Guide Life-Cycle Savings and Public Policy: A Cross-National Study of Six Countries

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Research Areas

Abstract Differences in individual wealth holdings are widely viewed as a driving force of economic inequality. Citing Literature. Volume , Issue 1 March Pages Related Information. Close Figure Viewer. Browse All Figures Return to Figure. Previous Figure Next Figure.

Policy Uncertainty and Household Savings

Email or Customer ID. For example, an important public policy question is how government programs that provide income security during retirement affect household savings and wealth accumulation. This is a difficult question to answer using data from a single country, since variation among the individual components of a country's public program are relatively rare, and within-country changes tend not to be dramatic.

In addition, there is a legitimate question about the extent to which within-country changes in program parameters are exogenous. In contrast, variations across countries in the way income security during retirement is provided are much larger, and thus offer considerable statistical power in testing how the design of public income security programs affects household wealth accumulation.

This section first describes what the panel believes are the most salient patterns of household wealth accumulation in the United States. These are the basic facts that theories of household wealth accumulation and savings must be able to explain if they are to be taken seriously as keys to understanding household savings.

We next present a parallel summary of the most salient patterns observed in Europe and Japan, based largely on research results summarized in the papers commissioned for this study. We then examine cross-country variations in wealth levels and wealth inequality and explore some of the explanations for these variations.

Figure highlights some of the more salient attributes of wealth distribution in the United States. The figures shown are based on PSID data, which span the entire age distribution.


It is clear, first, that wealth distribution is extremely unequal in the United States. In sharp contrast, the top 5 percent of households typically have more than 10 times that amount, while the bottom third have virtually no net worth at all.

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If anything, indeed, reliance on PSID leads to a substantial understatement of the extent of wealth inequality since it excludes the super-rich. Distribution of net worth in the United States: Inequality is even more dramatic in financial assets alone see Figure Most American households have very few financial assets, but a few have a great deal.

Research Areas

Median financial wealth is only a few thousand dollars. Distribution of financial wealth in the United States: It is important to understand two basic patterns in household wealth holdings—the age profile and the relation of wealth to household income. Household wealth and household income have distinctive age gradients, but the gradient is much sharper for wealth than for income, so that wealth-income ratios increase over the life cycle. For example, wealth at age 50 is about twice as high as population wealth and about 10 times higher than the wealth of those household heads under age A critical question about the age-wealth gradient concerns whether wealth declines at older ages.

A principal implication of the life-cycle model is that households will eventually dissave during the postretirement period as their consumption exceeds their income. Whether this is in fact the case is much in dispute, in part because of the small samples at this phase of the life cycle and the existence of other contaminating factors, including across-cohort increases in wealth and differential mortality by wealth.

There is no dispute that just before and during retirement, the general pattern of extreme heterogeneity in wealth holdings continues to apply, with many households having almost no household wealth. This generalization is even more accurate with regard to financial assets.

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To what extent can income disparities account for these large wealth disparities? Household income and wealth as well as all key components of wealth are strongly positively related, albeit in a highly nonlinear way. Financial assets and total net worth all increase at a more rapid rate than income as one moves from lower-income to higher-income households. Net worth doubles between the 5th and 7th income deciles, doubles again between the 7th and 9th income deciles, and almost doubles once more between the 9th and 10th deciles.

Households in the highest-income decile have six times the wealth of the median average-income household and almost times as much wealth as those households in the lowest average-income decile. The increases in income across deciles are considerably smaller. Yet it is easy to overemphasize the importance of income in determining household savings behavior and wealth. While not as frequently discussed, the diversity in wealth holdings even among households with similar incomes is enormous.

The within-income diversity of wealth holdings holds true even among households in the lowest-income decile. For a number of reasons, much less is currently known about motives and patterns of wealth accumulation in western Europe than in the United States.

One reason is that European countries have lagged behind the United States in the collection of good household wealth data within their better household surveys. Fortunately, this situation is now changing rapidly in many but not all European countries. The panel took advantage of this positive development by encouraging new research on patterns of wealth accumulation and savings in several European countries. In addition, the Japanese NSFIE, conducted since , provides invaluable information about savings and wealth patterns.

We summarize the most important findings from these studies. Table summarizes data from an OECD report on crosscountry variation in household wealth accumulation. To standardize the comparison as much as possible, the data listed in the table are ratios of wealth to after-tax income for couples around age The variation observed across the countries listed in this table can best be described as enormous. For example, the ratio of total household wealth to after-tax income shown in Table as total net worth ranges from a high of 8 in Japan to a low of 2 in the Netherlands.

On the low end are Sweden and the Netherlands, with ratios around 2, while on the high end are France, Italy, and the United Kingdom, with average ratios of around 5. Considerable variation across these countries can also be observed in ratios of financial wealth to income. In Europe, Germany joins Sweden and the Netherlands in the lower tier, with mean levels of financial wealth representing a half-year or less of income. Why do these countries at roughly similar levels of economic development differ so much in their private wealth holdings?

Vermögen in Europa

Table lists some basic summary statistics on household wealth in the five countries for which the panel commissioned papers. In light of the extreme skew that exists in most wealth distributions, both mean and median levels of household wealth are shown when available. Note that because financial wealth accumulation is of interest in its own right, this table, like Table , provides data for total net worth as well as financial wealth. Among the countries listed in Table , per capita income differences are relatively small.

By comparison, however, cross-national household wealth differences are large. As suggested by Table , the lowest household wealth levels are observed in the Netherlands—well less than half of the levels in Germany and a third of those in Italy. The disparities in financial wealth among the European countries listed are considerably smaller.