Household saving behaviour in the Netherlands has attracted much attention in recent years. On the one hand, savings deposits mounted considerably, feeding the assumption that more of these savings could be used for consumer spending. On the other hand, Dutch households were overdrawn more frequently and spent more than they earned over the past few years. Are we looking at a savings paradox? Household saving behaviour in the Netherlands is described in terms of two savings definitions: (i) active saving by not consuming income, and (ii) passive saving through capital appreciation. An analysis using the DNB Household Survey, which contains detailed information on households financial behaviour, shows that both savings definitions are interconnected. Active savings are highly sensitive to financial developments, increasing when equity prices fall, and vice versa. This demonstrates that saving behaviour is not as paradoxical as it may appear.
Introduction Household saving behaviour has been quite a brainteaser in recent years. For one, households were expected to draw on more of their savings to fund consumer spending than they actually did. The underlying idea was that households were overly pessimistic about the prospects for the Dutch economy, and that this lack in confidence had in part generated the greater appetite for savings. Consumer confidence has been exceptionally low since mid-22 (Chart 1), and households savings deposits have expanded between 21 and 24 from eur 14 billion to eur 2 billion (Chart 2). The theory was supported by the National Accounts, which present a statistical overview of all economic activity in the Netherlands. According to the 23 edition, household savings as a percentage of disposable income were virtually stable in the years 21-23, partly explaining the weaker contribution of household spending to economic growth in recent years. However, other data show that households have not much tightened their purse strings at all. Surveys by Statistics Netherlands indicate that the number of households saying they can just about make ends meet has risen over the past few years. In addition, more households are overdrawn on their current account. And according to the National Accounts as revised in 25, households expenditure in 23 and 24 exceeded their disposable income. So households actually dissaved during those years. These developments appear to contradict each other. This article sets out the development in household saving in recent years, relating changes in households savings deposits to financial market developments, and Chart 1 Consumer confidence Monthly data; seasonally adjusted 3 2 1-1 -2-3 -4 95 97 99 1 3 5 Note: Balance of positive and negative responses. Source: Statistics Netherlands. demonstrating that this connection can explain saving behaviour to some extent. Two savings definitions Active saving is not consuming According to an old saying, savings are for a rainy day. In other words, savings are that part of your income that you do not consume immediately but put aside for the future. The macroeconomic term closest to this savings definition is individual savings: each individual decides whether he wants to save, and if so, how much. For all Dutch households collectively, individual savings are calculated as disposable income minus consumer spending. Disposable income is what remains of salary income after deduction of tax and contributions. Individual savings are hence calculated as a residual item, and so are extremely sensitive to revisions. Box 1 gives more details on how the recent revision of the National Accounts has impacted on household savings. Besides individual savings, there are also so-termed collective savings, measured as the net total of pension premiums and pension payments. Collective schemes determine how much households save. The sum of individual and collective savings equals total household savings in a given year. These savings reflect households active dealings in the financial markets. Chart 4 presents the evolution of individual, collective and total savings, expressed as a percentage of disposable income. 1 Collective savings account for a major share in total savings, averaging 7% in the 198s and 199s. This reflects the Dutch pension system, in which occupational pensions are financed through capital funding under the so-termed second pillar, meaning that part of current income is saved collectively for a specific objective: retirement. Another striking development is the decline in total savings as a percentage of disposable income throughout the 199s, a trend that can also be observed in other industrialised countries 2 and has yet to be satisfactorily explained. The path of collective savings was influenced by the pension funds premium policies. Premium holidays occurred in the 199s, whereas recent years have seen sharp increases in premiums. Other explanations, relating to total savings, range from changes in the age structure of the population, changing composition of households, and wealth effects (which we will return to later). Since older people generally dissave, the savings of the total population will decline if older people make up a greater share of the population. Single-parent households are often 44 DNB / Quarterly Bulletin March 26
