Silviase/jgov_v1.4_full_ann huggingface dataset:
# Dissaving by the elderly in Japan: Empirical evidence from survey data $ ^{\dagger} $

Keiko Murata $ ^{\ddagger} $

March 2018

## Abstract

Using two micro datasets of household surveys, this study empirically examines the (dis)saving behavior of the elderly in Japan. Using the long-run dataset covering 20 years, the findings indicate that, on average, the elderly in Japan dissave, but the pace of dissaving of retired elderly appears to be excessively slow in light of the standard life cycle-permanent income hypothesis. The analysis suggests that one likely factor is the desire to leave a bequest. Both the saving rate and the pace of wealth decumulation show that retired households dissave more slowly if the head plans to leave a bequest. Retired elderly who intend to have savings for precautionary purposes are not found to dissave more slowly except for those who do not plan to leave a bequest to their children.

Keywords: Household saving, Life cycle/permanent income hypothesis, Aging, Bequest, Precautionary saving

JEL classification codes: D14, E21, D91
### 1. Introduction

Many studies on elderly households show that retirees spend their wealth at a slower rate than predicted by the basic life-cycle model. Current explanations for the slow decumulation of wealth include uncertainty about longevity or health expenses (e.g., Love et al. 2009, De Nardi et al. 2010, Ameriks et al. 2015) and the desire to leave a bequest (e.g., De Nardi 2004, Love et al. 2009). However, the extant literature has provided mixed results regarding the relative importance of these factors. $ ^{1} $

This study empirically examines the saving/dissaving behavior of the elderly in Japan using two micro datasets, one covering households throughout Japan over a long period and the other based on more recent surveys focusing on middle-aged and elderly households. Japan provides a particularly pertinent case study because population aging is progressing much faster than in other countries. Elderly households – i.e., households with a head aged over 60 – now make up more than 40 percent of households in Japan and account for almost 50 percent of household expenditure. In addition, Japan has a compulsory national health insurance scheme, meaning that the burden of medical costs on individuals is limited, mitigating the need to save for unforeseen medical expenses. $ ^{2} $

Until around the 1980s, the saving behavior of the elderly in Japan attracted academics' attention mainly because it might provide a possible reason for the high saving rate of Japanese households in international comparison (e.g., Hayashi 1986). At that time it was found that Japanese aged households do not dissave (Hayashi et al. 1988, Dekle 1990), while Ishikawa (1988) showed that the average saving rate of aged households whose head is retired is substantially lower than that of working aged households. $ ^{3} $ In the late 1980s, with population aging progressing, the Family Income and Expenditure Survey (FIES) published by the Statistics Bureau started to provide the average saving rate of elderly households by employment status of the head, which showed that the average saving rate of elderly households was positive if the head was employed and negative if the head was retired (i.e., not in work). Horioka (2010), using the semi-aggregate data by employment status from the FIES, showed that the rate of decumulation of financial assets for retired households was slow compared to the rate implied by the simple life-cycle hypothesis.
While these studies have revealed some important facts about the saving/dissaving behavior of the elderly in Japan, they have not necessarily succeeded in identifying the factors underlying the patterns they observe, probably due to limitations regarding the information available in the datasets used. For instance, the datasets employed in the studies do not contain certain key variables necessary to understand the behavior of the elderly, such as the detailed family structure (in particular, whether a family has a child/children not living in the household), information on the health of household members, and information on intergenerational transfers within the family. Since the desire to leave a bequest and precautionary saving likely are key factors underlying excess saving by the elderly, empirical studies not taking these factors into account provide only an incomplete understanding of the saving behavior of the elderly.

That said, there are two studies that addressed these issues as at least partially. The first of these is the study by Horioka et al. (1996), which examined the saving behavior of aged households using household level data including information on respondents' bequest motives. They calculated the average stocks and flows of saving by household characteristics, namely, (i) the health of the head and (ii) the respondent's bequest motive. They showed that the pace of net worth decumulation was slower for households with a selfish bequest motive than other respondents, but found little difference depending on whether the household head was healthy or not. The second study is that by Horioka and Niimi (2017), which analyzed the relationship between elderly households' amount of financial assets for various saving purposes (i.e., the share of savings for retirement in their current total savings, the share for precautionary purposes, the share for leaving a bequest, and the share for other purposes) and whether they were dissaving or not, using a survey which contained questions about households' savings for each purpose. They found that saving for precautionary reasons was more important than saving for leaving a bequest in elderly households' saving/dissaving behavior. Thus, the studies by Horioka et al. (1996) and Horioka and Niimi (2017) produce inconclusive results regarding the saving/dissaving behavior of elderly households: the former suggested that the selfish bequest motive was important in the rate of asset decumulation, while the latter suggested that precautionary saving was more important in households' saving/dissaving behavior. $ ^{4} $

