Discussion Paper No. 605

DO THE ELDERLY DISSAVE IN JAPAN?

Charles Yuji Horioka

June 2004

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

DO THE ELDERLY DISSAVE IN JAPAN?*

by Charles Yuji Horioka
Institute of Social and Economic Research, Osaka University, andNational Bureau of Economic Research, Inc.
June 7, 2004
Abstract
In this paper, I summarize Albert Ando’s seminal and ingenious work on the saving
behavior of the elderly in Japan and then present some pertinent data and evidence that became
available only after Ando did his work in this area.

I conclude that the retired elderly in Japandissave, in accordance with the life cycle hypothesis of saving, and that all of the available dataand evidence suggest that the life cycle hypothesis of saving is highly applicable in the case ofJapan.

Address for correspondence:Charles Yuji Horioka, Institute of Social and Economic Research, Osaka University, 6-1,
Mihogaoka, Ibaraki 567-0047, JAPAN.
Telephone: 81-6-6879-8586
Facsimile: 81-6-6878-2766
E-mail: horioka@iser.osaka-u.ac.jp*This paper is dedicated to the memory of the late Albert Ando, who gave so generously of histime and wisdom from the time I was still a graduate student.
sorely missed.

His advice and kindness will be

I am indebted to Shizuka Sekita for her valuable comments and to the Ministryof Education, Culture, Sports, Science, and Technology of the Japanese Government for
Grant-in-Aid for Scientific Research number 12124207.

1. Introduction

Together with Franco Modigliani and Richard Brumberg, the late Albert Ando was oneof the founding fathers of the life cycle hypothesis of saving, which posits that people work andsave when they are young and retire and dissave when they are old.

It is not surprising,

therefore, that Ando was very interested in whether the elderly dissave, as predicted by the life
cycle hypothesis.

One of Ando’s most ingenious papers is Hayashi, Ando, and Ferris (1988),

in which he and his collaborators devise a very clever way of estimating the saving behavior of
the elderly who live with their children.
This paper is organized as follows: in section 2, I summarize Ando’s seminal work inthis area; in section 3, I present some pertinent data and evidence that became available only
after Ando did his work in this area; and section 4 concludes.

2. Professor Ando’s Contribution

Although it is easy to speak about the saving of the elderly in theoretical terms, it isnotoriously difficult to measure it in actual practice, and as a result, no consensus has beenreached about whether or not the elderly dissave.

Just to enumerate some of the problems thatarise when one wants to measure the saving of the elderly, one problem is that the unit ofobservation of the data that are available is almost always the household, and hence it is notpossible to obtain direct data on the saving of the elderly individuals who live in
multi-generation households.

This problem is especially severe in Japan where there are somany extended families (households in which parents and their grown children live together).

1Second, households are usually classified by the age of the household head and sinceelderly household members are not necessarily the household head (in fact, they usually are notbecause the head is defined as the household member with the highest income), it is difficult to
identify households that have elderly members.
Because of these data limitations, previous researchers were forced to look at data on
the saving of households whose head is elderly and to make inferences about the saving of allelderly individuals based on these data.
the case of such data.

However, the two aforementioned problems apply inFirst, such data pertain to the household as a whole and include thesaving of not only the elderly head but also of his/her spouse, cohabiting children, cohabiting
grandchildren, etc.

Second, such an analysis totally ignores the saving of elderly individuals

who are not household heads (primarily elderly individuals who live with their grown children,
hereafter referred to as “dependent elderly”) and implicitly assumes that their behavior is
identical to that of elderly heads.

This is a risky assumption because the majority of theelderly in Japan live with their grown children and are not classified as the household head andbecause these dependent elderly are very different from elderly heads (for example, they arepresumably considerably poorer, on average).
Thus, even if one finds that households headed by an elderly individual in Japan do
not dissave, one cannot conclude that all elderly in Japan do not dissave.

For one thing, thefailure of elderly heads to dissave could merely reflect the positive saving of cohabiting children
and other cohabiting family members, and for another, elderly heads are, on average, more
affluent than dependent elderly and hence are more likely to be able to save.
The seminal paper by Hayashi, Ando, and Ferris (1988) is an important addition to theliterature on the saving behavior of the elderly because it is the first attempt to estimate thesaving behavior of elderly persons living in extended families.

2

The ingenious method they use

to indirectly infer the stock (flow) of saving of such elderly is to assume that the stock (flow) ofsaving of younger generations living in extended families is identical to that of similarly aged
nuclear families and to compute the stock (flow) of saving of older generations living in
extended families as the total stock (flow) of saving of extended families minus the stock (flow)of saving of the younger generation.1

They apply this method to micro data from the 1984

National Survey of Family Income and Expenditure, which is conducted every five years by theStatistics Bureau of the Ministry of Public Management, Home Affairs, Posts andTelecommunications of the Government of Japan.
Hayashi, Ando, and Ferris (1988) present the results for both the stock and flow ofsaving, but in my opinion, the results for the flow of saving are more reliable because (1) they
do not need to be adjusted for the so-called cohort effect, (2) they do not include
intergenerational transfers, and (3) they do not include capital gains and losses, allowing us tofocus on out-of-pocket saving.

