes.

Indeed, Table 3 shows that the financial burden of parental care has a positive and16

Because of the wording of the question, we assume that the saving for long-term care needs here ismainly to cover the long-term care costs of household members, i.e., of either the household head or his
spouse in our sample of couple households.

22significant effect on the probability of decumulating financial wealth, suggesting that
adult children provide a safety net for their elderly parents in case they require financial
support to pay for the cost of long-term care. The regression results indicate that a 1,000yen (about US$9) 17 increase in the monthly financial cost of parental care is associatedwith an increase in the probability of decumulating financial wealth of about 0.2
percentage points. This finding suggests that the financial burden that retired households
bear for their elderly parents’ long-term care might be a relevant issue when analyzing
their wealth decumulation behavior, at least in the case of Japan where adult children’s
obligation to take care of their elderly parents remains relatively strong in comparison to
the US and Europe.

As for the other regression results, we find a U-shaped relationship between the age ofthe household head and the probability of decumulating financial wealth, with a decline
in the probability of decumulating financial wealth until the age of about 79, followed byan increase past that age. A possible explanation for this pattern is that, although retired
individuals may enjoy travelling and other leisure activities when they first retire, they
may become less able to engage in such activities as they age, as a result of which theirconsumption (and their need to decumulate financial wealth) may decline with age.
However, the probability of decumulating wealth might start rising after the age of 79
because medical and long-term care needs are likely to increase prior to death.

Table 3 also shows that households whose heads are better educated or those whose
members are in relatively good health are less likely to decumulate financial wealth. The
latter result may be because people in good health incur less medical expenses and arethus better able to accumulate wealth or because the life expectancy of people in good
health is likely to be longer, meaning that they have a greater need to accumulate wealth.

The level of financial net worth is also negatively associated with the probability ofdecumulating financial wealth, but its marginal effect is relatively small in magnitude―a17

At the exchange rate of US$1 = 110 Japanese yen.

23

one million yen (about US$9,100) 18 increase in financial net worth is associated with
only a 0.5 percentage point decline in the probability of decumulating financial wealth.
As for the effect of public pensions, a one percentage point increase in the share of living
expenses covered by public pensions is associated with a 0.2 percentage point decline in
the probability of decumulating financial wealth. This suggests that receiving relatively
generous public pensions alleviates the need to decumulate wealth to finance one’s living
expenses.
5.2 Regression Results based on Data from the Preference Parameters Study

We now turn to our discussion of the regression results based on data from the Preference
Parameters Study. As we have done for the Survey of Households and Saving, wesummarize in Table 4 the average level of financial net worth as well as the average
homeownership rate by the age, educational attainment, and self-rated health status of
respondents using data from the Preference Parameters Study. 19 As shown in Table 1, theolder, the better educated, and the more healthy the respondent is, the higher is the levelof his/her household financial net worth, while the majority of elderly households arefound to own a house or a condominium. 20

In the analysis using data from the Preference Parameters Study, we examine the18

At the exchange rate of US$1 = 110 Japanese yen.
Note that in the case of the Preference Parameters Study, we do not have any observations older than 78
in the 2012 wave of the survey because all respondents were 69 or younger when they were surveyed
initially although they became older with each wave of the survey. This is the same reason why the shareof respondents in the 60-69 age group is higher in the Preference Parameters Study than in the Survey ofHouseholds and Saving (compare Tables 1 and 4).
20This survey collected information only on the respondent’s own health status. Note that the shares ofhousehold heads and their spouses who are in good health were found to be higher in the Survey on
Households and Saving than in the Preference Parameters Study. This is due mainly to the fact that the way
in which the relevant question was phrased and the reply options were different between the two surveys.
In the case of the Survey on Households and Saving, respondents were asked how the household head’s
health was and how his spouse’s health was, and they were asked to choose from among the following
options: good, relatively good, not very good, and not good. We constructed a good health variable for thehousehold head (or his spouse) that equals one if the household head’s (or his spouse’s) health was reported
to be good or relatively good and zero otherwise. By contrast, in the case of the Preference Parameters
Study, respondents were asked how true the statement “I’m concerned about my health” was for them andthey were asked to answer on a scale of 1 to 5 where “1” means “it is particularly true” and “5” means “itis not true at all.” We constructed a good health variable that equals one if respondents chose 4 or 5 andzero otherwise.
19

24

determinants of the wealth accumulation or decumulation rate (the percentage change infinancial net worth) of the retired elderly, as explained in Section 4.2. Table 5 reports thesummary statistics for the dependent and explanatory variables. According to this table,households in Japan increased their financial net worth slightly (by about 5%), on average,
between 2012 and 2013. The fact that even retired households in Japan are continuing toaccumulate wealth, on average, indicates that the same puzzle that is observed in othercountries (viz., the failure to observe a tendency for the retired elderly to decumulate theirwealth) is observed in Japan as well.