Chart 2 Evolution of households savings deposits eur billion, annual changes 22 2 18 16 14 12 1 98 99 1 2 3 4 5 14 12 1 8 6 4 2 eur billion Percentage changes, right-hand scale Source: dnb. unable to put much savings aside. The more such households there are, the lower the savings of the population as a whole. Notably individual savings have decreased sharply in the Netherlands. This is the downside of the brisk growth in consumer spending, which in the second half of the 199s was propelled especially by the exuberant expansion in world trade and the release of home equity. 4 The rapid growth in world trade gave a strong boost to Dutch exports, and consequently to the income earned in the export sector. For the first time in 2, and again in 23 and 24, individual savings moved into negative figures, implying that households spending exceeded their disposable income. This development is expected to continue in 25 and 26. The saving rate is expected to become less negative in 26, however, since owing in part to the pick-up in the labour market - disposable income in that year will grow at a faster pace than consumer spending. How can households spend more than they earn? That brings us to a second supplementary savings definition. Passive saving through capital appreciation Saving can also be seen as accruing wealth. This capital can be drawn on at a later stage to finance consumer spending. Wealth is partly amassed by putting money that is not spent on consumer goods into equities or a Box 1 Revision to National Accounts 3 Statistics Netherlands last year revised the data in the National Accounts (na) in two ways. For the year 21, the level of Gross Domestic Product (gdp) and other macroeconomic statistics were recalculated using readjusted methods and data sources. The growth figures for the years 22-24 were revised too. Chart 3 plots the individual saving rate over the period 21-24 according to the new na (24) and the former na (23). In the new na, both private consumption and households disposable income in 21 have been revised upwards by around eur 12 billion. The saving rate remained more or less unchanged in that year. Over the years 22-24, the individual saving rate in the new na traces a marked decline. The reason is that Statistics Netherlands lowered its estimate of income from pensions and life insurance policies on the strength of better data, whereas it raised its estimate of pension and social security contributions. The increase in disposable income was therefore lower, whereas the growth estimate for private consumption remained virtually unchanged. DNB / Quarterly Bulletin March 26 45
Chart 3 Individual savings of households Percentages of disposable income Chart 5 Change in household financial wealth eur billion 3 2 1-1 -2 1 5-5 -1-3 1 2 3 4-15 1 2 3 4 na 23 na 24 Note: na is National Accounts. Source: Statistics Netherlands. Chart 4 Savings in the Netherlands Percentages of disposable income 17.5 15 12.5 1 7.5 5 2.5-2.5 Individual savings 8 82 84 86 88 9 92 94 96 98 2 4 Collective savings Total savings Source: National Bureau for Economic Policy Analysis. Financial transactions (claims) Changes in value Debts (-) Source: Statistics Netherlands (National Accounts 24). Net changes in wealth savings account. But wealth can also grow if the assets increase in value. A distinction can be made between financial wealth and non-financial wealth. Financial wealth includes savings deposits, equities and pension provisions. Chart 5 presents the change in households net financial wealth for the years 21-24. The change in net financial wealth is the net result of changes in assets on the one hand and changes in household debt on the other. Net financial wealth declined in 21 and 22 and increased again in 23 and 24. The contribution of household debt was negative in each of those years, so total debt has gradually increased. This is mainly because households have taken out more mortgage loans, partly based on previous appreciation in real estate values. Looking at the change in wealth, an important distinction can be drawn between the net outcome of sales and purchases on the one hand (financial transactions) and value changes on the other. The net outcome of sales and purchases reflects households active dealings in the financial markets. This is often referred to as active savings, see above. Examples are the purchase of equities or withdrawals from a savings account (this is active dissaving). In contrast, the changes in value in any given investment portfolio lie beyond households sphere of influence, and are hence often referred to as passive savings. Cases in point are changes ensuing from developments in equity prices. 5 These passive savings have exhibited sharp fluctuations in recent years. In 21 and 22 the aex declined by 2% and 36% respectively (Chart 6), depressing the value of equities owned directly by households. Indirect holdings, in the form of pension provisions, also declined sharply in value since pension funds invest part of the resources, entrusted to them in pension contributions, in equities. The aex recovered in 23 and 24 and the value of equity holdings rose again. A background factor is that investing gained in popularity in the 199s, swelling the amount of equities owned by households. Consequently, a change in the price of equities now has 46 DNB / Quarterly Bulletin March 26
