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Do the Elderly Contribute to the National
Savings Rate?
By Lowell Alexander
Over the past half-century, the developed
countries of the world have experienced declining fertility rates; the result
of this trend is a growing percentage of elderly in the population. The
growing proportion of elderly in the population raises concern over the
feasibility of funding effective pension programs without significantly
raising taxes. The contribution of the elderly to the national savings rate
is an even more pertinent issue when considering the future growth of an
economy. Because of the connection between national savings and overall
investment, the national savings rate is a crucial factor when trying to
predict the future growth of an economy. As a result, researchers and economists
study the income and expenditure patterns of the elderly to determine what
effect a large proportion of elderly will have on the economic growth of
the country. According to the life cycle hypothesis, an individual accumulates
savings and assets over the course of his or her working years, and then
consumes that wealth during retirement. Under this assumption, the percentage
of elderly in a population would presumably drain the amount of total savings
in the economy. Paradoxically, on the micro-level, retirees actually begin
to save more and accumulate assets during their later years of retirement.
However, macro-economic studies show that an aging population does have
a negative impact on the overall savings rate of an economy. After further
examination, the discrepancy between micro and marco-economic statistics
results from the influence that the elderly has on the saving tendencies
of the working population, and a large percentage of dependent citizens
in a population does have a negative effect on the national savings rate
of a given country.
In order to examine national savings issue more thoroughly, this paper
will interpret the conclusions of three studies on this topic conducted
by various economists. The first study, conducted by Axel Borsch-Supan,
analyzes the consumption and saving patterns of individual households in
West Germany. This study tries to determine the contribution that older
citizens have on the national savings rate from a micro perspective. The
second study by David Weil analyses the interactions between generations
and the effect that bequests can have on the savings rates of working individuals
not yet retired. The last study by Richard Disney discusses the macro-economic
effects of an aging population and gives an explanation why the elderly
reduce the national savings rate.
Axel Borsch-Supan: Saving and consumption patterns of the elderly
– The German case
This essay extrapolates its conclusions from two German Income and Expenditure
Surveys in 1978 and 1983. The two surveys take two large samples of households
and qualify them according the age of the head of the household. The households
are categorized into five-year age groups in order to study the income and
consumption patterns of households at different stages of retirement (50-54,
55-59, … 80+). The data excludes households with annual incomes of
over DM 300,000 and also institutionalized retirees. However, the percentage
of households with annual income above DM 300,000 is less than 2 percent,
and only 15 percent of citizens 80 years or older are institutionalized.
The study also divides expenditures into seven categories: (1) rent and
other housing expenditures, (including mortgage payments, maintenance, modernization,
and utilities and energy) (2) food, (3) health expenditures (including insurance
payments, out-of-pocket medical expenditures, home care, and prolonged nursing
home stays), (4) transportation and travel (including commuting, family
visits and holiday travel, all car expenses), (5) leisure (education, phone,
TV, movies etc), (6) clothing, and (7) other durables.
By dividing households by age and qualifying expenditures into categories,
the consumption patterns of the elderly are apparent. Initially, the savings
patterns of the elderly correspond to the patterns predicted by the life
cycle hypothesis. From age 50 to ages in the mid-60’s, the actual savings
and the savings rates of retirees decrease. However, in the later years
of retirement, the elderly begin to save more than in the first years of
retirement. One of the explanations for the reversal in savings is a decline
in expenditures. Perhaps one explanation for this decrease in consumption
is that people begin to save more later in retirement in order to cover
increased medical costs. However, this argument is not convincing in the
case of Germany because of mandatory health insurance. A more convincing
argument arises when observing the transportation and travel category of
household expenditure. The transportation travel category significantly
decreases over the course of retirement. As people grow older and health
deteriorates, it impedes mobility and thus lowers expenditures on transportation
and travel.
The results of the micro-economic study of German households conclude
that the elderly actually contribute to national savings because travel
and transportation expenditures decline during retirement due to "health-related
physical impediments."