Table 4: Wealth Levels of Retired Households (in million yen)
No. ofobservations

Financial net worth
MeanStandard deviation

Homeownership(%)

Respondents’ characteristics
Age groups
60-69
70-79

69
68

26.34
21.59

31.04
22.39

0.91
0.94

Education
University
No university

29
108

37.97
20.23

40.28
21.02

0.93
0.93

35
102

29.77
22.00

34.08
24.14

0.94
0.92

HealthGood, relatively good
Average, not very good,
not good

Total
137
23.99
27.10
0.93
Source: Calculations based on data from the 2012 wave of the Preference Parameters Study.

The average age of respondents is about 69 years old and about 48% of respondents arefemale. Just over one-fifth of respondents have a university degree. The majority of
respondents are married (about 84%), have a child (children) (about 88%), and own ahouse or a condominium (about 93%). About one quarter of respondents say that they are
not concerned about their health. Only about 4% of respondents expect to receive
bequests and/or inter vivos transfers from their parents and/or parents-in-law. This figure
seems somewhat low, but this is presumably because many households in this age groupare likely to have already received intergenerational transfers from their own parents
and/or parents-in-law. It is interesting to find that about 28% of households have a saving

25

plan for the next year.

Table 5 also shows that respondents would allocate, on average, about 62% of their endof-life wealth to a bequest and the remaining (about 38%) to cover long-term care costs(the cost of a private room in a nursing home). To take a closer look at this, Figure 1
shows the distribution of this share. We find that a relatively large share of respondents
would prefer allocating more to bequests rather than to covering long-term care costs. To
see whether this preference varies by the nature of the respondent’s bequest motive, Table
6 reports the average share of end-of-life wealth allocated to a bequest as well as theaverage levels of financial net worth and net worth by type of bequest motive.

Table 5: Summary Statistics
Mean

Standard
deviation

5.09

48.95

Respondent’s characteristics
Age
Age2/100
FemaleMarriedGood health
University degree

69.23
48.10
0.48
0.84
0.26
0.21

4.16
5.76

Child
Homeownership
Net worth (million yen)
Expect to receive bequests and/or inter vivos transfers
Pensions (share of living expenses)
Have a saving plan for the next one year

0.88
0.93
45.88
0.04
0.74
0.28

Preference for leaving a bequest (share of end-of-life wealthallocated to bequests)
Bequest motives
No bequest motive
Strong (altruistic) bequest motive
Strategic bequest motive
Weak bequest motive

0.62

Residing in a major city

0.21

Percentage change in financial net worth (100 log(financial
net worth for 2013/financial net worth for 2012))

40.29
0.22

0.32

0.15
0.18
0.04
0.62

No. of observations
137
Source: Calculations based on data from the 2012 and 2013 waves of the Preference Parameters Study.

26

First of all, Table 5 shows that the majority of respondents (about 62%) have only a weak
bequest motive―i.e., they plan to leave a bequest only if they have some wealth left overat death. In other words, bequests are likely to be more accidental or unintended in naturein the case of Japan. This is consistent with the findings of a previous international
comparison analysis of bequest motives (Horioka, 2014), which finds that the bequest
motive of the Japanese tends to be much weaker than that of Americans. Table 6 thenshows that, as expected, the share of end-of-life wealth that respondents allocate to abequest is highest for those who have a strong (altruistic) or strategic bequest motive,
while it is relatively low for those who have a weak or no bequest motive. The same tablealso shows that relatively well-off households are more likely to have a strong or strategic
bequest motive than those who are less well-off. Similar findings are obtained, forinstance, by Alessie, Lusardi, and Kapteyn (1999), who find, using data on the
Netherlands, that bequest motives are mostly concentrated among rich households andthat saving for one’s children increases almost monotonically with wealth.

Figure 1: Trade-off between Bequests and Long-term Care at the End of Life30

% of sample

25
20
15
10
5
0
0.000

0.125

0.250

0.375

0.500

0.750

0.875

Share of End-of-Life Wealth Allocated to a Bequest
Source: Calculations based on data from the 2011 wave of the Preference Parameters Study.