Chart 6 aex index Percentage changes on previous corresponding period; end-of-year figures 3 2 1-1 -2-3 Chart 7 Price development of private homes Percentage changes 25 2 15 1 5-4 1 2 3 4 5 97 98 99 1 2 3 4 5 Source: Thomson Financial. a greater effect on household wealth than a similar change had in the past. Although figures for the development of household financial wealth over 25 are not yet available, the sharp increase in the aex indicates that equity holdings 25 have further increased in value. An important source of non-financial wealth is home ownership. 6 Over the years 21-24, house prices rose by around 6% annually (Chart 7). Like the value appreciation in equity holdings, this too can be seen as passive saving. On the other hand, outstanding mortgage debt also increased over this period, from eur 318 billion in 21 to eur 428 billion in 24. On balance, net wealth from home ownership nonetheless increased by around eur 5 billion. 7 It should be noted that, according to the National Accounts, households financial wealth includes outstanding mortgage debt but not home ownership. We can thus conclude that, as measured by the National Accounts, Dutch households actively dissaved in 23 and 24, whereas their net wealth position passively improved considerably over the same period. But it is dangerous to look exclusively at passive savings when analysing household savings, or to reach a net total of active and passive savings. Owing to the vast changes in wealth, passive savings, expressed as a percentage of disposable income, are particularly volatile. This makes it difficult to interpret changes from one year to the next. In addition, it is possible that households do not immediately see a value appreciation in their equity holdings as savings. Whether the appreciation in value is temporary or permanent cannot be judged in advance. Only if the appreciation is permanent may it be used for consumer spending, now and in the future. In that case, households will use a greater Source: Kadaster (Dutch Land Registry Office). part of their disposable income directly for consumer spending, and active savings will decrease. By relating the development in active savings to changes in wealth, we can examine the extent to which households really view the value appreciation in their capital as savings. In other words, do households view active savings and passive savings partly as communicating vessels? Effect of wealth on saving in industrialised countries Much research has been conducted into the effect of changes in asset prices on active saving by households in the United States. Over the past 15 years, savings by us households as a percentage of disposable income have declined sharply, from around 6% in 199 to -.5% in 25 (Chart 8). In the same period, both equity prices and house prices increased markedly (Chart 9). Juster et al (26) demonstrate that this decrease in the saving rate can largely be attributed to the surge in equity prices. According to Parker (1999), another factor is that us households have become more optimistic about the future, and have consequently stepped up their current consumption. However, this increased optimism partly reflects the rising equity prices. Jansen and Nahuis (23) show that consumer confidence, particularly in relation to the general economic situation in a country, improves as equity prices move upwards. Benjamin et al (24) stress that us households are particularly sensitive to changes in housing wealth. This notably explains the recent path of the saving rate in the United States. The persistent increase in house prices in recent years is partly why the saving rate did not climb up in DNB / Quarterly Bulletin March 26 47
Chart 8 United States household saving rate Percentages of disposable income 7 6 5 4 3 2 1-1 9 95 5 Source: Thomson Financial. response to the plunge in equity prices in the years 21-23. Quantitative estimates of the effect of a change in financial wealth on saving in the United States diverge widely in practice, but generally range between.3 and.7. This means that if a household sees its wealth expanding by 1 dollars, it will actively save three to seven dollars less. In drawing up these estimates it is generally unknown whether households perceive the change in their financial wealth to be permanent or temporary. The estimates should hence simply be seen as averages, for both the households and the various changes in the actual assets. One household may be quicker to view a rise in equity prices as permanent than Chart 9 us equity and house prices Index 199=1 5 4 3 2 1 s&p5 9 95 5 House price index, right-hand scale Source: Thomson Financial. 