Therefore, I focus on the results for the flow of saving in what

follows.
Hayashi, Ando, and Ferris’s (1988) results show that the flow of saving of the elderly
living in extended families is positive for all but the oldest elderly (i.e., those aged 87).
Moreover, their results for the elderly living in nuclear families show that their flow of saving is
also positive except for those aged 80 or older.
of all ages (who are relatively poor) dissave.

They do find, however, that the single elderly

Thus, Hayashi, Ando, and Ferris’s (1988) results

provide some (but not overwhelming) support for the life cycle hypothesis, with the majority ofthe elderly in Japan continuing to save and only the oldest elderly (i.e., those aged 80 or older)
and the single elderly dissaving.
However, the fact that the single elderly of all ages dissave and the fact that mostelderly dissave eventually (i.e., when they reach their eighties) provide considerable support for3the life cycle hypothesis.

Moreover, one of the few defects of Hayashi, Ando, and Ferris’s(1988) analysis is that it fails to control for the employment status of the elderly.

The life cycle

hypothesis predicts not that all elderly will dissave but rather that the retired elderly will dissave,and it is highly likely that Hayashi, Ando, and Ferris (1988) would have found more widespread
evidence of dissaving if they had focused on the retired elderly, regardless of their living
arrangements.

Put differently, I believe that the fact that they find any evidence at all of

dissaving even though they include the working elderly in their sample constitutes strong
evidence on favor of the life cycle hypothesis.

3. Newly Available Data and Evidence on the Saving of the Elderly in Japan

In this section, I survey newly available data and evidence on the saving of the elderly
in Japan.

One analysis that is closely related to that of Hayashi, Ando, and Ferris (1988) andthat does take account of the employment status of the elderly to some extent is that of Ishikawa(1988), who uses data from the Family Saving Survey, conducted by the Statistics Bureau of the
Ministry of Public Management, Home Affairs, Posts and Telecommunications of theGovernment of Japan, to analyze the saving behavior of the dependent and independent elderly
in Japan.

Ishikawa (1988) finds that the presence of cohabiting elderly parents has virtually no

impact on the saving rate of young households, which suggests that elderly parents cohabiting
with their children are neither saving nor dissaving, but he has no information on whether the
cohabiting parents are working or retired.

Ishikawa (1988) is able to break down the sample ofindependent elderly into those who are working and those who are retired and finds that the
average total saving rates of salaried worker (including corporate managers), self-employed, andretired independent elderly households are 15.8%, 11.5%, and 1.5%, respectively, and that their4

average financial saving rates are 8.5%, 4.7%, and –6.9%, respectively.

Thus, he finds, as

expected, that the saving rates of working and retired households are very different, with theformer being positive and much higher than the latter and the latter being roughly zero in thecase of the total saving rate and negative and large in absolute value in the case of the financial
saving rate.

These results are broadly consistent with Hayashi, Ando, and Ferris’s (1988)

results and provide limited (but not overwhelming) support for the life cycle hypothesis.
However, the data used by Ishikawa (1988) suffer from various defects, and his results would
undoubtedly have been stronger if he had had access to better data.
Unfortunately, no direct data on the saving behavior of the retired elderly wereavailable in Japan until recently.

The Family Income and Expenditure Survey, conducted by

the Statistics Bureau of the Ministry of Public Management, Home Affairs, Posts andTelecommunications of the Government of Japan, collects information on saving rates (“ratiosof surplus”) by age group of the household head, but the problem is that, until recently, data on
saving rates were collected only for salaried worker households (households in which thehousehold head is a salaried worker).

Thus, even the data for elderly households pertained

only to elderly households whose head is still working as a salaried worker, and no information
was available on the saving rates of the retired elderly even though it is their saving rate that isof most interest.
Table 1 shows data on saving rates by age group of the household head for salaried
worker households for the 1990-2002 period, and as can be seen from this table, the saving ratesof elderly households (households with a head who is 60 years old or older) is lower than that ofyounger households but is positive and large in absolute magnitude nonetheless, ranging from
13.7 to 22.6%.

Looking at trends over time, the saving rates of elderly households declined

more or less steadily during the 1995-2002 period, from 22.6% in 1995 to 13.7% in 2002, but

5was positive and large in absolute magnitude even in 2002.

