A Comparison of Personal Sector Saving Rates in the UK, US and Italy

Size: px
Start display at page:

Download "A Comparison of Personal Sector Saving Rates in the UK, US and Italy"

Transcription

1 A Comparison of Personal Sector Saving Rates in the UK, US and Italy Tatiana Kirsanova James Sefton November 18, 2002 Abstract We develop the approach of Gokhale, Kotlikoff & Sabelhaus (1996), based on the lifecycle model of savings, to decompose the large differences in the personal sector saving rates between the UK, US and Italy. Our work suggests that the US saving rate is lower principally because Americans on average retire later. The Italian saving rate is high predominantly because Italians are unable to borrow much, particularly when they are young. We also found that demography and the different tax and benefit systems are able to explain little of the cross-sectional differences in saving rates. The study estimates the size of, and accounts for the possible importance of, intergenerational private transfers in determining saving rates. Key Words: Saving Rates, International Comparisons, Intergenerational Transfers, Borrowing Constraints JEL Reference Number: D91, E21, D31 This research has been supported by ESRC grant number R The authors would like to thank Jagadeesh Gokhale and Larry Kotlikoff for their considerable help, especially with the specifics invoving the US; Roberto Carderelli, Maria Cozzolino and Tullio Jappelli for their help with procuring and understanding the Italian data; Matin Weale for his help and encouragement. National Institute of Economic and Social Research Corresponding author; Imperial College and National Institute of Economic and Social Research; address for correspondence: NIESR, 2, Dean Trench Street, London SW1P 3HE; tel: +44 (0) ; fax: +44 (0)

2 1 Introduction Personal sector saving rates differ dramatically between countries. Here we explore the factors which can account for these differences in three developed countries; Italy, the United Kingdom and the United States. Averaged over the 1990s the Italians saved, net of depreciation, just below 20% of their disposable income, the British saved just under 8% and the Americans just above 0%. There are a number of factors which might account for such differences: 1. Demography: The balance of the population between those yet to join the workforce, those of working age and those retired will influence the savings rate. The savings rate will be higher in countries where the proportion of people of working age, who tend to be the savers, is higher all else being the same. 2. The Welfare State: If the retired receive state pensions, health care and other state benefits financed predominantly out of taxes levied on people of working age, then saving will be lower as compared to a country where there are no such benefits and people needed to make greater provision for their retirement. 3. Retirement behaviour: In a country where people retire later, then all other things being equal, they are likely to save less than those in a country where they tend to retire earlier. 4. Borrowing constraints: People may wish to borrow, particularly when young, to finance their immediate consumption with the intention of repaying the loan later when their income rises or circumstances change. If one country has tighter borrowing regulations viz-á-viz another, then it is likely to have a higher saving ratio. 5. Income distribution over a lifetime: The way in which income varies with age may differ from country to country, in part because different countries have different systems of tertiary education. This should be expected to have some influence on saving rates. 1

3 6. Capital Gains: The national accounts do not include capital gains on assets as part of income. Hence if people in one country hold on average a higher proportion of their assets as corporate equity (whose return is predominantly in the form of capital gains) than people in another country then their saving ratio is likely to be lower everything else being the same. Like Gokhale et al. (1996) in their study of the postwar decline of US savings rates, we use cohort data within a life-cycle framework to decompose the differences in personal sector saving rates. However we apply the method across countries rather than over time. It is imperative in a cross-country study to take full account of all sources of income and expenditure 1.Itisnotsufficient to concentrate only on household income and consumption as generally recorded in the household surveys; it is also necessary to account for all benefits in kind as well as all money benefits. For example, in a country where higher education tuition fees are subsidised, students are much less likely to need to borrow and therefore personal sector saving rates are likely to be higher than otherwise. Conversely in a country where health care of the elderly is subsidised, people need to save less for their retirement and therefore savings rates are likely to be lower. However, in some countries these transfers may be received as a money transfer, as is the case of medicaid payments in the US, or as in kind benefits,asisthecasefor the health care provided by the NHS in the UK.There are large differences between countries in the size of such in kind payments, being almost 20% of consumption expenditure in the UK, around 15% in Italy and only 10% in the US; such differences are easily large enough to have a major effect on personal sector saving rates. It is also essential in a cross-country study, as Jappelli (2001) argues in his critique of previous work in this area, to adjust for the different division in the covered countries between mandatory 1 An omission in a time series study of a component of income may not have a significant bearing on the results if it remains roughly a similar proportion of individual s income over time; in a cross country study it is unlikely that this component will consitute a similar proportion of the income of individals in the different countries. 2

4 and discretionary contributions to pension funds. To the extent that the national accounts treat mandatory contributions like a tax but discretionary contributions as savings, conventional saving rates can give a misleading picture of the amount of saving that is undertaken in the various countries. As Jappelli (2001) states, the conventional definition of saving implicitly assumes that households are myopic, and that they do not realise that (mandatory) contributions during the working-span entitle them to benefits when old. In this study we do adjust our measure of savings for the different pension arrangements in the countries and so do not assume our households are myopic. To this end, we have compiled a unique data set of the distribution of all incomes and allocation of all expenditures of the personal sector by age and sex for the base year of 1997 in all three countries. This was achieved by using survey data from many sources to construct relative age and sex profiles of the distribution of these resources and expenditures at a fairly disaggregate level; then benchmarking the total amount received or spent on each category against the respective national accounts totals. In this way we able to derive a consistent breakdown of the personal sector savings by age and sex. Like Gokhale et al. (1996), we used the framework of life-cycle model to analyse the causes of the observed differences in the cohort specific savings rates. However, unlike Gokhale et al. (1996), we also use what we have termed a full equilibrium as an alternative to their partial equilibrium analysis to decompose the differences in the saving rates. Their partial equilibrium analysis asked the question if suddenly group A income expectations were changed for group B s what would be their new savings rates. It therefore did not take account of the fact that if group A always had group B s income expectations then they would now have very different holdings of assets and this too could have a significant bearing on the savings rates now. In our full equilibrium analysis, by making the assumption that our income and expenditure profiles have been reasonably constant over time, we take account of this interaction; we answer the 3

5 question if group A income expectations were changed for group B s and they had made their consumption decisions accordingly what would be their savings rates. We believe that the full equilibrium approach is preferable when trying to explain long term differences in savings rates between countries, despite the stronger assumptions; however we do include the results of a partial equilibrium analysis too. Though the magnitude of the numbers differ, the conclusion from the two experiments are in close agreement. Our analysis suggests that the US savings rates are low because people in the US people retire far later than their counterparts in the UK and Italy. Though Poterba (1994) suggests that the shape of the lifetime income profile will cause savings rates to differ between countries, we have found no mention of the observation that the longer average working life of the US citizen significantly reduces the savings rates in the US relative to other countries. On the other hand we find that savings rates in Italy are unusually high because of borrowing constraints or capital market restrictions. Young Italians save far more of their income than their US and UK counterparts even after taking into account all differences in income profiles. As Jappelli & Pagano (1998) and Jappelli & Pistaferri (2000) describe, in Italy downpayment requirements on any new house purchase are significantly higher than in other developed markets except Japan (which also has a very high savings ratio). Therefore many young Italians choose to live in their parents home until they have saved enough for the downpayment on their first house. Finally Poterba (1994) and Guiso & Jappelli (1998) both argue that private transfers within households could also be important in determining individual savings rates. Individuals who are expecting to receive large transfers from their parents are much less likely to save than those who are not. We estimate the size of these intergenerational private transfers from the cohort wealth equation. Though the amount of money transferred is large in all countries, even if it is fully anticipated by the recipients, our conclusion are only slightly modified. 4

6 The structure of the paper is as follows: in Section 2 we review the work on analysing personal sector saving rates using micro data and describe our approach, and in Section 3 we describe the data and measurement issues. In Section 4 we detail our results and Section 5 concludes. 2 Micro Analysis of Saving Rates Recently there have been a number of studies, Bosworth, Burtless & Sabelhaus (1991), Attanasio (1998) and Gokhale et al. (1996), all who have used micro survey data on household and individual saving rates to analyse the decline in the US saving rates. Jappelli & Pagano (1998) used a similar approach to examine reasons for the high personal sector saving rates in Italy. Attanasio & Banks (1998) was the first to use micro data to compare saving decisions across two countries, the US and UK, but his work focused on whether tax incentives encouraged saving. We therefore believe this is the first paper to use micro data set to investigate empirically the causes for the wide dispersion in saving rates across countries. In their analysis, Bosworth et al. (1991) decomposed the aggregate saving rate as SR t = Y t C t Y t = X all i µ yi,t c i,t y i,t µ yi,t (Y t /N t ) µ ni,t N t (1) where Yt is total income of the personal sector in period t C t is total consumption of the personal sector in period t N t is the total population in period t y i,t is the average total per capita income of an individual aged i in period t c i,t is the average per capita consumption of an individual aged i in period t n i,t is the number individuals aged i in period t. This analysis has so far ignored any intergenerational private transfers. These are present at this cohort level of analysis but net out at the aggregate as one individual s gain is another s loss. We shall continue under this assumption, and introduce them at a later stage. Bosworth et al. (1991) use this decomposition to demonstrate that changes to the age distribution of the US population, p i,t = n i,t /N, could not account for the fall in the US personal sector s saving rate over the 1980s and 1990s. 5