27

1.000

Table 6: Trade-off between Bequests and Long-term Care and Wealth Levels
by Type of Bequest Motive

Strong (altruistic) bequest motive
Strategic bequest motive
Weak bequest motive
No bequest motive

Share of end-of-life
wealth allocated toa bequest

Financial net worth(million yen)

Net worth(million yen)

0.69
0.69
0.62
0.56

34.95
43.31
22.82
10.14

61.28
72.19
45.01
23.57

Total
0.62
23.99
45.88
Source: Calculations based on data from the 2011and 2012 waves of the Preference Parameters Study.

Table 7: OLS Regression Results
CoefficientStandard error

Respondents’ characteristics
Age
Age2/100
FemaleMarriedGood health
University degree

9.979-7.517-19.935*-8.811
16.561-12.935

29.91421.66311.80510.70711.95212.476Child
Homeownership
Net worth (million yen)
Expect to receive bequests and/or inter vivos transfers
Pensions (share of living expenses)
Have a saving plan

10.3176.381-0.186-20.674
3.260-4.70914.47718.2850.131
23.71220.792
11.441

Preference for bequests (share of end-of-life wealthallocated to a bequest)
Bequest motives(No bequest motive)
Strong (altruistic) bequest motive
Strategic bequest motive
Weak bequest motive-46.679***

17.53526.352*46.294**24.607*15.41918.56812.952

Residing in a major city
1.245
9.494
Constant-316.390
1029.451
R2
0.209
No. of observations
137
Note: ***, ** and * denote statistical significance at the 1%, 5% and 10% levels, respectively. Robust
standard errors are reported. Regional dummies are included in all regressions.
Source: Estimation based on data from the 2012 and 2013 waves of the Preference Parameters Study.

We now turn to the regression results reported in Table 7. We find that having a stronger
preference for leaving a bequest to one’s children versus receiving more
luxurious/comfortable long-term care is negatively associated with the financial wealth28

accumulation rate. More specifically, if the share of end-of-life wealth allocated to abequest increases by one percentage point, the wealth accumulation (decumulation) rateis expected to decrease (increase) by about 0.5 percentage points. This can be interpreted
as saying that having a strong precautionary saving motive relative to a bequest motive
leads to a lower wealth decumulation rate. This is consistent with the conclusion we havereached earlier based on data from the Survey on Households and Saving that
precautionary saving plays a more important role in explaining the slow decumulation of
wealth by the retired elderly in Japan.
As far as the nature of bequest motives is concerned, we find that every type of bequest
motive is significantly and positively associated with the wealth accumulation rate. Thissuggests that bequest motives also play some role in explaining the wealth decumulation
behavior of the retired elderly in Japan. The magnitude of the effect is largest for the
strategic bequest motive. In other words, we find that households with a strategic bequest
motive accumulate wealth faster (decumulate wealth more slowly) than not only
households with no bequest motive but also households with any other type of bequest
motive. Given that a strategic bequest motive comes at least partly from the household’s
desire to induce family members to provide necessary long-term care in old age, this result
also suggests that the observed lower than expected wealth decumulation rate of theelderly is driven more by precautionary saving than by (altruistic) bequest motives, atleast in the case of Japan.
6. Conclusions

This paper analyzed the determinants of the wealth decumulation behavior of the retired
elderly in Japan using unique information from two household surveys (namely, theSurvey on Households and Saving and the Preference Parameters Study), and by so doing,
attempted to assess the relative importance of precautionary saving and bequest motives
in explaining the lower than expected rates of wealth decumulation of the retired elderly
in Japan. Taken together, our analyses of these two datasets showed that both
precautionary saving and bequest motives are important drivers behind the lower than
expected wealth decumulation rates of the retired elderly in Japan.

29

As for which of the two aforementioned factors is more important as an explanation forthe lower than expected wealth decumulation rate of the retired elderly in Japan, both thefact that the elderly who are saving relatively more for precautionary purposes are lesslikely to decumulate financial wealth than other elderly and the fact that having apreference for leaving a bequest to one’s children as opposed to being more concerned
about one’s own wellbeing at the end of one’s life leads to a significant decrease(increase) in the wealth accumulation (decumulation) rate suggest that saving forprecautionary purposes is more important as an explanation of the lower than expected
wealth decumulation rate of the elderly than saving for bequests, at least in the case ofJapan. This may partly reflect the relatively weak bequest motive of the Japanese incomparison with, for example, that of Americans.