However, these figures are notnecessarily contrary to the life cycle hypothesis because they pertain to salaried worker
households, not to retired households.

What is needed is information on the saving rates ofretired elderly households.
Fortunately, the Family Income and Expenditure Survey started collecting saving rate
data and other data on various categories of elderly households including retired elderly
households in 1995.
retired elderly.

Thus, it became possible for the first time to know the saving rate of theTable 2 shows data on the saving rates of various categories of retired elderly

households for the 1995-2002 period, and as can be seen from this table, the saving rate of all
three categories of retired elderly households is negative and large in absolute magnitude.

For

example, the saving rate of retired households with at least one elderly member ranged from
-9.9 to -20.4%, the saving rate of retired households all of whose members are elderly ranged
from -5.2 to -19.6%, and the saving rate of retired elderly couples ranged from -4.0 to -18.3%.
Trends over time differ from one category of retired elderly households to another:
the saving rate of retired households with at least one elderly member increasing sharply from1997 from 2001 (in absolute magnitude), before tapering off slightly, while the saving rate ofretired households all of whose members are elderly and that of retired elderly couples fell
steadily (in absolute magnitude) from 1995 until 2000 before increasing sharply.

What allcategories of retired elderly households have in common is that their saving rates peaked (inabsolute magnitude) in 2001 or 2002.
Thus, it appears that the tendency of the retired elderly in Japan to dissave has always
been observed (at least since 1995) and that this tendency has become even more pronounced inrecent years.

This suggests that the life cycle hypothesis of saving is highly applicable inJapan and that it has become even more applicable in recent years.

6Moreover, data from the Household Survey of Financial Asset Choice, conducted by
the Institute of Posts and Telecommunications Policy of Japan Postal show that the retired
elderly dissave, on average, in Japan and that even the working elderly dissave, on average,
after the age of 70 (see Horioka, et al. (1996)).

This constitutes even stronger support for theapplicability of the life cycle hypothesis of saving in Japan.
Note, moreover, that various other types of data and evidence also provide strong
support for the applicability of the life cycle hypothesis of saving in Japan (see, for example,
Hayashi (1986, 1997), Horioka (1984, 1993, 2002), and Horioka, et al. (2000)).

For example,

Horioka and Watanabe (1997) decompose total household saving in Japan into saving forindividual motives and find that saving for retirement is by far the largest component,
accounting for a full 62.5% of total household saving.
As another example, econometric analyses based on time series data as well as
cross-country data (see, for example, Horioka (1989, 1997)) provide strong evidence that theage structure of the population has a significant impact on household, private, and nationalsaving rates, as predicted by the life cycle hypothesis of saving.
As a final example, Horioka (2002) and Horioka, et al. (2000) find that the vast
majority of bequests in Japan are either unintended or accidental bequests arising from lifespan
uncertainty or are selfishly motivated bequests that are left in exchange for care, attention,
and/or financial assistance provided by one’s children during old age, both of which areconsistent with the life cycle hypothesis of saving.

4. Conclusion

The late Albert Ando devoted much of his life and career to analyzing the consumption

7

and saving behavior of individuals in Italy, Japan, the United States, and throughout the world,and his work on the saving behavior of the elderly in Japan is merely a small subset of thisimpressive body of work.

I am sure that he will be pleased to know that the data and evidence

that become available only after he did his pathbreaking work in this area provides even more
support for the life cycle hypothesis than his own work in this area did.
life cycle hypothesis of saving was justified after all!

8

His commitment to theReferences

Hayashi, Fumio (1986), “Why Is Japan’s Saving Rate So Apparently High?” NBER
Macroeconomics Annual 1986, vol. 1, pp. 147-210.

______________ (1997), Understanding Saving: Evidence from the United States and Japan(Cambridge, Massachusetts: MIT Press).

_______________; Ando, Albert; and Ferris, Richard (1988), “Life Cycle and Bequest Savings:
A Study of Japanese and U.S. Households Based on Data from the 1984 NSFIE and the 1983
Survey of Consumer Finances,” Journal of the Japanese and International Economies, vol. 2,
no. 4 (December), pp. 450-491.

Horioka, Charles Yuji (1984), “The Applicability of the Life-Cycle Hypothesis of Saving toJapan,” Kyoto University Economic Review, vol. 54, no. 2 (October), pp. 31-56.

___________________ (1989), “Why Is Japan's Private Saving Rate So High?” in Ryuzo Satoand Takashi Negishi, eds., Developments in Japanese Economics (Tokyo: Academic
Press/Harcourt Brace Jovanovich, Publishers), pp. 145-178.