7 This approach implicitly makes the reasonable assumption that both the cohort specific saving rates and the age distribution of income, at least to a first order, are independent of the demographic composition of the population. However using this method to decompose changes in aggregates saving rate into changes due to the cohort specific saving rates, (y i,t c i,t )/y i,t or changes to the age distribution of income, y i,t /(Y t /N t ), wouldbemoreproblematic. Clearly the saving rate is a function of the income age profile amongst other things and so can not be modified independently. 2.1 Life Cycle Framework As a way of determining whether the decline in saving rates in the US was due to changes in the distribution of life time income or to a more fundamental behavioural change, Gokhale et al. (1996) suggested using a decomposition based on the life-cycle model. The life-cycle model relates individuals consumption decisions, or equivalently their saving decisions, to their resourcesbothtodayandinthefuture;itcanthereforebeusedtoinvestigatewhatproportionof the changes to the level of savings can be explained by changes in the level of future resources. They initially used a no bequest life-cycle model under certainty as their framework, stating categorically that this is not to suggest that other determinants of savings are unimportant but that it provides a useful initial framework in which to work. In the standard life-cycle model with certainty each cohort s consumption is proportional to the present value of its remaining life-time resources. We shall refer to all individuals aged i in period t as cohort i where time dependence is assumed. A cohort s per capita resources are the sum of its average per capita asset holdings, w i,t, and the average per-capita present value of its all non-capital income, h i,t. Non-capital income, y NC i,t, is the sum of labour earnings y L i,t, pension contribution and payments 2, yi,t P, and all net transfers with the government, whether in 2 We have treated all pensions, private and state, as though they were run on a PAYGO basis. This facilitated comparisons across the countries. There are more details of this point later in the paper. 6

8 kind or monetary, less its tax payments, y T i,t ;thatis y NC i,t = y L i,t + y P i,t + y T i,t. Total income, y i,t, is then the sum of non-capital income and capital income (the returns to wealth), yi,t C. The present value of cohort i s resources is estimated by assuming that the relative age profile of the distribution of all the different components of income remain constant over time. The level of these per capita resources grow at the historical productivity growth rate. These assumptions, though clearly an abstraction, seem a reasonable first attempt. The income streams are given a present value by assuming interest rates are constant and by making the necessary adjustments for current and future mortality rates 3. Now the life-cycle model of consumption predicts that an individual s consumption is a linear function of its all its resources, that is c i,t = α i (h i,t + w i,t ) (2) where α i is the average propensity to consume (APC) out of resources of a cohort aged i. Therefore the decomposition of aggregate saving under the life-cycle theory yields SR t = 1 = 1 à X i à X i α i (h i,t + w i,t ) y L 35,t n i,t N t! y L 35,t (Y t /N t ) α i (ψ i,t + ω i,t )p i,t! y L 35,t (Y t /N t ) (3) (4) where ψ i,t and ω i,t are the average levels of per capita non-capital and capital resources respectively of cohort i expressed as a ratio of average per capita gross labour income at the age of 35, y35,t L. We chose to normalise the profiles around yl 35,t for two reasons. Firstly, the ratio of labour income at age 35, y35,t L, to overall average income per capita, (Y t/n t ), is almost equal for all three countries. Therefore, when we decompose the difference in the saving rates between the 3 The population and mortality projections are the present projections from the respective country actuarial government departments. 7

9 countries into the differences due to different α i, ψ i,t or p i,t there is no need to adjust simultaneously for the scaling factor y35,t L /(Y t/n t ). Secondly, the labour income at age 35 can be regarded as being independent of the savings decisions (very few individuals, sport stars excluded, even contemplate retirement at 35) and therefore, at least to a first order, exogenous to the model. As such changes in the saving rates due to changes in ψ i,t are clearly interpretable as due to changes in the distribution of resources and not to changes in the normalisation. Finally, it was necessary to choose labour income gross of all pension contributions because of the very different pension arrangements in the countries. This is discussed in details later. Equation (4) can now be used to decompose differences in the saving rates between countries into the three components: 1. the difference due to any differences in the age distribution of the population p i,t. 2. the difference due to any differences in the lifetime distribution of resources ψ i,t.weshall breakdown resources into its constituent parts, labour income y L i,t, net pension income yp i,t and net government transfers yi,t T, and examine the effects of changes in the age distribution of these individual components on the saving rate. 3. differences in average propensities to consume, α i. We shall think of these three causes for the differences in the saving rates as largely independent. They may of course be related; for example imperfect capital markets may affect both the propensity to consume and the decision to work and therefore resources. Similarly if the intertemporal elasticity of consumption is significantly different from one then interest rates may affect both the propensity to consume and the level of available resources. However we shall assume in our interpretation that this interdependence is small. Now, the first two causes for the differences in saving rates between countries are due to observable economic differences between the countries. This is in contrast to the third cause which is in terms of a derived economic 8

10 parameter, the average propensity to consume. Interpretation of the differences in saving rates due to differences in the average propensities to consume requires more thought. Differences in the average propensity to consume (APC) between countries can be caused by a number of factors; Blanchard (1985) shows that the APC is a function of mortality rates and expected future interest rates, Jappelli & Pagano (1989) that it is a affected by borrowing constraints, Banks, Blundell & Preston (1994) that it is a function of future family size and Caballero (1991) that it is affected by the degree of income uncertainty. The US and the UK are very similar in all these respects. Demographically they are almost identical and, as both have fairly liberalised open capital markets, the future rates of returns on assets in these countries will be similar. Italy however is different. In a series of papers, Jappelli & Pagano (1989), Guiso, Jappelli & Terlizzese (1992b), Guiso & Jappelli (1998), Jappelli & Pagano (1998) and Jappelli & Pistaferri (2000), these authors have investigated the effects of the tight capital markets on saving behaviour in Italy. They document extensively the the dearth of mortgage lending in Italy and the consequent need for Italians to finance their home purchases predominantly from accumulated savings. This they do, as nearly 61%, (Jappelli & Pagano 1998), of Italians households are home-owners as compared to 68% in the UK and 65% in the US (Holmans 1994). The reason for this shortage is that Italian law makes it very difficult and therefore costly for a mortgage company to repossess a house should its borrower fall behind with repayments. The mortgage companies therefore require large downpayments to protect themselves against this eventuality. Jappelli & Pagano (1998) also document that in the late 1980s consumer credit as a percentage of consumption expenditure was also low in Italy, only 4% as compared to 10% and 20% in the UK and US respectively. The presence of these borrowing constraints would unequivocally reduce the average propensity to consume. If individuals wish to borrow but can not, they clearly consume less than they 9

11 would wish. Therefore observed average propensity to consume, consumption divided by total resources, is lower. Having found that the average propensity to consume in Italy is significantly lower than in the UK and US, we shall therefore interpret this as evidence in support of Jappelli and Pagano s thesis that Italians, and especially young Italians, face more borrowing constraints than their peer groups in the US and UK. Family size can be another possible cause of the difference in the propensities to consume. The number of adults per household by age of household head is more than double in Italy for the ages as compared to the UK and US (see Figure 1). The principle reason is that in Italy many children choose to live with their parents until they can afford the downpayment on their house, see Guiso & Jappelli (1991). Given this is the cause, it can be argued that this difference in behaviour is also a result of imperfect capital markets. Now these living arrangements will affect the cohort specific propensities to consume. Assuming the young adults work and there are economies of scale in living together, then these arrangements will encourage individuals to reallocate their consumption from the ages of and when they are sharing to other periods of their lives when they are not. It will therefore reduce the estimates of the propensity to consume at these ages and increase it proportionally at the others. As such it will offset partly of the effects of the capital market restrictions. Indeed this is the main motivation. One would also expect that due to these living arrangements there is likely to be larger intergenerational transfers from the middle-aged to young. We shall return to this point later. 2.2 Decomposing the Difference in Saving Rates: Partial versus Equilibrium Modelling Gokhale et al. (1996) suggest using equation (4) to decompose the difference in saving rates across time or, in our case, across countries. They propose an approach that is partial equilibrium in nature. Given equation (4) expresses the saving rate of country A as a function of its cohort propensities to consume α i, the normalised distribution of their non-capital resources 10

12 ψ i,t and the age distribution of its population p i,t, they suggest substituting out one of these constituent components with the respective quantity from country B. This would convey the potential importance of the different saving determinants, rather than giving a precise quantification of the size of the effect. The reason for calling this analysis partial equilibrium in nature is that changes in the age-distribution of resources or in the propensities to consume will induce changes in the age distribution of wealth holdings, ω i,t. However this analysis does not try to account for these implicit changes. We investigate the difference in saving rates between our three countries using Gokhale et al. s (1996) partial equilibrium analysis. However we also complement these results with a full equilibrium or steady state analysis. In this approach we also try to estimate the changes to the age-distribution of wealth holdings ω i,t that would have been induced by any changes in the age distribution of non-capital resources or by any changes in the cohort specific propensities to consume. We could have estimated the size of these induced changes to the wealth distribution with the life-cycle model as described above but, as Wolff (1999) pointed out, this method ignores private intergenerational transfers and therefore under-predicts the wealth of the young and overpredicts the wealth of the old. Therefore before discussing the simulation approach, we shall describe in detail our approach to estimating and accounting for these private intergenerational transfers Inter Vivos Transfers and Bequests Inter vivos transfers and bequests do not show up in the national accounts as they are transfers within the personal sector and so net out in aggregate 4. However these intergenerational private transfers do have substantial bearing on the distribution of resources across cohorts. The conventional view is that such transfers are considerable but are difficult to estimate accurately, 4 In theory they could be included in the personal sector accounts as transfers in both the resources and uses accounts. However the difficutly in measuring them means that in reality they are omitted. 11