Another key finding of our analysis is that, despite the relatively generous coverage of
the Japanese LTCI program, the financial burden of parental care that the elderly bear canbe significant enough to affect their wealth decumulation behavior. Given that parental
care responsibilities tend to arise relatively late in life, often after retirement, in the caseof Japan, our results suggest that the financial burden of parental care may be a relevant
issue when analyzing the wealth decumulation behavior of the elderly.

An important direction for future work is to extend our analysis using panel data. Paneldata analysis will allow us to examine, among other things, the effect of health shocks aswell as family status transitions (e.g., widowhood and divorce) on the wealthaccumulation/decumulation of the elderly, which the current analysis could not do due todata constraints even though they have been found to be important determinants of thewealth decumulation behavior of the elderly (e.g., Poterba, Venti, and Wise, 2011; Van
Ooijen, Alessie, and Kalwij, 2015). Working with a data set with a larger sample size isalso on the agenda. Another area that requires more work is to examine why precautionarysaving remains so important for the elderly in Japan even though they face, at least
objectively, relatively little uncertainty given the comprehensive coverage of the public
pension, health insurance, and LTCI programs. The answer to this question is key to30

understanding why the wealth decumulation rate of the elderly in Japan is so low andwhat can be done to induce them to decumulate their wealth at a faster rate. Furthermore,
given that we could examine the implication of the financial burden of parental care forthe wealth decumulation behavior of the retired elderly using data only from the Surveyof Households and Saving due to the absence of relevant data in the Preference
Parameters Study, more work certainly needs to be done to determine the importance ofthe financial burden of parental care for the elderly’s wealth decumulation patterns.

Despite these limitations, the findings of this paper have some important policy
implications. Reducing gift taxes on inter vivos transfers is sometimes considered as away to encourage the elderly to transfer their wealth to younger generations. Indeed, theJapanese government recently revised the gift tax structure by reducing the tax rate incases where donees are the children or grandchildren of the donor, as part of the 2013 Tax
Reform, which became effective on January 1, 2015. In addition, there are currently
various tax exemptions for gifts from parents and grandparents that are used for housing
acquisition, education, marriage, and childcare. Our finding that bequest motives are oneof the explanations for the slow decumulation of wealth by the retired elderly suggeststhat such measures might help induce the elderly to decumulate their wealth faster.
Nevertheless, we also find that a relatively small percentage of households have a strong(altruistic) bequest motive and that the vast majority do not have saving specifically forbequests in the case of Japan. These findings seem to cast some doubt on how effective
such measures would be.

We now turn our attention to the finding that precautionary saving plays a relatively
important role in explaining the wealth decumulation behavior of the retired elderly inJapan. This suggests that alleviating the uncertainties that the retired elderly in Japan facewould be the most effective way of raising their wealth decumulation rates. The previous
literature has shown that the main sources of uncertainty that the retired elderly are likely
to face are lifespan uncertainty and the possibility of facing high medical expenses andlong-term care expenses in the future. The coverage of Japan’s public pension, healthinsurance, and LTCI programs is relatively comprehensive, but it is possible that there are31some lacunae in the current structure of these programs. Identifying the defects of thesystems that lead the elderly to retain their wealth into very old age is beyond the scopeof this paper, but this is certainly an important agenda for future research.

32

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Appendix: Comparison of Estimation Samples with
Data from the Family Income and Expenditure Survey(in million yen at 2013 prices)

Homeownership (%)
Financial assets
Liabilities
Financial net worth

2013 Family Income
and Expenditure
Survey2013 and 2015 Survey
on Households andSaving2012 Preference
Parameters Study

Retired couple
households(husband aged 65 orabove and wife aged
60 or above)

Retired couple
households(husband and wife
aged 60 or above)

Retired couple orsingle-personhouseholds(husband and wife (orthe single person) aged
60 or above)

92.6
23.64
0.33
23.31

91.9
19.81
0.37
19.44

92.7
24.38
0.39
23.99

Number of observations
1,119
210
137
Source: Data from the 2013 and 2015 Survey on Households and Saving; data from the 2012 Preference
Parameters Study; and the Statistics Bureau, Ministry of Internal Affairs and Communications, Annual
Report on the Family Income and Expenditure Survey 2013, Volume II: Savings and Liabilities, 2013 edition(http://www.stat.go.jp/data/sav/2013np/index.htm).

36