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It's commonplace to worry about the financial habits of today's young people, particularly about whether they save as much as they "should". But we actually have had very little information about the saving behaviour of people at different ages or of different generations in New Zealand. An article I wrote in a recent edition of the New Zealand Economic Papers looks at how saving rates vary according to age and generation, and it came to some surprising conclusions.
The analysis draws on data from 1984 to 2010 in the Household Economic Survey, the one data set we have that provides disaggregated saving data over time. The chart below summarises the results. Each line in the chart shows the average saving rate of a generation of New Zealand households at different ages. For example, the chart shows that households with a household head born between 1960 and 1969 saved at average rates of around 5 per cent during their twenties.[1]
- 10-year-birth cohort average saving rates by age of household head
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The chart shows that younger New Zealand households do indeed generally have lower saving rates than middle-aged and older households, consistent with the common perception. This pattern is also consistent with the predictions of economic theory, based on the idea that people like to “smooth” their expenditure on consumption over their lifetime. In other words, it makes sense for a person to save less (or borrow) when their income is low as a young person, and to save more (and/or pay off debts) when they start to earn more later in life. The chart also shows that saving rates fall for older households. This, again, is consistent with what one would expect as older people work less and draw down on their savings.
A surprising feature of the data is that the saving rates of younger generations appear to be generally higher than those of the generations preceding them. To check this result I used a variety of econometric techniques, and all suggested that this pattern is robust. Contrary to popular opinion, successive generations of households appear to be saving at significantly higher rates than earlier generations did at the same age. One plausible explanation for this rise in saving rates, supported by other related research, is that it reflects the precautionary response of younger generations to an economic environment with higher unemployment and less generous public welfare than faced by their parents.
There are some unexplainable differences between the overall saving rate trends in the Household Economic Survey and other total household saving rates measures. These differences represent a caveat to the results. However, given we have no other household-level data (and so no information to the contrary), these findings at least warn against claiming that today’s young people have relatively low rates of saving. The results also offer a reason to believe that the trend in New Zealand’s aggregate household saving rate may increase over the next decade or two as higher-saving younger generations begin to represent a larger share of the economy.
Notes
- [1] The household head is defined here as the household member with the highest income. However, defining the head of the household in other ways (such as the oldest household member) does not change the overall saving patterns shown.
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Treasury Staff Insights: Rangitaki
See Treasury Staff Insights: Rangitaki for other articles in this series.