13 see, among others, Wolff (1999), Guiso & Jappelli (1991) and Guiso & Jappelli (1998). We propose a new approach to estimating the size of these transfers. Intergenerational private transfers by age t i,t can be estimated as the residual from the previous years wealth evolution equation. The wealth identity must be amended to include these transfers which are significant at the cohort level, w t+1,i+1 =(1+ρ t )w i,t + y NC i,t + t i,t c i,t (5) implying that transfers can be estimated as t i,t = w t+1,i+1 (1 + ρ t )w i,t y NC i,t + c i,t (6) Under the assumption that relative age wealth profiles have stayed constant over time, we can rescale our observed relative wealth profile in the base year, 1997, by the observed aggregate level of wealth in 1998 at 1997 prices and estimate the intergenerational private transfers from equation (6). In estimating these private intergenerational transfers we used the observed real interest rate for 1997, see Table 1. The results are discussed later in Section 4.2. It is always problematic estimating any quantity as a residual, particularly one that is dependent on the relative age profile of wealth holdings. We can however check our estimates satisfy various conditions. The first identity is that the population weighted sum of all private inter-vivos transfers should be equal the value of bequests net of tax that year. If we assume that those who died in any year had the same average level of wealth as those who survived, we can estimate the amount left in bequests net of the average inheritance tax rate, s, in any year t as B t =(1 s) X i w i,t (n i+1,t+1 n i,t ) and this should equal the sum of net private transfers X t i,t n i,t = B t i (7) 12

14 Table 2 presents our estimates of the value of bequests left and total private transfers received given as a percentage of total disposable income. The identities are approximately satisfied for all three countries, and the value of inter-vivos transfers paid is similar. One might have expected the estimates for the US to be closer to those of the UK rather than those of Italy; suggesting perhaps that the size of these transfers is overestimated in the US. Our estimates of the value of these private intergenerational transfers as a percentage of disposable income are larger than the estimates given in both Wolff (1999) and Gale & Scholz (1994); however the estimates are not comparable. As all our analysis occurs at the individual level, and so our figures include intrahousehold transfers whereas Wolff (1999) and Gale & Scholz (1994) do not. Therefore for example, if a parent is subsidising the consumption of their adult child who still is living in parental home this will be recorded as a transfer under our schema but not under Wolff (1999). Further we also believe that Wolff s approach would have underestimated the level of inter-vivos transfers. He chose to estimate the cohort specific saving rates from the consumer expenditure survey (CEX). However as Slesnick (1992) shows, the CEX survey underestimates consumption by almost 30% whereas income is barely underestimated. Hence the saving rate estimates will be over-estimated which will bias down his estimates of inter-vivos transfers. However all this being said, we still recognise there is likely to considerable uncertainty associated with all estimates based on this residual approach. It is clear that private intergenerational transfers are likely to be sensitive to the population distribution. To illustrate this assume a country where there is on average one child per household as compared to another where there are two. Also assume that all bequests are accidental; this is an assumption consistent with our version of the life-cycle model. Then in the country with the fewer number of children, one would expect that the average bequest per capita would be almost double those of the other country. However, as there are only minor demographic differences between our countries, we shall assume for the rest of the analysis that private transfers 13

15 per capita are relatively independent of small changes to the population distribution Equilibrium Modelling Gokhale et al. s (1996) analysis was partial equilibrium in nature in that it did not account for endogenoity of capital resources, w i,t. We suggest simulating our model, so as to estimate the changes to the age distribution of capital resources that would have been induced by any changes in the age distribution of non-capital resources or by any changes to the cohort specific propensities to consume. This estimated distribution is dependent on all our assumptions; the most critical of these is the assumption that the parameters of the model are stable over time. As such the estimated distribution can only be treated as the equilibrium distribution of wealth consistent with the changes to income resources or propensities to consume. Because of these qualifications, it must be seen as a complement to, rather a substitute for, the partial equilibrium analysis. In order to simulate the model, we must decide how to treat private intergenerational transfers. We identify two polar cases: firstly, when these transfers are unanticipated and secondly when all transfers are anticipated. In the first case individuals include only transfers in the current year as part of their resources; in the second case they include current and all future private transfers as part of their resources. Reality of course must lie somewhere between these polar cases. We shall denote the present value of average per capita future private transfer payments of cohort i as τ i,t. Therefore the system of simulation equations are c i,t = α U i (w i,t + h i,t + t i,t ) Case 1 (8) c i,t = α A i (w i,t + h i,t + τ i,t ) Case 2 (9) w i+1,t+1 = (1+ρ)w i,t + y NC i,t yi,t+1 NC = (1+g)yi,t NC + t i,t c i,t t i,t+1 = (1+g)t i,t 14

16 subject to initial condition that the cohort has no wealth holdings in the first period of their life. The two cases, unanticipated transfers (8) and anticipated transfers (9), also imply different estimates for the propensity to consume α U i and α A i. We shall report both estimates later. In our simulations we assume the real interest rate, ρ, and growth rate g are constant as our cohort specific income, transfer and APC relative profiles. We also only simulate our model for individuals older than 18. Only a small component of education expenditure, and the corresponding welfare transfer to pay for it, is allocated to individuals under 18. In this equilibrium framework we can also decompose the differences in the saving rates between two countries, country A and country B, but now two steps are involved in the analysis; the new induced wealth distribution must be estimated firstbeforethesavingratescanbe decomposed. For example, let s say that we wish to estimate how much of the difference in saving rates can be attributed to the difference in the pension arrangements between the two countries. First, it is necessary to estimate the distribution of wealth and consumption by cohort in country A that would have prevailed if they had country B s pension arrangements. This is done by substituting in the cohort distribution of the present value of pension resources in country B for those in country A and simulating either the system equations (8) or (9). The implied aggregate difference in the saving rates is then found by summing up the individual cohort responses using the population weights. In this approach, we have only calculated the levels of wealth held by individuals, that are consistent with both their expected resources and the life-cycle model of consumption. The individuals can therefore be thought of as holding their equilibrium levels of wealth. However the personal sector can not be thought of holding its equilibrium levels of wealth; for this to be the case, the population distribution would also have to be stable. Hence even though individuals are saving at their equilibrium rate, the aggregate saving rate need not be at its equilibrium level. 15

17 In all our countries, we know that the population structure is ageing and that there is a higher proportion of middle-aged people at present than there is likely to be in the future. Hence, as middle-age people tend to be savers, we would expect aggregate saving rates to be above their equilibrium levels at present. This effect will be particularly acute in Italy, where the middle-aged Italians save far more than their counterparts in the UK or the US. 3 Measurement Issues 3.1 Individuals vs. households Following Gokhale et al. (1996) this study treats individuals, rather than households, as the life-cycle decision makers. This approach is in line with recent research by Deaton & Paxton (1999). They argue that households are simply veils for a group of individuals; households are transient entities that appear, transform and disappear through time. For example, one would not expect two households both with a head of household aged 45 to behave in the same way, if one of the heads is living on his own and another is married and supporting a 20 year old son and 70 year old mother. Therefore a model based on households as the basic economic unit would need to adjust for the household size, age of the household members and possibly their inter-relationships. Rather than attempt this difficult task, we chose to treat individuals as our basic unit. Deaton & Paxton s (1999) research supports this approach as they found empirical support for the life-cycle model at the individual level but found it considerably harder to find at the household level. Individuals under 18 were also included in all our analysis, but were treated as dependants rather than as decision makers. The practical problem when treating individuals as the decision making unit, rather than households, is how to allocate household consumption, income and wealth among the adult members of a household. For descriptive purposes we shall make the following definitions; all individuals 18 or younger are treated as dependent children 5, the head of households and their 5 We ignored the odd household where the head of household was 18 or younger. 16

18 partners, if any, are called the principle adults and any other adults in the household are called dependent adults. We shall start by describing the allocation of consumption. Wherever it was possible to determine the particular consumer of a good or service within the household, such as the consumer of pipe tobacco, the relevant individual is allocated this consumption. Consumption where it is not possible to identify the consumer, such as expenditures on food, is allocated among all adults and children using the following age equivalence scale. A newborn baby was assumed to consume 30% of an adult, and this proportion increased linearly until by 18 a dependent child was assumed to consume as much as every other adult in the household. After allocating all consumption in this manner, the consumption of all dependent children was then reallocated equally between the principle adults. The allocation of wealth was done differently. All housing wealth was distributed equally between the principle adults whereas financial wealth was distributed equally among all adults except for those younger than 30 and in full time education. Finally, income was allocated wherever possible to the individual who was receiving it. For those cases, such as housing benefit, where there was no clear benefactor then the income was divided equally among the principle adults. To clarify this allocation scheme consider the following example: a household consists of a working head of household aged 55, a partner aged 50, their working son of 25, a student daughter of 22, a schoolboy of 8 and a parent of the head of household aged 80. We assume the annual consumption of the household is 100, their total financial wealth is 1000 and their housing assets are worth Line 1 of Table 3 gives the ratio of consumption using the age equivalence scale; line 2 gives the initial allocation of consumption according to this equivalence scale and line 3 gives the final consumption allocation. The final two lines give household allocation of financial and housing wealth. A possible problem with this allocation scheme is that it may overestimate the wealth of 17