___________________ (1993), “Saving in Japan,” in Arnold Heertje, ed., World Savings: An
International Survey (Oxford, UK, and Cambridge, USA: Blackwell Publishers), pp. 238-278.
9

___________________ (1997), “A Cointegration Analysis of the Impact of the Age Structure of
the Population on the Household Saving Rate in Japan,” Review of Economics and Statistics, vol.
79, no. 3 (August), pp. 511-516.

___________________ (2002), “Are the Japanese Selfish, Altruistic, or Dynastic?” Japanese
Economic Review, vol. 53, no. 1 (March), pp. 26-54 (the 2001 JEA-Nakahara Prize Lecture).

___________________; Fujisaki, Hideki; Watanabe, Wako; and Kouno, Takatsugu (2000), “AreAmericans More Altruistic than the Japanese?

A U.S.-Japan Comparison of Saving andBequest Motives,” International Economic Journal, vol. 14, no. 1 (Spring), pp. 1-31.

___________________; Kasuga, Norihiro; Yamazaki, Katsuyo; and Watanabe, Wako (1996),“Do the Aged Dissave in Japan? Evidence from Micro Data,” Journal of the Japanese andInternational Economies, vol.10, no. 3 (September), pp. 295-311.

___________________ and Okui, Megumi (1999), “A U.S.-Japan Comparison of theImportance and Determinants of Retirement Saving,” Economics Letters, vol. 65, no. 3

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(December), pp. 365-371.

___________________ and Watanabe, Wako (1997), “Why Do People Save?

A

Micro-Analysis of Motives for Household Saving in Japan,” Economic Journal, vol. 107, no.
442 (May), pp. 537-552.

___________________; Yamashita, Koji; Nishikawa, Masashi; and Iwamoto, Shiho (2002),“On the Importance, Nature, and Impact of Bequests in Japan,” mimeo., Institute of Social andEconomic Research, Osaka University.

Ishikawa, Tsuneo (1988), “Saving and Labor Supply Behavior of Aged Households in Japan,”
Journal of the Japanese and International Economies, vol. 2, no. 4 (December), pp. 417-449.

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Table 1: Saving Rate by the Age Group of the Household Head, 1990-2002
29 years or
30-39
40-49
50-59
CalendarYear
All agesyounger
years
years
years
60 or older
1990
24.7
24.0
27.1
24.0
25.1
19.0
1991
25.5
25.8
27.2
25.1
25.9
21.0
1992
25.5
26.0
28.3
25.2
24.7
20.7
1993
25.7
25.3
29.0
24.9
24.9
22.6
1994
26.6
27.6
28.5
25.2
28.2
20.5
1995
27.5
28.0
31.3
25.4
28.3
22.6
1996
28.0
28.1
31.4
27.1
21.8
28.4
1997
28.0
31.3
26.9
28.3
22.4
30.4
1998
29.5
32.8
28.0
22.5
28.7
28.7
1999
28.5
28.8
32.7
28.5
27.3
21.0
2000
27.9
25.9
32.3
26.8
17.9
29.1
2001
27.9
24.0
27.5
27.0
18.4
33.8
2002
26.9
26.1
33.3
27.8
25.5
13.7
Notes: The figures show the saving rates ("ratios of surplus") of salaried worker
households.

Source: Statistics Bureau, Ministry of Public Management, Home Affairs, Posts andTelecommunications, Government of Japan, ed., Annual Report on the Family Income
and Expenditure Survey (Tokyo： Japan Statistical Association), various editions.

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Table 2: The Saving Rate of the Retired Elderly in Japan
Retired elderly
Retired elderly
Calendaryear
households (1)households (2)Retired elderly couples
1995
-11.5
-9.2
-9.3
1996
-10.8
-6.0
-5.8
1997
-9.9
-6.3
-5.1
1998
-11.3
-6.1
-5.4
1999
-14.6
-7.4
-6.0
2000
-16.2
-5.2
-4.0
2001
-20.4
-14.5
-14.3
2002
-17.5
-19.6
-18.3
Notes: The figures show saving rates ("ratios of surplus"). "Retired elderly
households (1)" denote households in which there is at least one member who
is 60 years or older. "Retired elderly households (2)" denote households inwhich all males are 65 years or older, all females are 60 years or older, andthere is at least one member who is 65 years or older. "Retired elderly
couples" denote retired couples in which the husband is 65 years or older andthe wife is 60 years or older.
Source: Statistics Bureau, Ministry of Public Management, Home Affairs,
Posts and Telecommunications, Government of Japan, ed., Annual Report on
the Family Income and Expenditure Survey (Tokyo： Japan Statistical
Association), various editions.

13Endnotes

1

Hayashi, Ando, and Ferris (1988) also use another method—namely, seeing how the stock(flow) of saving of extended families in which the younger generation is of a certain age
changes as the age of the older generation increases—but the results based on this method are
not discussed here due to space limitations.

14