Against this background, this study attempts to deepen our understanding of (dis)savings by the elderly using two micro datasets on Japanese households. Specifically, using the most recent detailed micro dataset constructed from the FIES covering a period of two decades, the (dis)saving behavior of the elderly in Japan is re-examined. Analyzing the issue employing both flow data (saving rate) and stock data (wealth decumulation), it is found that the average saving rate turns negative for households with heads in their early 60s, but the speed of
net worth reduction is very slow and is even slower the older the household head is. A simple calculation based on the standard life-cycle/permanent income hypothesis (LC/PIH) indicates that the pace of dissaving of retired elderly is excessively modest.

Next, based on the results obtained from the FIES data, the determinants of the saving/dissaving behavior of the aged are examined using another micro-based dataset on households, the Japanese Study on Ageing and Retirement (JSTAR). JSTAR is a recently launched longitudinal survey on elderly households, the contents of which are similar to the Health and Retirement Study (HRS) in the United States. JSTAR contains valuable information that is unavailable in the FIES, such as whether householders have children (including children that live separately), health information on household members, and whether they plan to leave a bequest. Running regressions that control for heterogeneity in family composition and the health of household members, it is found that aged households whose heads plan to leave a bequest have a higher saving rate (or a less negative saving rate if it is negative) than those not planning to leave a bequest. Precautionary saving is not found to be an important determinant of the saving rate of the elderly; however, it does appear to play a role in the slow pace of asset decumulation in households with a retirement age head that do not plan to leave a bequest to their children. The finding that households that want to leave a bequest do not appear to additionally save for precautionary purposes is in line with Dynan et al.'s (2002, 2004) argument that savings simultaneously serve two functions: (1) a precautionary life-cycle function, and (2) a bequest function when things turn out better than could have been.

The results obtained in this study allow the following conclusions. First, in line with Horioka's (2010) finding, it is found that the rate of asset decumulation of retired households is slower than predicted by the standard LC/PIH. While Horioka obtained this finding based on financial assets, the results here show that the conclusion is also supported when focusing on households' net worth (including housing wealth). Moreover, the discrepancy between the actual rate of dissaving and that predicted by the standard LC/PIH becomes larger the older the household is. Second, part of the reason why households dissave slower than predicted by the standard LC/PIH appears to be the desire to leave a bequest. Third, precautionary saving does not play a key role in the dissaving behavior of the retired except for those who do not plan to leave a bequest.

The remainder of the study is organized as follows. The next section provides a brief outline of the data. Section 3 presents a descriptive analysis of age consumption/income profiles and age-wealth profiles using microdata from the FIES. Section 4 employs a simple regression to investigate factors affecting the saving behavior of the elderly. Finally, Section 5 concludes.

### 2. Data description
To investigate the (dis)saving behavior of the elderly in Japan, two Japanese household datasets, the Family Income Expenditure Survey (FIES) and the Japanese Study of Aging and Retirement (JSTAR), are used.

### 2.1 Family Income and Expenditure Survey (FIES)

Section 3 of this study uses the FIES to examine the (dis)saving behavior of the elderly, since it is a national representative survey which contains rich information on consumption, income and wealth. The FIES is employed by Horioka (2010), for example, to investigate the saving rate and net financial assets using time-series data of semi-aggregated published series for the elderly from 1995 to 2008. In this paper, using microdata from the FIES, the age profile of saving and wealth decumulation of financial assets as well as net worth are examined. The focus is on recent data for 2008-2012, but a dataset for the longer period from 1984 to 2012 is also used to analyze wealth decumulation by cohorts.

The FIES is a monthly survey that provides comprehensive data on the income and expenditure of households. It supplies the basic information used for the calculation of the Quarterly Estimates of GDP and the Consumer Price Index. The survey covers around 9,000 households each month, and each household is surveyed for six months: one-sixth of the households are replaced by new households every month. As the monthly consumption data are compiled from a diary collected twice a month, the information can be assumed to be accurate and credible. The FIES also provides information on households' financial assets and liabilities, the family composition, and the employment status of each household member living in the household. Until 2001, the survey focused on households with two or more members, and since 2002 one-person households are also included. Among the 9,000 households surveyed, around 700 households are one-person households. Financial asset holdings and liabilities are not surveyed for one-person household.