19 younger generations by assigning them too high a share of the household wealth. But our method is consistent across countries, and we do control for non-earners. 3.2 Treatment of private pensions The three countries have very different pension systems. The UK and the US have a similar mix of PAYGO state and funded private pensions arrangements. In contrast in Italy nearly all individuals rely only on their PAYGO state pension; the value of private pension funds is ineligible. Hence in the UK and the US, a large proportion of personal sector wealth is held as financial assets in funded pension reserves, whereas in Italy these funds are minimal. In our approach, in common with both Bosworth et al. (1991) and Gokhale et al. (1996), individuals do understand that mandatory pension contributions entitle them to benefits when old and so we do not assume individuals are myopic. This is an essential first step, as Jappelli (2001) argues, if we are to account for differences in saving rates between countries. However there is a further problem, both the European System of Accounts (ESA) and the National Income and Product Accounts (NIPA) consider saving in private pension funds as part of personal sector saving, but do not consider mandatory saving in the form of social insurance contributions as part of saving. Therefore if countries have a very differentmixofprivateandstatepension arrangements, this definition has the implication that the measured personal sector saving rates are not comparable across these countries. To correct for this, we therefore choose to treat private pension arrangements in the UK and the US as if they were run on a PAYGO basis, rather than on a funded one. Private contributions are therefore treated as a tax and pension payments as income. This is instead of treating contributions as saving and pension payouts as the drawing down of capital. Under this scheme, saving in private pension funds is not included in the estimate of the sector s saving rate. Treating funded pension schemes as if they were PAYGO schemes will have no effect on our results as long as the present value of all private pension contributions is equal to the present 18

20 value of all pension fund payouts over the lifetime of each of our cohorts. To check this condition is satisfied for both the US and the UK, considerable care needs to be taken over how and when the monies from the pension funds are paid out. Of the money paid out from the private pension funds in both the US and UK, surrender, refund and death claims make up about a third, lump sum payments a third and periodical pension payments about a third. Of these only periodical pension payments are recorded in most survey data on household income. As described in the data Appendix accompanying this paper Kirsanova & Sefton (2001), we used alternative sources from the insurance industry to construct age profiles of monies paid out as either surrender, refund and death claims or lump sum payments. Given these calculations the present value condition linking contributions to payouts was satisfied almost exactly in both the US and UK. The second panel of Figure 5 plots the estimate of the APCs in both the US and UK first assuming that the private pensions system is treated as if it were a PAYGO system and secondly treating it as a funded system. As is evident, the estimates are almost identical. 3.3 Definitions of Aggregate Saving Rates In order to compare saving rates across countries, it is desirable that the personal sector accounts are constructed on a comparable basis across countries. There are three areas that need particular attention to ensure comparability: the treatment of private funded pensions, the estimates of depreciation and estimates of interest, dividend and other returns to wealth payments. Both the European System of Accounts (ESA) and the National Income and Product Accounts (NIPA) consider pension fund reserves as part of personal sector wealth. Therefore personal sector savings include private savings in pension funds. However, as we argued in the previous section, this makes comparability across the countries difficult. Therefore we chose to treat private funded pensions schemes as if they were run on a PAYGO basis. This implies that returns to the pension fund must be excluded from interest and dividend payments, private contributions from income must be treated as a tax and further private pension payments must 19

21 be treated as part of income 6. Columns 1 to 4 in Table 4 show the changes this adjustment makes to both net and gross saving rates for the three countries. Estimates of depreciation are by their nature unreliable. They are derived from estimates of the value and age of the capital stock and estimates of a typical product life. So much so that Dean, Durand, Fallon & Hoeller (1990) suggest that gross rates are more comparable across countries that net rates. In columns 1 and 3 of Table 4, we show a comparison of net and gross saving rates for the three countries 7. The estimates of depreciation are a far larger proportion of income in Italy than they are in the other countries; in part though, this reflects the greater importance of unincorporated business in the Italian accounts. However depreciation is a component of the return to capital, albeit a negative one, and so can be treated together with the third problem; how to measure the returns to wealth. There are some difficulties to using national accounts estimates of the returns to wealth. Firstly, it is often impossible to breakdown the value added of unincorporated business into the return to capital and the return to labour; this inevitably increases the error in estimates of the return to wealth. Secondly, the estimates of the nominal return to wealth are sensitive to level of inflation in that country; thirdly, these estimates do not include capital gains as part of the return on wealth; fourthly, different countries use different approaches to derive estimates of the imputed return from owner occupied housing and, finally, the estimates of depreciation are unreliable. As a solution to the first problem, we assumed in all countries that 70% of the total income from unincorporated business could be regarded as labour income. As a way of avoiding the second problem, we define the saving ratio on an inflation adjusted basis, see Dean et al. (1990). This is done by basing the calculations on the real interest rate rather than an a nominal rate. In our base year, inflation was nearly 2% in all our countries and so the upward 6 In the ESA system of accounts this amounts to removing the net equity adjustment for insurance reserves and netting out attributed interest payments on both the uses and resources side of the accounts. 7 The figures are slightly different from those recorded in the respective country national accounts. This is because we have included income in kind in our measure of income. The difference is marginal though. 20

22 bias on the saving rates because of inflation was small. To illustrate the magnitude of the final three problems, we look at the implied rate of return on all assets in our base year for the three countries. The implied nominal rate of return is simply calculated as the total net return from all assets divided by value of these assets; the calculated values are recorded in column 5 of Table 4. The first thing to note is that all these returns are below 5%, in a year when the stock market grew by over 15% in all three countries and nominal interest rates was above 6% on all government securities. The second observation is that the implied rate of returns in all three countries are similar. The UK, though, has the lowest implied rate of return. This can explained by the much lower estimates of the rental rate imputed to owner occupied housing in the UK as compared to Italy and the US. The rate of return on owner occupied housing in the UK is around 3% according to the National Accounts, whereas in the US it is as high as 5%. To correct for the difficulties in estimating the returns to wealth, we assumed a real rate of return of 5% per annum on all assets and estimated the returns under this assumption. In Table 5 we record in the first column personal sector saving ratio under this new assumption; in column 2 we record the saving ratio implied by a 7% rate of return for comparison. This saving ratio must be regarded as inflation adjusted rate of return, see Dean et al. (1990), as they are calculated on the basis of real rates of return. In the final two columns we show the predicted long run saving rate from our simulation model under the assumptions that transfers are either unanticipated or anticipated; real interest rate is constant at 5% and the productivity growth rate is also constant at 1.75% per annum. The simulated saving ratio are close to those observed when a 5% real rate of return on wealth is imposed. The only significant difference is in the US where the model suggests that current saving rates are below their long run level. Similarly simulated wealth to total income ratios are close to those observed in the three 21

23 countries; that is 5.9 in Italy, 3.8 in the US and 3.3 in the UK 8. As we remarked earlier these can not be considered to be the equilibrium saving rates or equilibrium wealth to income ratios for the personal sector. They are calculated given the current demography and not a steady state or equilibrium population structure. They would agree exactly with the derived saving ratios in the first column of Table 5 and the observed wealth to income ratios if we had used an interest rate of 5% in our calculation of private transfers rather than the observed return in the three countries in 1997, and if we had calculated saving behaviour for all individuals rather than just for those older than Looking at the data 4.1 Demography Demographic factors play a significant role in our empirical analysis, so we start with a discussion of the demographic differences between the countries. The age distributions of population are plotted on the first panel in Figure 1. The graphs are all normalised so that y-axis measures the percentage of the population that are of a given age. The major difference between the countries is the low current fertility rates in Italy resulting in a smaller percentage of children as a proportion of the population. The next two panels show how the household composition changes with the age of the head of household. The family composition in the US and the UK is almost identical. In contrast in Italy, unsurprisingly given the first chart, there are fewer children in each household. However more importantly for our analysis is the difference in the number of adult children per household. In Italy, parents aged between 45 and 60 are twice as likely to be living with their adult children than in the UK or US. As mentioned earlier, Guiso & Jappelli (1991) argue that the principle reason for this difference is that many children choose to live with their parents until they can afford the downpayment on their house. 8 The ratios are calculated given returns to wealth are assumed to be 5% and pension fund reserves are not considered as part of personal sector wealth. 22

24 4.2 Income, Consumption, Transfers and Wealth In Figure 2, we have plotted the per capita distribution of the components of non-capital income by age as a ratio of average per capita income. We have split income into the three components; gross labour income y L i,t, private and state pension payments minus pension contributions yp i,t and all benefits whether in kind or monetary net of tax payments yi,t T. In all cases the distributions are normalised by dividing through by average per capita income Y t /N t. The reason for this split is that gross labour income can be seen as the basic return to labour and the other two components can be seen as intergenerational transfers implemented through either the pension system of the welfare state. The total net present value across the population of net pension income yi,t P is close to zero for all countries and the net present value of all welfare transfers is only slightly positive; the welfare state is in part funded by indirect taxes which are included within consumption. Therefore by analysing the transfers at this level, we will be able to measure how the individual country welfare and pension arrangements affect the personal sector saving rate. The main observations from Figures 2 are: 1. Gross labour income is earned at markedly different times in the different countries: Italians and Americans start work later than Britons, and Americans retire on average more than five years later. On their own these data would suggest that both Italians and Americans would wish to borrow more when young and, further, Americans would also wish to save less for retirement as they tend to work longer. 2. The pension payments in retirement are very similar across the countries. However the Italians start drawing their pension one or two years earlier than the British and five to six years earlier than the Americans. The Italians also pay higher contributions to save for their longer retirement. 3. The welfare system in the UK is more generous and less expensive than in the other two 23

A Comparison of National Saving Rates

A Comparison of National Saving Rates A Comparison of National Saving Rates intheuk,usanditaly TatianaKirsanova University of Exeter JamesSefton Imperial College July 28, 2006 Abstract We develop the approach of Gokhale, Kotlikoff & Sabelhaus

More information

. In this case the leakage effect of tax increases is mitigated because some of the reduction in disposable income would have otherwise been saved.