David Weil: The Saving of the Elderly in Micro and Macro Data
In Weil’s study, he attempts to reveal why micro and macro-economic
statistics differ when trying to determine the contribution of the elderly
to the national savings rate. Weil constructs a linear equation for arriving
at an individual’s savings rate using age-groups to classify individuals
into three categories: young (0-19), working age (20-64), and old (65 and
above). Using regression analysis, the study arrives at statistically significant
coefficients that represent the contribution of each age group to the savings
rate. The coefficients show what percentage increase (or decrease) a one-percent
increase of population in a particular age group will have on the savings
rate. For example, the study showed that moving one-percent of the population
from the working age to the old age reduces the private savings rate by
0.88 percent. Overall, the study proves that having an increasing percentage
of elderly in the population will have a negative effect on the savings
rate. However, the analysis using macro-economic data and does not explain
the contradictory results of micro and macro-economic studies.
In order to address the discrepancy between micro and macro-economic
statistics, Weil highlights the importance of intergenerational relations;
in other words, Weil tries to determine the influence that the elderly has
on the savings rate of the working age group. In particular, the study examines
the effect that bequests or the expectations of bequests can have on the
savings rate of the working aged group. Weil again constructs an equation
for an individual’s savings rate assuming the two determinants of the
savings rate is the individual’s age and his or her relations with
people from other generations. Using these determinants allows one to see
the influence that children have on the savings rate of parents and the
influence that parents have on the savings rate of children. The study finds
that parents with more children are more inclined to save more in their
later years in order to raise the amount of bequests per child. Conversely,
working age people are inclined to save less if they have fewer siblings
(or no siblings at all). In conclusion, Weil finds that the effect of the
elderly on the saving of the young could explain the difference between
micro and macro-economic data. The micro-economic data excludes cash flows
from household of different generations (bequests) that have a significant
influence on the saving patterns of all generations. Although the elderly
apparently contribute to savings rates on the micro level, bequests left
by the elderly reduce savings rates of the working age group.
Richard Disney: Aging and Saving
Richard Disney, in his study of aging populations, looks at the effect
that a greater percentage of elderly can have on economic growth. Disney
focuses on the 24 OECD countries and their relative dependency ratios compared
to their GDP growth. The dependency ratio is the ratio of retired people
(65 and above) over the number of working age people (15-64) in the economy.
Plotting the dependency ratios and GDP growth numbers of the 24 OECD countries
shows an inverse relationship between the GDP percentage growth and dependency
ratio. As the dependency ratio increases, the GDP percentage growth declines.
Presumably, as the population of economy ages, the national savings rate
of the country declines. Because of the direct link between savings and
investment, a country with a large percentage of elderly will save less
and consequently grow less in the future. In addition, a country with an
aging population will deter outside investment and inward capital flows
because the rate of return on capital will no be as high in an aging economy.
Therefore, countries with younger populations will encourage capital flows
and grow faster than aging economies. This phenomenon explains the inverse
relationship between the dependency ratio and projected GDP growth. Disney’s
study concludes that the elderly will have a negative effect on the national
savings rate of the population for similar reasons cited by Weil. However,
Disney presents some of the consequences of having a lower savings rate:
reduced investment and slower GDP and economic growth.
Conclusion
There are several conclusion to draw from the threes studies discussed
above. The contribution of the elderly to the national savings rate differ
depending on whether one examines their effect from a micro or macro perspective.
The elderly saving patterns contradict the life cycle hypothesis because
the elderly do not dissave during their later years of retirement. However,
large elderly populations do have a negative effect on the overall savings
rate of an economy given macro-economic statistics. Therefore, the effect
of an elderly population results from their influence on the savings rates
of the working generation. Bequests (or the expectation of receiving bequests)
lowers the savings rate of the younger generation and consequently lowers
the savings rate of the entire economy. A lower national savings rate has
long-term effects for the future growth of the economy because of the link
between savings and investment. Therefore, an aging population does have
a negative effect on the GDP growth of an economy.