While the FIES does not provide information on households' housing wealth, it does provide relevant information on households' home, such as whether households own their house, the size of the residence, the year of purchase, the type of structure (e.g., a wooden house or an apartment), and the area where the home is located. Using this information, it is possible to calculate the market value of households' housing wealth by estimating the value of the land on which a property sits and the value of the structure and adding the two together. More precisely, the land value is calculated by multiplying the land area reported in the FIES and the price of land at the closest survey location in the "Land Market Value Publication" (Chika-koji) provided by the Ministry of Land, Infrastructure, Transport and Tourism (MLIT). The value of the structure is estimated based on the construction material costs reported in the "Annual
Report of Building Construction” (1953–2012) and applying a certain depreciation rate that depends on the type of structure of the dwelling. $ ^{5} $

### 2.2 Japanese Study of Aging and Retirement (JSTAR)

Section 4 of this study uses JSTAR, a recently started comprehensive longitudinal survey which covers information on the economic, social, and health status of elderly people in Japan. It is very similar to the Health and Retirement Study (HRS) in the United States, the English Longitudinal Study of Ageing (ELSA) in Britain, and the Survey of Health, Aging and Retirement in Europe (SHARE). $ ^{6} $ JSTAR started collecting data in five municipalities in 2007, with a sample comprising a total of 7,723 respondents; the response rate was nearly 60 percent. In 2009, these respondents were surveyed for a second time, while a baseline/first survey was conducted in two newly added municipalities. The JSTAR 2011 survey consisted of the third survey of the original respondents together with the second survey of the respondents added in 2009, and additionally conducted a first survey in three new municipalities. $ ^{7} $

The observations in the baseline/first survey are for respondents aged 50 to 75 randomly chosen from the household register after regional stratification in each municipality. Apart from various questions on economic variables such as income and assets, JSTAR asks whether respondents have a child/children, including children that live separately. In addition, JSTAR asks the following questions related to leaving a bequest and precautionary saving:

Q1(a) Do you expect to give someone else a gift or leave an inheritance?

1. Yes 2. No 3. Have no one to leave anything for 4. Don’t know 5. Do not want to answer.

Respondents who answered with “yes” are asked to reply to the following additional question:

Q1(b) Who do you expect to give the gift or inheritance to? (Multiple answers allowed)

1. No one 2. Spouse 3. Parent 4. Parent in law 5. Sibling 6. Child/child’s spouse/grandchild 7. Other relative 8. Other 9. Don’t know 10. Do not want to answer.
In relation to precautionary saving, respondents were asked the following question:

Q2. What are you saving for? Please choose all answers that apply.

1. In preparation for an illness or unforeseen misfortune

2. For children’s education 3. For children’s wedding

4. To buy or improve a home 5. For old age living expenses

6. To purchase durable goods 7. For travel or leisure

8. For tax payments 9. Want to leave inheritance to children

10. No special purpose, but feel more secure/comfortable with savings

11. Other (Describe) ___ 12. Do not want to answer

In the analysis below, the responses to these questions are used as proxies to examine the link between the desire to leave a bequest and precautionary saving on the one hand and the saving rate and wealth decumulation of elderly households on the other. More precisely, respondents who answered Q1(a) with option 1 and Q1(b) with option 6 are defined as individuals planning to leave a bequest, while respondents who answered Q2 with option 1 and/or option 10 are defined as individuals saving for precautionary reasons.

Table 1 presents the basic statistics of the dataset from the FIES and JSTAR. The second set of columns in the table, labeled (b), shows those for households in the FIES whose head is aged 50 or over, which corresponds to the age group covered by JSTAR. Although JSTAR does not employ probabilistic sampling at the national level, the difference in the average level of disposable income between the FIES and JSTAR is not very large, and the median values are even closer. On the other hand, the level of consumption is substantially lower in JSTAR, even though the average number of household members is the same in both surveys. Given that for the elderly consumption tends to fall with age, this is partly because JSTAR respondents on average are considerably older than those in the FIES (65.1 vs. 62.4 years of age), but it may also reflect differences in survey methods. In the FIES, survey respondents are asked to record expenditure item by item on a daily basis in a diary, which is collected twice a month. In contrast, JSTAR asks respondents retrospectively about their monthly expenditure on nondurables and services over the past year, together with the total amount of durable goods purchases (except for automobiles) over the year. The latter methodology, which relies on respondents' memory, may result in respondents underestimating their expenditures. Finally, the average net worth as well as financial assets are reasonably close in the two surveys.