22 19 16 13 1 another, perhaps because it has not yet experienced a significant stockmarket slump. On the other hand, if a climb in equity prices can be attributed to higher productivity growth, more households will see this increase as permanent than would be the case if the increase appeared inexplicable. Faster productivity growth enables enterprises to push up profitability, and this will be reflected in higher equity prices. The influence of stockmarket fluctuations on household saving depends in part on the share of equities in total household assets. In Anglo-Saxon countries such as Canada and the United Kingdom, where equity holdings by households is more or less just as widespread as in the United States, the effect of changes in financial assets on savings can be compared to that in the us. The effect in continental European countries is often less noticeable (Bertaut, 22, Paiella, 24). In the euro area, the value of equities held directly by households in 23 was equivalent to around 5% of gdp, whereas it amounted to 15% in the United States. The wealth effect on saving in the Netherlands This section looks at whether there is a link in the Netherlands between changes in the value of financial investments in equities, bonds and mutual funds on the one hand (passive saving), and active saving on the other. A complication in exposing such a connection is that in the Netherlands, as in many other European countries, ownership of these financial products has only become popular over the past twenty years. Mutual funds, which allow investors to spread their risk for a small fee, have encouraged widespread equity holdings across the population. The intensified competition and formation of conglomerates in the Dutch financial sector may also have contributed to the development of more products with an investment component. It would hence make little sense to use data from the 198s or earlier decades when researching this topic. So as to nonetheless have enough observations to establish the effect of changes in the value of financial investments on savings deposits with some accuracy, we used the data for individual households from the dnb Household Survey (dhs). dhs contains detailed information on the financial situation and the financial behaviour of households. More than 15 households respond annually to questions on income, expenditure, possessions and debts. The survey defines household savings as the change in the balance on savings and current accounts, supple- 48 DNB / Quarterly Bulletin March 26
mented by the sale and purchase of equities, bonds and participations in mutual funds. This approximates active savings: that part of disposable income that is not used for consumption but is put into a savings account or invested. Besides the change in the balance of savings deposits, it is important to consider the sales and purchases of financial investments too. An example serves as illustration: say that a household becomes more risk-averse at a given moment, for example if equity prices plummeted. If the household responds by selling equities, putting the gains in a savings account, it may at first appear as if the household has begun to save more. But what has actually happened is that the household is simply saving in a different way, namely with less risk. We have adjusted for this portfolio effect. The change in value of the financial investments was determined by looking at which financial investments were held by each household at the start of the year and at the price developments in these investments throughout the years. Where specific information on the holdings of financial investments was lacking, the price development was approximated using the course of aggregated indices, such as the aex. We used data over the years 1993-25, the objective being to measure the effect of the changes in the value of financial investments on active savings by households. Active savings depend on many factors. The analysis takes account of total household income, changes in wealth from home ownership, and various demographic characteristics of the household, such as the number of family members and the age and sex of the head of the household. Research into savings behaviour shows that the saving rate of the household rises as the head of the household becomes older, and falls after the head of the household has retired. Families with children generally have less opportunity to save, as do families with low incomes. The test period, 1993-25, covers both the stockmarket boom and the bear period which followed. Consequently, in contrast to many of the studies cited in this article, it is possible to explore whether households react differently to a decline in the value of their financial investments than to an increase. The underlying idea is that risk-averse investors will react more strongly to wealth losses than to an equal amount of wealth gains. Mastrogiacomo (26) shows that Dutch households, when confronted with equal-sized losses and gains, perceive their losses as larger than their gains. Active savings by Dutch households proved to react significantly to changes in the value of their financial investments. 