. In this case the leakage effect of tax increases is mitigated because some of the reduction in disposable income would have otherwise been saved. Chapter 4 Review Questions. Explain how an increase in government spending and an equal increase in lump sum taxes can generate an increase in equilibrium output. Under what conditions will a balanced

More information

Generational Aspects of Medicare. David M. Cutler and Louise Sheiner * Abstract

Generational Aspects of Medicare. David M. Cutler and Louise Sheiner * Abstract Generational Aspects of Medicare David M. Cutler and Louise Sheiner * Abstract This paper examines the generational aspect of the current Medicare system and some stylized reforms. We find that the rates

More information

2 Voluntary retirement module specification

2 Voluntary retirement module specification 2 Voluntary retirement module specification As part of its research on Superannuation Policy for Post-Retirement the Commission has developed a model referred to as the Productivity Commission Retirement

More information

Wealth Accumulation by Age Cohort in the U.S., 1962±1992: The Role of Savings, Capital Gains and Intergenerational Transfers

Wealth Accumulation by Age Cohort in the U.S., 1962±1992: The Role of Savings, Capital Gains and Intergenerational Transfers The Geneva Papers on Risk and Insurance Vol. 24 No. 1 (January 1999) 27±49 Wealth Accumulation by Age Cohort in the U.S., 1962±1992: The Role of Savings, Capital Gains and Intergenerational Transfers by

More information

VERY PRELIMINARY AND INCOMPLETE NOT FOR CITATION

VERY PRELIMINARY AND INCOMPLETE NOT FOR CITATION VERY PRELIMINARY AND INCOMPLETE NOT FOR CITATION The Drop in the U.S. Household Saving Rate between 1985 and 2000: an inquiry using the Consumer Expenditure Survey. Albert Ando* Dimitrios Christelis**

More information

Money and Public Finance

Money and Public Finance Money and Public Finance By Mr. Letlet August 1 In this anxious market environment, people lose their rationality with some even spreading false information to create trading opportunities. The tales about

More information

Explaining the Decline of the U.S. Saving Rate: the Role of Health Expenditure

Explaining the Decline of the U.S. Saving Rate: the Role of Health Expenditure Explaining the Decline of the U.S. Saving Rate: the Role of Health Expenditure Yi Chen Maurizio Mazzocco Béla Személy Current Draft, May 2015. Abstract In this paper we provide evidence that most of the

More information

!A6@6B?A< @%C+DE >FG+F8H!+8B!:?A8@< <I6..!J+<8H?@/K !"#$%&'( 1)*L4=#*+.C+2))3)& .)$)&+/&#0* /4&)$5+67"' 87)9+:%;#*'%*

!A6@6B?A< @%C+DE >FG+F8H!+8B!:?A8@< <I6..!J+<8H?@/K !#$%&'( 1)*L4=#*+.C+2))3)& .)$)&+/&#0* /4&)$5+67' 87)9+:%;#*'%* !A6@6B?A< >6:2?@/+.8.!:< @%C+DE!"#$%&'(!")*+!''#,-.)$)&+/&#0* 1)*+2))3)& /4&)$5+67"' 87)9+:%;#*'%* 24&7+FG+F8H!+8B!:?A8@<

More information

Global Demographic Trends and their Implications for Employment

Global Demographic Trends and their Implications for Employment Global Demographic Trends and their Implications for Employment BACKGROUND RESEARCH PAPER David Lam and Murray Leibbrandt Submitted to the High Level Panel on the Post-2015 Development Agenda This paper

More information

Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence

Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence Zeldes, QJE 1989 Background (Not in Paper) Income Uncertainty dates back to even earlier years, with the seminal work of

More information

Life Cycle Asset Allocation A Suitable Approach for Defined Contribution Pension Plans

Life Cycle Asset Allocation A Suitable Approach for Defined Contribution Pension Plans Life Cycle Asset Allocation A Suitable Approach for Defined Contribution Pension Plans Challenges for defined contribution plans While Eastern Europe is a prominent example of the importance of defined

More information

SOCIETY OF ACTUARIES THE AMERICAN ACADEMY OF ACTUARIES RETIREMENT PLAN PREFERENCES SURVEY REPORT OF FINDINGS. January 2004

SOCIETY OF ACTUARIES THE AMERICAN ACADEMY OF ACTUARIES RETIREMENT PLAN PREFERENCES SURVEY REPORT OF FINDINGS. January 2004 SOCIETY OF ACTUARIES THE AMERICAN ACADEMY OF ACTUARIES RETIREMENT PLAN PREFERENCES SURVEY REPORT OF FINDINGS January 2004 Mathew Greenwald & Associates, Inc. TABLE OF CONTENTS INTRODUCTION... 1 SETTING

More information

Taxation and Savings: A Survey

Taxation and Savings: A Survey Fiscal Studies (1995) vol. 15, no., pp. 19-63 Taxation and Savings: A Survey ROBIN BOADWAY and DAVID WILDASIN 1 I. INTRODUCTION The choice of how much of society s income to consume today and how much

More information

This paper is not to be removed from the Examination Halls

This paper is not to be removed from the Examination Halls This paper is not to be removed from the Examination Halls UNIVERSITY OF LONDON EC2065 ZA BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences, the Diplomas

More information

Household Saving Behaviour in New Zealand: Why do Cohorts Behave Differently?

Household Saving Behaviour in New Zealand: Why do Cohorts Behave Differently? Household Saving Behaviour in New Zealand: Why do Cohorts Behave Differently? Grant M Scobie and John K Gibson N EW Z EALAND T REASURY W ORKING P APER 03/32 D ECEMBER 2003 NZ TREASURY WORKING PAPER 03/32

More information

Impact Assessment (IA)

Impact Assessment (IA) Title: Welfare Reform and Work Bill: Impact Assessment for Converting Support for Mortgage Interest (SMI) from a benefit into a Loan Lead department or agency: Department for Work and Pensions Other departments

More information

Live Long and Prosper? Demographic Change and Europe s Pensions Crisis

Live Long and Prosper? Demographic Change and Europe s Pensions Crisis 10 November 2015, Brussels Live Long and Prosper? Demographic Change and Europe s Pensions Crisis Key Note Speech Dr. Jochen Pimpertz Head of Research Unit Public Finance, Social Security, Income and Wealth

More information

PRIVATE FINANCING OF LONG-TERM CARE: CURRENT METHODS AND RESOURCES PHASE II

PRIVATE FINANCING OF LONG-TERM CARE: CURRENT METHODS AND RESOURCES PHASE II U.S. Department of Health and Human Services Assistant Secretary for Planning and Evaluation Office of Disability, Aging and Long-Term Care Policy PRIVATE FINANCING OF LONG-TERM CARE: CURRENT METHODS AND

More information

The Role of Health Care Spending in Projecting Federal Elderly Entitlement Spending

The Role of Health Care Spending in Projecting Federal Elderly Entitlement Spending The Role of Health Care Spending in Projecting Federal Elderly Entitlement Spending Andrew J. Rettenmaier and Zijun Wang April 2009 Private Enterprise Research Center Texas A&M University College Station,

More information

TREASURY WORKING PAPER 98/8

TREASURY WORKING PAPER 98/8 TREASURY WORKING PAPER 98/8 Household Savings: A Survey of Recent Microeconomic Theory and Evidence Andrew Coleman Abstract This paper summarises recent theoretical and empirical developments in the vast

More information

Briefing Paper on Equity Release

Briefing Paper on Equity Release COUNCIL of MORTGAGE LENDERS Briefing Paper on Equity Release What is equity release? 1. Equity is the difference between any mortgage you may have and the value of your home. Equity release is a way of

More information

Can Equity Release Mechanisms fund long term care costs? Desmond Le Grys

Can Equity Release Mechanisms fund long term care costs? Desmond Le Grys 2001 Health Care Conference Can Equity Release Mechanisms fund long term care costs? Desmond Le Grys 1 Introduction 1.1 Scope This paper attempts to explain why equity release products have rarely been

More information

Personal debt ON LABOUR AND INCOME

Personal debt ON LABOUR AND INCOME ON LABOUR AND INCOME Personal debt Although the economy and population are almost times the size of s, the two countries show several similarities. Both have relatively high per-capita income and living

More information

Housing boom and burst as seen from the Spanish Survey of Household Finances

Housing boom and burst as seen from the Spanish Survey of Household Finances Housing boom and burst as seen from the Spanish Survey of Household Finances Olympia Bover Prepared for the 2nd Conference on Real Estate Market, Bank of Greece, Athina, December 2011 PLAN FOR THIS TALK

More information

The UK s public finances in the long run: the IFS model

The UK s public finances in the long run: the IFS model The UK s public finances in the long run: the IFS model IFS Working Paper W13/29 Michael Amior Rowena Crawford Gemma Tetlow The UK s public finances in the long-run: the IFS model Michael Amior, Rowena

More information

THE U.S. HOUSEHOLD SAVINGS RATE AND CONSUMPTION 3 March 2009, additions 4 March see http://www.closemountain.com/publications.