### 3. Descriptive analysis based on the FIES
### 3.1 Age consumption/income profiles

To start examining how the elderly decumulate their assets, Figure 1 shows age-profiles of the saving rate using the micro data obtained from the FIES. The figure displays the age-profiles of the average saving rate, average consumption, and average disposable income for the period 2008-2012. $ ^{8,9} $ Households are grouped into age groups in three-year intervals (e.g., those aged 29 to 32, represented in the figure by age 31). Figure 1(a) represents households with two persons or more. The figure shows that the average saving rate is positive until the head is around 60 years old. After that, it sharply declines and becomes negative, but then reverses again around the age of 70, forming a U-shape. $ ^{10} $ The U-shape of the saving rate of elderly households is due to a continuous decline with age in average consumption, while average income gradually declines and then levels off when the head is around 70 years old. Figure 1(b) constrains observations to households consisting of a couple living on its own to exclude possible influences arising from children living in the same household. The average saving rate of elderly couples also follows a U-shape.

Next, Figure 2 compares the age profiles of consumption and disposable income of aged households by employment status. It shows that the average consumption of elderly workers' households is lower than their average income, meaning that they continue to save on average, including households in their late 70s. $ ^{11} $ In contrast, the average consumption of retired households is higher than their average income, meaning that retired households dissave on average, with the gap between income and consumption shrinking as the household head gets older, indicating that the rate of dissaving decreases with age.

#### 3.2. Age-wealth profiles
Having seen that elderly households dissave on average, let us examine age-wealth profiles to investigate how quickly households spend down their net worth and what type of assets (i.e., financial assets and/or housing wealth) they decumulate. Utilizing the long-run microdata available from the FIES, Figure 3 shows the age-wealth profiles of aged households by cohort. Households' net worth is defined as net financial assets + housing assets, while net financial assets are defined as financial assets – liabilities. Households' stock of durable goods is not included, since the FIES does not contain suitable data to calculate this. Given that the age-wealth profiles of different cohorts inevitably are affected by changes in asset prices (such as real estate and stock prices), cohorts of various generations are examined to distill common features of wealth drawdown (dissaving) by the elderly.

Figures 3(a) and 3(b) show that, regardless of the cohort, elderly households tend to decumulate their wealth at a very moderate pace from their mid-60s. Using the median value of net worth (Figure 3(a)), the average rate of decumulation across all cohorts from the peak of net worth, which for most cohorts lies between age 63 and 65, is 1.4 percent (1.2 percent for elderly couples). Looking at net financial assets (Figure 3(b)), the rate of decumulation is 1.4 percent (1.9 percent for elderly couples). The rate of net financial asset decumulation is broadly in line with the results reported by Horioka (2010), who, focusing on the period 1995-2008, found that the rate of net financial asset decumulation ranged from 1.0 to 2.0 percent for retired couples where both spouses were aged 65 or older (and from 1.9 to 2.4 percent for couples with a husband aged 65 or older and a wife aged 60 or older). Figure 3 also indicates that wealth decumulation tends to slow as the household head ages. Specifically, while the annual rate of wealth decumulation for those in their 60s (from age 61-63 to age 69-71) is 1.8 percent, this decelerates to 0.5 percent for those in their 70s (from age 69-71 to age 78-80). The corresponding slowdown for elderly couples is from 1.4 percent to 0.8 percent.

### 3.3 Do the elderly consume too little and save too much during retirement?

The above findings indicate that households may be saving too much during retirement compared to what the basic LC/PIH suggests. To examine whether elderly couples spend their resources at an appropriate pace if one takes the standard LC/PIH as a yardstick, let us employ a simple calculation using information available from the FIES for the period 2008-2012. Specifically, household i is assumed to live for $ (T_{i} - S_{i}) $ , the average life expectancy for a person at age $ S_{i} $ , and use up the life-cycle wealth at the end of period $ T_{i} $ . For simplicity and taking into account that interest rates and inflation in Japan have been near zero for the past two decades, both the interest rate and time preferences are assumed to be zero. Then the “optimal” consumption level in each year for households i, $ c_{i}^{*} $ , is equal to the life-cycle wealth of