Savings Rate
The savings rate is the proportion of income that households, or an economy, save rather than consume. For households, it is typically measured as personal saving divided by disposable income, while for an economy, the national saving rate is gross saving divided by gross national income. The savings rate determines the resources available for investment, and it is a central determinant of capital accumulation, growth, and the external position of an economy.
Measurement
Household saving is the difference between disposable income and consumption, and the savings rate is this difference divided by disposable income. The measurement is affected by the treatment of durable goods, of housing, and of pension contributions, which differ across statistical systems. Pension saving, in particular, is treated in different ways, and the measured rate can change substantially depending on whether contributions and benefits are included.
National saving is the sum of household, corporate, and government saving, and it equals gross national income minus consumption and government spending. It is the source of funds for domestic investment and for net foreign investment, and the relationship between national saving and investment determines the current account. The national saving rate is therefore central to the analysis of external balance as well as of capital accumulation.
Determinants
The savings rate depends on several factors. Income and wealth affect saving, with higher-income households saving a larger share of their income. The age structure of the population matters, since saving is concentrated among those of working age, and economies with a large share of dependants tend to have lower savings rates. Uncertainty about the future raises the precautionary motive for saving, increasing the rate.
Institutions and policy also matter. The design of pension systems affects the need for private saving, with generous public pensions reducing the incentive to save. The tax treatment of saving, including the taxation of interest and of capital gains, affects the return and hence the incentive to save. Access to credit allows households to smooth consumption, reducing the need to save, while the absence of credit increases it. The savings rate therefore reflects a combination of preferences, demographics, and institutions.
Implications
The savings rate has implications for growth and for external balance. A higher savings rate provides more resources for investment, supporting the accumulation of capital and, potentially, raising the level of income. Countries with high savings rates tend to have high investment rates, and they may accumulate foreign assets, running current account surpluses. Countries with low savings rates may need to import capital to finance investment, running deficits.
The relationship is not mechanical. The effect of saving on growth depends on the productivity of investment and on the presence of opportunities, and high saving can be wasted if the investment is inefficient. The effect on the external position depends on the relationship between saving and investment, and on the exchange rate regime and capital mobility. The savings rate is therefore an important determinant of outcomes, but it operates in conjunction with other factors.
Policy and debate
Policy debates about the savings rate concern the adequacy of saving for retirement, the external position, and the level of investment. Measures to encourage saving include tax incentives, the design of pension systems, and financial education, and their effectiveness depends on the response of households to incentives. Measures to reduce saving include the provision of social insurance, which reduces the need for precautionary saving, and the expansion of credit.
The debate also concerns the macroeconomic effects of saving. In an economy with spare capacity, an increase in the desire to save can reduce demand and output, the paradox of thrift, while in an economy at full employment, higher saving can free resources for investment. The appropriate rate of saving therefore depends on the state of the economy and on the objectives of policy, and it is not a matter of a single optimal level applicable to all circumstances.
Household saving and wealth accumulation
The household saving rate accumulates into household wealth, which consists of housing, financial assets, and other holdings. The relationship between saving, capital gains on existing assets, and wealth is central to understanding the position of households. Capital gains can raise wealth substantially even when the saving rate is low, and they affect the distribution of wealth, since they accrue to those who hold assets.
The composition of household wealth matters for behaviour. Households whose wealth is concentrated in housing may be more sensitive to house prices and more reliant on credit, while those with financial assets may be more sensitive to equity prices. The distribution of wealth across households is highly unequal, and the behaviour of the wealthiest households therefore has a disproportionate effect on aggregate wealth and, through the wealth effect, on consumption.
Saving and the life cycle
The life-cycle pattern of saving explains much of the variation in saving rates across households and over time. Households save during working years to finance consumption in retirement, and they dissave in old age. The aggregate saving rate therefore depends on the age structure of the population, and economies with a large share of working-age adults tend to have higher saving rates than those with many dependants.
The life-cycle pattern also affects the external position. Economies with a high saving rate tend to invest abroad or to run current account surpluses, while those with low saving invest domestically or import capital. Changes in the age structure, including ageing populations, affect the saving rate and hence the external position, and they are an important consideration in the analysis of long-term fiscal and external sustainability.
Policy and incentives
Policy affects the saving rate through several channels. Tax incentives for retirement saving, including exemptions and deferrals, raise the return and can increase saving, though the effect depends on the response of households and on the extent to which incentives shift saving from one form to another. Public pension systems affect the need for private saving, and generous systems reduce the incentive to save for retirement.
Financial development and access to credit also affect the saving rate. Where credit is available, households can smooth consumption without saving as much, and the saving rate may be lower. Where credit is limited, households must save to finance large purchases, and the saving rate may be higher. The design of the financial system therefore affects the behaviour of households and the level of saving, and it interacts with the design of the pension and tax systems.
The measurement of saving
The measurement of saving is complicated by several issues. The treatment of durable goods, which provide services over time, raises the question of whether their purchase should be treated as consumption or as investment. The treatment of pension contributions and of capital gains raises similar questions, and the measured saving rate can change substantially depending on the conventions.
These measurement issues affect the interpretation of saving rates and of their evolution over time. Comparisons across countries must account for differences in conventions, and comparisons over time within a country must consider changes in the measurement. The analysis of saving therefore requires attention to the definition and to the treatment of the components, and it is informed by the broader system of national accounts.