THE U.S. HOUSEHOLD SAVINGS RATE AND CONSUMPTION 3 March 2009, additions 4 March see http://www.closemountain.com/publications. THE U.S. HOUSEHOLD SAVINGS RATE AND CONSUMPTION 3 March 2009, additions 4 March see http://www.closemountain.com/publications.html for updates T. S. Coleman PhD Close Mountain Advisors www.closemountain.com

More information

Does Means Testing Exacerbate Early Retirement?

Does Means Testing Exacerbate Early Retirement? Does Means Testing Exacerbate Early Retirement? James Sefton andjustinvandeven 1 Introduction The means testing of pension benefits has been heavily criticised for discouraging savings and work effort,

More information

Chapter 3: Property Wealth, Wealth in Great Britain 2010-12

Chapter 3: Property Wealth, Wealth in Great Britain 2010-12 Chapter 3: Property Wealth, Wealth in Great Britain 2010-12 Coverage: GB Date: 15 May 2014 Geographical Area: GB Theme: Economy Key Points Aggregate net property wealth for all private households in Great

More information

Successful value investing: the long term approach

Successful value investing: the long term approach Successful value investing: the long term approach Neil Walton, Head of Global Strategic Solutions, Schroders Do you have the patience to be a value investor? The long-term outperformance of a value investment

More information

Today s Research on Aging P ROGRAM AND P OLICY I MPLICATIONS Issue 3, May 2007

Today s Research on Aging P ROGRAM AND P OLICY I MPLICATIONS Issue 3, May 2007 Today s Research on Aging P ROGRAM AND P OLICY I MPLICATIONS Issue 3, May 2007 Savings and the Elderly Savings strongly influence the well-being of the elderly and the rate of a country s economic growth.

More information

Saving and Life Insurance Holdings at Boston University A Unique Case Study

Saving and Life Insurance Holdings at Boston University A Unique Case Study Saving and Life Insurance Holdings at Boston University A Unique Case Study by B. Douglas Bernheim Stanford University and National Bureau of Economic Research bernheim@stanford.edu Solange Berstein Boston

More information

Keywords: Overlapping Generations Model, Tax Reform, Turkey

Keywords: Overlapping Generations Model, Tax Reform, Turkey SIMULATING THE TURKISH TAX SYSTEM ADEM İLERİ Middle East Technical University Department of Economics aileri@metu.edu.tr PINAR DERİN-GÜRE Middle East Technical University Department of Economics pderin@metu.edu.tr

More information

Social Security Eligibility and the Labor Supply of Elderly Immigrants. George J. Borjas Harvard University and National Bureau of Economic Research

Social Security Eligibility and the Labor Supply of Elderly Immigrants. George J. Borjas Harvard University and National Bureau of Economic Research Social Security Eligibility and the Labor Supply of Elderly Immigrants George J. Borjas Harvard University and National Bureau of Economic Research Updated for the 9th Annual Joint Conference of the Retirement

More information

Retirement Income White Paper Insights Presentation

Retirement Income White Paper Insights Presentation Retirement Income White Paper Insights Presentation Alun Stevens Jack Ding Nathan Bonarius Agenda Background Preliminary projections What are the risks? What are the possible solutions? Purpose of presentation

More information

Commentary: What Do Budget Deficits Do?

Commentary: What Do Budget Deficits Do? Commentary: What Do Budget Deficits Do? Allan H. Meltzer The title of Ball and Mankiw s paper asks: What Do Budget Deficits Do? One answer to that question is a restatement on the pure theory of debt-financed

More information

MACROECONOMIC ANALYSIS OF VARIOUS PROPOSALS TO PROVIDE $500 BILLION IN TAX RELIEF

MACROECONOMIC ANALYSIS OF VARIOUS PROPOSALS TO PROVIDE $500 BILLION IN TAX RELIEF MACROECONOMIC ANALYSIS OF VARIOUS PROPOSALS TO PROVIDE $500 BILLION IN TAX RELIEF Prepared by the Staff of the JOINT COMMITTEE ON TAXATION March 1, 2005 JCX-4-05 CONTENTS INTRODUCTION... 1 EXECUTIVE SUMMARY...

More information

Socio-economic implications of retiring baby boom generation people, shrinking workforce in the developed economy and proposed solution

Socio-economic implications of retiring baby boom generation people, shrinking workforce in the developed economy and proposed solution Socio-economic implications of retiring baby boom generation people, shrinking workforce in the developed economy and proposed solution By Sonjai Kumar Abstract This paper talks about the socio-economic

More information

WITH-PROFIT ANNUITIES

WITH-PROFIT ANNUITIES WITH-PROFIT ANNUITIES BONUS DECLARATION 2014 Contents 1. INTRODUCTION 3 2. SUMMARY OF BONUS DECLARATION 3 3. ECONOMIC OVERVIEW 5 4. WITH-PROFIT ANNUITY OVERVIEW 7 5. INVESTMENTS 9 6. EXPECTED LONG-TERM

More information

CHAPTER 11. AN OVEVIEW OF THE BANK OF ENGLAND QUARTERLY MODEL OF THE (BEQM)

CHAPTER 11. AN OVEVIEW OF THE BANK OF ENGLAND QUARTERLY MODEL OF THE (BEQM) 1 CHAPTER 11. AN OVEVIEW OF THE BANK OF ENGLAND QUARTERLY MODEL OF THE (BEQM) This model is the main tool in the suite of models employed by the staff and the Monetary Policy Committee (MPC) in the construction

More information

An explanation of social assistance, pension schemes, insurance schemes and similar concepts

An explanation of social assistance, pension schemes, insurance schemes and similar concepts From: OECD Framework for Statistics on the Distribution of Household Income, Consumption and Wealth Access the complete publication at: http://dx.doi.org/10.1787/9789264194830-en An explanation of social

More information

Equality Impact Assessment Support for Mortgage Interest

Equality Impact Assessment Support for Mortgage Interest Welfare and Wellbeing Group Equality Impact Assessment Support for Mortgage Interest Clarification to the treatment of Excess Payments of Support for Mortgage Interest April 2010 Equality Impact Assessment

More information

Why Did House Prices Drop So Quickly?

Why Did House Prices Drop So Quickly? Why Did House Prices Drop So Quickly? David Barker April 26, 2009 Summary: After a long period of stability which ended in the early 1990s, U.S. house prices rose for more than a decade, then suddenly

More information

LIFE EXPECTANCY AND SOCIAL SECURITY: WHY LONGEVITY INDEXING THE PAYROLL TAX RATE MAKES GOOD ECONOMIC SENSE. Abstract

LIFE EXPECTANCY AND SOCIAL SECURITY: WHY LONGEVITY INDEXING THE PAYROLL TAX RATE MAKES GOOD ECONOMIC SENSE. Abstract LIFE EXPECTANCY AND SOCIAL SECURITY: WHY LONGEVITY INDEXING THE PAYROLL TAX RATE MAKES GOOD ECONOMIC SENSE Abstract This paper examines the economic case for indexing the payroll tax to longevity. Over

More information

2012 Protection Gap Study - Singapore

2012 Protection Gap Study - Singapore Life Insurance Association Singapore 2012 Protection Gap Study - Singapore End of 2011 Protection Gap 28 August 2012 Life Insurance Association Singapore i Table of Contents Section 1 : Executive Summary...1

More information

WORKING P A P E R. Unequal Giving. Monetary Gifts to Children Across Countries and Over Time JULIE ZISSIMOPOULOS JAMES P. SMITH WR-723.