8 Where financial investments appreciate by eur 1, active saving decreases by around eur 8. Where the value decreases by eur 1, active saving increases by around eur 2. Households thus show a markedly stronger reaction to a decline in value of their financial investments than to an increase. The impact of wealth gains is comparable to that of earlier studies as described above, which did not have the option of distinguishing between wealth gains and wealth losses. Although the estimates for individual households presented in this article cannot be translated to savings behaviour by all households at macro-level, they are helpful in interpreting savings behaviour by Dutch households at macro-level over the past few years. Following the stockmarket corrections in the years 2-22 (Chart 6), the growth in savings deposits soared. The increase in savings rose from around 4% annually at the start of 2 to almost 13% at the end of 21 and mid-way 23 (Chart 2), reflecting the proportionately strong reaction by savings to wealth losses. In contrast, the growth in savings deposits declined more gradually when equity prices began to rise again in 23. This also fits in with the estimates presented in this article. Seen in that light, the strong rise in the equity prices in 25 is nonetheless an insufficient explanation for the recovery in private consumption growth in the second half of that year. Conclusions Household savings can be measured in various ways. Analyses of savings behaviour are hence dependent on the chosen approach. If we look jointly at savings according to the definition of the National Accounts and the composition of household wealth, and then consider the connection between both savings definitions, the savings behaviour of Dutch households in recent years is not such a paradox after all. Research shows that Dutch households compensate for falls in equity prices by saving more, whereas they do the reserve, albeit to a lesser extent, when equity prices increase. This in part explains why savings deposits expanded so rapidly when equity prices collapsed in the first years of this millennium. Moreover, it clearly reveals that the dissaving by Dutch households in recent years is partly linked to the strong recovery in equity prices and the continued increase in house prices. Nevertheless, the strong recovery in private consumption in the second half of 25 remains partly a mystery. DNB / Quarterly Bulletin March 26 49
Literature Alessie, R.J.M., Kapteyn, A. and F. Klijn (1997), Mandatory pensions and personal savings in the Netherlands, De Economist. Benjamin, J.D., Chinloy, P. and G. D. Jud (24), Real estate versus financial wealth in consumption, Journal of Real Estate Finance and Economics. Berben, R.P., Bernoth, K. and M. Mastrogiacomo (26), Households response to wealth changes: do gains or losses make a difference?, DNB Working Paper no. 9. Bertaut, C.C. (22), Equity prices, household wealth, and consumption growth in foreign industrial countries: wealth effects in the 199s, Fed ifdp no. 724. Browning, M. and A. Lusardi (1996), Household saving: micro theories and micro facts, Journal of Economic Literature. Netherlands Bureau for Economic Policy Analysis (25), Macro Economic Outlook 26. dnb (24), The origins of growth: the Dutch economy in 1998-26?, DNB Quarterly Bulletin June 24, p. 45-56. Euwals, R. (2), Do mandatory pensions decrease household savings? Evidence for the Netherlands, De Economist. Jansen, W.J. and N. Nahuis (23), The stock market and consumer confidence: European evidence, Economics Letters. Juster, F.Th, Lupton, J.P., Smith, J.P. and F. Stafford (26), The decline in household saving and the wealth effect, Review of Economics and Statistics, due for publication. Mastrogiacomo, M. (26), Asymmetric consumers reaction to wealth changes, cpb discussion paper no. 53. oecd (23), The decline in private saving rates in the 199s in oecd countries, Economic studies no. 36. Paiella, M. (24), Does wealth affect consumption? Evidence for Italy, Banca d Italia working paper no. 51. Parker, J.A., 1999, Spendthrift in America? On two decades of decline in the us saving rate, nber working paper no. 7238. equities and bonds, in the form of dividend and interest, are included in disposable income according to the National Accounts. 6 Besides owner-occupied homes, durable consumption goods, such as cars and boats, may be included in non-financial wealth. Owing to the lack of data, these goods have been left out of consideration. 7 See Netherlands Bureau for Economic Policy Analysis (25). 8 For an extensive statistical analysis see Berben, Bernoth and Mastrogiacomo (26). 1 Disposable income is defined as including collective savings. 2 See oecd (23). 3 See Statistics Netherlands (25) and Netherlands Bureau for Economic Policy Analysis (25). 4 See dnb (24). Pension contributions also declined in the period under review. However, the extent to which this has prompted more or less individual savings is uncertain. (Alessie et al. (1997), Euwals (2)). 5 Value changes in bonds are limited since households have relatively small direct bond holdings. The yield on investments in 5 DNB / Quarterly Bulletin March 26