WORKING P A P E R. Unequal Giving. Monetary Gifts to Children Across Countries and Over Time JULIE ZISSIMOPOULOS JAMES P. SMITH WR-723. WORKING P A P E R Unequal Giving Monetary Gifts to Children Across Countries and Over Time JULIE ZISSIMOPOULOS JAMES P. SMITH WR-723 December 2009 This paper series made possible by the NIA funded RAND

More information

PENSIONS POLICY INSTITUTE. Retirement income and assets: outlook for the future

PENSIONS POLICY INSTITUTE. Retirement income and assets: outlook for the future Retirement income and assets: outlook for the future The PPI is grateful for the support of the following sponsors of this project: Sponsorship has been given to help fund the research, and does not necessarily

More information

Reallocation of Resources Across Age in a Comparative European Setting

Reallocation of Resources Across Age in a Comparative European Setting Reallocation of Resources Across in a Comparative European Setting Working Paper no 3 Authors: Bernhard Hammer (TU WIEN), Alexia Prskawetz (TU WIEN), Inga Freund (TU WIEN) March 24 Authors: Bernhard Hammer

More information

HELP Interest Rate Options: Equity and Costs

HELP Interest Rate Options: Equity and Costs HELP Interest Rate Options: Equity and Costs Bruce Chapman and Timothy Higgins July 2014 Abstract This document presents analysis and discussion of the implications of bond indexation on HELP debt. This

More information

FEDERAL RESERVE BULLETIN

FEDERAL RESERVE BULLETIN FEDERAL RESERVE BULLETIN VOLUME 38 May 1952 NUMBER 5 Business expenditures for new plant and equipment and for inventory reached a new record level in 1951 together, they exceeded the previous year's total

More information

Rare Events and Annuity Market Participation

Rare Events and Annuity Market Participation Rare Events and Annuity Market Participation Paula Lopes London School of Economics and FMG and Alexander Michaelides London School of Economics, CEPR and FMG November 2005 We thank Edmund Cannon, Frank

More information

READING 14: LIFETIME FINANCIAL ADVICE: HUMAN CAPITAL, ASSET ALLOCATION, AND INSURANCE

READING 14: LIFETIME FINANCIAL ADVICE: HUMAN CAPITAL, ASSET ALLOCATION, AND INSURANCE READING 14: LIFETIME FINANCIAL ADVICE: HUMAN CAPITAL, ASSET ALLOCATION, AND INSURANCE Introduction (optional) The education and skills that we build over this first stage of our lives not only determine

More information

How To Understand The Economic And Social Costs Of Living In Australia

How To Understand The Economic And Social Costs Of Living In Australia Australia s retirement provision: the decumulation challenge John Piggott Director CEPAR Outline of talk Introduction to Australian retirement policy Issues in Longevity Current retirement products in

More information

How To Calculate The Total Product Of An Economic System

How To Calculate The Total Product Of An Economic System This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: The Measurement of Saving, Investment, and Wealth Volume Author/Editor: Robert E. Lipsey

More information

THE TAX-FREE SAVINGS ACCOUNT

THE TAX-FREE SAVINGS ACCOUNT THE TAX-FREE SAVINGS ACCOUNT The 2008 federal budget introduced the Tax-Free Savings Account (TFSA) for individuals beginning in 2009. The TFSA allows you to set money aside without paying tax on the income

More information

T1 Model Flow Diagrams

T1 Model Flow Diagrams Slide 1 T1 Model Flow Diagrams M.C. McCracken Nancy Cebryk Informetrica Limited November 2003 Slide 2 T1 Flows (11/03) Demography Stocks of Wealth Final Demand Foreign Linkages Disposable Incomes Government

More information

Demographic Implications for Capital Markets Euromoney Conference 2005 Rome, September 6

Demographic Implications for Capital Markets Euromoney Conference 2005 Rome, September 6 Demographic Implications for Capital Markets Euromoney Conference 2005 Rome, September 6 Stefan Schneider Chief International Economist Structure Demographic trends and their drivers Population dynamics

More information

a) Aggregate Demand (AD) and Aggregate Supply (AS) analysis

a) Aggregate Demand (AD) and Aggregate Supply (AS) analysis a) Aggregate Demand (AD) and Aggregate Supply (AS) analysis Determinants of AD: Aggregate demand is the total demand in the economy. It measures spending on goods and services by consumers, firms, the

More information

The Optimal Mix of Traditional and Roth Retirement Accounts with Progressive Taxation

The Optimal Mix of Traditional and Roth Retirement Accounts with Progressive Taxation The Optimal Mix of Traditional and Roth Retirement Accounts with Progressive Taxation By Philip Sprunger Department of Economics Lycoming College Williamsport, PA 770 USA sprunger@lycoming.edu Phone: 570-3-478

More information

Study Questions for Chapter 9 (Answer Sheet)

Study Questions for Chapter 9 (Answer Sheet) DEREE COLLEGE DEPARTMENT OF ECONOMICS EC 1101 PRINCIPLES OF ECONOMICS II FALL SEMESTER 2002 M-W-F 13:00-13:50 Dr. Andreas Kontoleon Office hours: Contact: a.kontoleon@ucl.ac.uk Wednesdays 15:00-17:00 Study

More information

ANSWERS TO END-OF-CHAPTER QUESTIONS

ANSWERS TO END-OF-CHAPTER QUESTIONS ANSWERS TO END-OF-CHAPTER QUESTIONS 9-1 Explain what relationships are shown by (a) the consumption schedule, (b) the saving schedule, (c) the investment-demand curve, and (d) the investment schedule.

More information

Economic Dependency Ratios: Present Situation and Future Scenarios

Economic Dependency Ratios: Present Situation and Future Scenarios RESEARCH GROUP ECONOMICS Institute of Mathematical Methods in Economics Economic Dependency Ratios: Present Situation and Future Scenarios December 2014 by Elke Loichinger Bernhard Hammer Alexia Prskawetz

More information

The Elasticity of Taxable Income: A Non-Technical Summary

The Elasticity of Taxable Income: A Non-Technical Summary The Elasticity of Taxable Income: A Non-Technical Summary John Creedy The University of Melbourne Abstract This paper provides a non-technical summary of the concept of the elasticity of taxable income,

More information

4. Work and retirement

4. Work and retirement 4. Work and retirement James Banks Institute for Fiscal Studies and University College London María Casanova Institute for Fiscal Studies and University College London Amongst other things, the analysis

More information

Female labor supply as insurance against idiosyncratic risk

Female labor supply as insurance against idiosyncratic risk Female labor supply as insurance against idiosyncratic risk Orazio Attanasio, University College London and IFS Hamish Low, University of Cambridge and IFS Virginia Sánchez-Marcos, Universidad de Cantabria

More information

An update on the level and distribution of retirement savings

An update on the level and distribution of retirement savings ASFA Research and Resource Centre An update on the level and distribution of retirement savings Ross Clare Director of Research March 2014 The Association of Superannuation Funds of Australia Limited (ASFA)

More information

The Determinants of Saving: Lessons from Italy

The Determinants of Saving: Lessons from Italy Inter-American Development Bank Office of the Chief Economist Research Network Working Paper R-313 November 1997 The Determinants of Saving: Lessons from Italy Tullio Jappelli* and Marco Pagano* Paper

More information

The Age-Saving Profile and the Life-Cycle Hypothesis

The Age-Saving Profile and the Life-Cycle Hypothesis CENTRO STUDI IN ECONOMIA E FINANZA CENTRE FOR STUDIES IN ECONOMICS AND FINANCE WORKING PAPER no. The Age-Saving Profile and the Life-Cycle Hypothesis Tullio Jappelli and Franco Modigliani November 8 DIPARTIMENTO

More information

SAMA Working Paper: POPULATION AGING IN SAUDI ARABIA. February 2015. Hussain I. Abusaaq. Economic Research Department. Saudi Arabian Monetary Agency

SAMA Working Paper: POPULATION AGING IN SAUDI ARABIA. February 2015. Hussain I. Abusaaq. Economic Research Department. Saudi Arabian Monetary Agency WP/15/2 SAMA Working Paper: POPULATION AGING IN SAUDI ARABIA February 2015 By Hussain I. Abusaaq Economic Research Department Saudi Arabian Monetary Agency Saudi Arabian Monetary Agency The views expressed

More information

Efficient Retirement Life Insurance - The Bernheimian Case Study

Efficient Retirement Life Insurance - The Bernheimian Case Study INTRODUCTION It is well established in the economics literature that annuities ought to be of substantial value to life-cycle consumers who face an uncertain date of death. Yaari (1965) proved that a life-cycle

More information

Changes to National Accounts: The Impact of the Changes to the Treatment of Pensions in the National Accounts

Changes to National Accounts: The Impact of the Changes to the Treatment of Pensions in the National Accounts Changes to National Accounts: The Impact of the Changes to the Treatment of Pensions in the National Accounts Authors: Robbie Jones and David Matthews Date: 17 September 2014 1 Introduction The UK National

More information

Volume URL: http://www.nber.org/books/feld87-2. Chapter Title: Individual Retirement Accounts and Saving

Volume URL: http://www.nber.org/books/feld87-2. Chapter Title: Individual Retirement Accounts and Saving This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Taxes and Capital Formation Volume Author/Editor: Martin Feldstein, ed. Volume Publisher:

More information

TECHNICAL NOTE TRANSFERRING US 401K AND IRA ACCOUNTS TO AUSTRALIA

TECHNICAL NOTE TRANSFERRING US 401K AND IRA ACCOUNTS TO AUSTRALIA NetActuary.com.au Retirement Solutions Actuaries TECHNICAL NOTE TRANSFERRING US 401K AND IRA ACCOUNTS TO AUSTRALIA ITEM 1. Introduction and Overview 2. US Fund Withdrawals 3. Types of US Retirement Funds

More information

OECD PROJECT ON FINANCIAL INCENTIVES AND RETIREMENT SAVINGS Project Outline 2014-2016

OECD PROJECT ON FINANCIAL INCENTIVES AND RETIREMENT SAVINGS Project Outline 2014-2016 OECD PROJECT ON FINANCIAL INCENTIVES AND RETIREMENT SAVINGS Project Outline 2014-2016 The OECD argues in favour of complementary private pension savings to boost overall saving for retirement. Financial

More information

FISCAL INCENTIVES AND RETIREMENT SAVINGS Project Outline 2014-2015

FISCAL INCENTIVES AND RETIREMENT SAVINGS Project Outline 2014-2015 FISCAL INCENTIVES AND RETIREMENT SAVINGS Project Outline 2014-2015 The OECD argues in favour of complementary private pension savings to boost overall saving for retirement. Financial incentives may be

More information

Retirement Planning Software and Post-Retirement Risks: Highlights Report

Retirement Planning Software and Post-Retirement Risks: Highlights Report Retirement Planning Software and Post-Retirement Risks: Highlights Report DECEMBER 2009 SPONSORED BY PREPARED BY John A. Turner Pension Policy Center Hazel A. Witte, JD This report provides a summary of

More information

A New Way To Assess Damages For Loss Of Future Earnings

A New Way To Assess Damages For Loss Of Future Earnings A New Way To Assess Damages For Loss Of Future Earnings Richard Lewis, Robert McNabb and Victoria Wass describe research which reveals claimants to have been under-compensated by tort This article summarises

More information

When will the Fund become cash flow negative?

When will the Fund become cash flow negative? LONDON BOROUGH OF BARKING AND DAGENHAM PENSION FUND 001 When will the Fund become cash flow negative? Addressee This paper is addressed to the Officers and Elected Members of London Borough of Barking

More information

Life Assurance (Provision of Information) Regulations, 2001

Life Assurance (Provision of Information) Regulations, 2001 ACTUARIAL STANDARD OF PRACTICE LA-8 LIFE ASSURANCE PRODUCT INFORMATION Classification Mandatory MEMBERS ARE REMINDED THAT THEY MUST ALWAYS COMPLY WITH THE CODE OF PROFESSIONAL CONDUCT AND THAT ACTUARIAL

More information

Financial protection for you and your family

Financial protection for you and your family Financial protection for you and your family Introduction Most of us believe life and other forms of protection insurance is a good thing. Protecting your family should underpin financial planning and

More information

FAMILY FORTUNES A GUIDE TO SAVING FOR RETIREMENT. A Discussion Meeting. Discussion Topics

FAMILY FORTUNES A GUIDE TO SAVING FOR RETIREMENT. A Discussion Meeting. Discussion Topics FAMILY FORTUNES A GUIDE TO SAVING FOR RETIREMENT A Discussion Meeting [Held by the Institute of Actuaries, 22 April 2002] Discussion Topics 1 Financial Institutions are increasingly faced with the problems

More information

THE IMPORTANCE OF INCENTIVES IN INFLUENCING PRIVATE RETIREMENT SAVING: KNOWN KNOWNS AND KNOWN UNKNOWNS

THE IMPORTANCE OF INCENTIVES IN INFLUENCING PRIVATE RETIREMENT SAVING: KNOWN KNOWNS AND KNOWN UNKNOWNS THE IMPORTANCE OF INCENTIVES IN INFLUENCING PRIVATE RETIREMENT SAVING: KNOWN KNOWNS AND KNOWN UNKNOWNS Richard Blundell Carl Emmerson Matthew Wakefield THE INSTITUTE FOR FISCAL STUDIES WP06/09 The importance

More information

Chapter 1. Introduction

Chapter 1. Introduction Chapter 1 Introduction What is productivity, how is it measured and why is it important? These questions are a useful starting point from which we can define and explain the range of productivity measures

More information

Current Ratio - General Fund

Current Ratio - General Fund Current Ratio - General Fund Are General Fund expenses able to be paid as they come due? Description: This measure is designed to focus on the liquidity position of the County s General Fund that has arisen

More information

A Guide to the Pension Options

A Guide to the Pension Options A Guide to the Pension Options James A. Chalfant and Helen L. Henry 1 Explanatory note: the purpose of this document is to go beyond the requests for tables showing simple, hypothetical results for new

More information

Inequality, Mobility and Income Distribution Comparisons

Inequality, Mobility and Income Distribution Comparisons Fiscal Studies (1997) vol. 18, no. 3, pp. 93 30 Inequality, Mobility and Income Distribution Comparisons JOHN CREEDY * Abstract his paper examines the relationship between the cross-sectional and lifetime

More information

Long Run Growth and Redistribution in the Italian Social Security System

Long Run Growth and Redistribution in the Italian Social Security System Long Run Growth and Redistribution in the Italian Social Security System Carlo Mazzaferro University of Bologna (Italy) and CAPP Marcello Morciano University of East Anglia (UK), Institute for Social and

More information

e-brief The Piggy Bank Index: Matching Canadians Saving Rates to Their Retirement Dreams

e-brief The Piggy Bank Index: Matching Canadians Saving Rates to Their Retirement Dreams e-brief March 1, 2010 PENSION PAPERS I N D E P E N D E N T R E A S O N E D R E L E V A N T The Piggy Bank Index: Matching Canadians Saving s to Their Dreams By David A. Dodge, Alexandre Laurin and Colin

More information

How To Encourage People To Save

How To Encourage People To Save Beyond Tax Relief - a new savings incentive framework Dr. Ros Altmann Currently the UK has relatively high per capita retirement savings - higher than most of Europe. The development of a *strong pension

More information

COMMONWEALTH EXPENDITURE ASSOCIATED WITH RETIREMENT (SUBCLASS 410) VISA

COMMONWEALTH EXPENDITURE ASSOCIATED WITH RETIREMENT (SUBCLASS 410) VISA COMMONWEALTH EXPENDITURE ASSOCIATED WITH RETIREMENT (SUBCLASS 410) VISA Copyright Statement Commonwealth of Australia, 2011 This copyright work is licensed under a Creative Commons Attribution - No Derivatives

More information

Assessing the social and economic impact of affordable housing investment

Assessing the social and economic impact of affordable housing investment Assessing the social and economic impact of affordable housing investment A REPORT PREPARED FOR G15 AND THE NATIONAL HOUSING FEDERATION September 2014 Frontier Economics Ltd, London. September 2014 Frontier

More information

CAVENDISH EQUITY RELEASE. The Essential Guide. Equity Release TRUSTED & IMPARTIAL ADVICE SINCE 1985

CAVENDISH EQUITY RELEASE. The Essential Guide. Equity Release TRUSTED & IMPARTIAL ADVICE SINCE 1985 CAVENDISH Equity Release TRUSTED & IMPARTIAL ADVICE SINCE 1985 EQUITY RELEASE The Essential Guide INDEX Welcome to Cavendish Equity Release 3 How can Equity Release be used? 4 Why is specialist advice

More information

welfare services be likely to have on different parts of the population?

welfare services be likely to have on different parts of the population? JANUARY 1999 Key questions and concepts In its April 1998 Green Paper on welfare reform, the new Government argues that its policy reforms will follow a third way : The welfare state now faces a choice

More information

EXTERNAL DEBT AND LIABILITIES OF INDUSTRIAL COUNTRIES. Mark Rider. Research Discussion Paper 9405. November 1994. Economic Research Department

EXTERNAL DEBT AND LIABILITIES OF INDUSTRIAL COUNTRIES. Mark Rider. Research Discussion Paper 9405. November 1994. Economic Research Department EXTERNAL DEBT AND LIABILITIES OF INDUSTRIAL COUNTRIES Mark Rider Research Discussion Paper 9405 November 1994 Economic Research Department Reserve Bank of Australia I would like to thank Sally Banguis

More information

ALL YOU NEED TO KNOW.

ALL YOU NEED TO KNOW. LIFETIME MORTGAGE LIFETIME MORTGAGES ALL YOU NEED TO KNOW 1 ALL YOU NEED TO KNOW. 2 LIFETIME MORTGAGES ALL YOU NEED TO KNOW CONTENTS 1. IntrODUCTION 2. AbOUT lifetime mortgages 3. FeaturES of our lifetime

More information

Q1 1990 Q1 1996 Q1 2002 Q1 2008 Q1

Q1 1990 Q1 1996 Q1 2002 Q1 2008 Q1 August 2015 Canada s debt burden By Richard J. Wylie, CFA Vice-President, Investment Strategy, Assante Wealth Management Much ink has been spilled over the past several years regarding the extent of the

More information

INTRODUCTION. DONALD DUVAL Director of Research AON Consulting, United Kingdom

INTRODUCTION. DONALD DUVAL Director of Research AON Consulting, United Kingdom DONALD DUVAL Director of Research AON Consulting, United Kingdom INTRODUCTION I have a rather narrower subject matter than David and inevitably some of what I am going to say actually goes over the grounds

More information

Insurance and Pension Funding Industry, Except Compulsory Social Services Review

Insurance and Pension Funding Industry, Except Compulsory Social Services Review Methodology of the Monthly Index of Services Insurance and Pension Funding Industry, Except Compulsory Social Services Review Introduction At the launch of the experimental Index of Services (IoS) in December

More information

Demographic Change and the UK Savings Rate. David Demery and Nigel W. Duck. Discussion Paper No 03/550

Demographic Change and the UK Savings Rate. David Demery and Nigel W. Duck. Discussion Paper No 03/550 Demographic Change and the UK Savings Rate David Demery and Nigel W. Duck February 2003 Discussion Paper No 03/550 Department of Economics University of Bristol 8 Woodland Road Bristol BS8 1TN UK Demographic

More information

The Future of Australia - An Accounting Analysis

The Future of Australia - An Accounting Analysis What is an intergenerational report? An intergenerational report assesses the long term sustainability of Commonwealth finances. It examines the impact of current policies and trends, including population

More information