Preparing for an Aging World The Case for Cross-National Research (2001) / Chapter Skim
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4. Private Wealth and Income Security: International Comparisons
4. Private Wealth and Income Security: International Comparisons
Pages 102-154
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From page 102... ...
During the last century, industrialized nations responded to the problem of having sufficient income to achieve a decent standard of living during retirement by developing the now-familiar three-tiered system: the primary role of the public tier is to guarantee through governmental transfers at least a minimum income standard during retirement; the second tier is based on employer-provided pensions; and the third tier consists of wealth accumulation through private household savings (see also Chapter 3~. As discussed below, individual countries in North America, Europe, and Asia have placed differing emphasis on these three tiers in devising their own unique schemes.
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From page 103... ...
In this chapter we do not advocate any particular system over others. However, one option that most countries are likely to consider involves relying on individual private savings and wealth accumulation to offset any reductions that may take place in the level of public-tier support.
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From page 104... ...
Because there exists much less research in Europe than in the United States on these issues, we commissioned papers from four European countries, selected on the basis of the following criteria: (1) they currently had wealth data from household surveys that were of sufficient quality to allow something useful to be learned about patterns of household wealth accumulation in the country; (2)
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From page 105... ...
Do institutions and national policies matter for aggregate national savings? An immense literature now exists on motives for wealth accumulation and savings (for an excellent survey, see Browning and Lusardi, 1996~.
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From page 106... ...
At least under some conditions, uncertainty causes individuals to discount future incomes more heavily and to place a high value on social insurance schemes (such as public pension annuities) that reduce risk.
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From page 107... ...
A related but somewhat different aspect of bequests involves the extent to which past inheritances can explain the diversity in current wealth holdings by households. It turns out that financial inheritances received represent but a fraction of total net worth, so that levels and distributions of wealth would be largely the same even if the maximum contribution of financial inheritances were taken into account.
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From page 108... ...
3. Do social insurance programs for retirement income have the effect of reducing household savings and wealth?
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From page 109... ...
The issues under this question are similar to those with public pensions, except that there is generally greater individual freedom in the choice of private versus public pension arrangements. Thus the possibility of spurious positive correlations between individual wealth accumulation and pension rights is even stronger: people who save a great deal also tend to have more generous pension arrangements.
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From page 110... ...
Next to the availability of excellent wealth data, the first priority would be to have data on the extent to which capital gains are anticipated and how certain individuals feel about the value of their stock holdings. As indicated with respect to research question 1, movements in stock market prices and real estate values show enough variation across countries that these differences can be exploited to learn more about the effect of capital gains on savings.
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From page 111... ...
is taxed differently. Examples include whether capital gains are taxed and whether mortgage and other interest payments are deductible.
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From page 112... ...
Conversely, those arriving at retirement age without significant wealth holdings may decide to return to the labor market at least part time to supplement the annuity income they are drawing from public and/or other pensions. Modeling of the interplay between wealth accumulation and labor force participation is technically complex (see, e.g., Blundell et al., 1997~.
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From page 113... ...
Indeed, data quality is an issue of longstanding concern among researchers interested in wealth accumulation (Curtin et al., 1989~. This section describes in detail some important new data sources for studying the process of household wealth accumulation that have emerged in the last two decades in the United States, the four European countries selected for study by the panel, and Japan.
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From page 114... ...
Unless this extreme concentration of wealth is addressed in the survey design, large portions of national wealth will be missing in the household survey. United States In the United States, there has been tremendous growth and improvement during the last decade in household surveys that contain significant wealth modules.
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From page 115... ...
, the following 11 categories are used in HRS: other real estate; vehicles; business equity; individual retirement account or Keogh; stocks or mutual funds; checking, savings, or money market funds; certificates of deposit, government savings bonds, or treasury bills; other bonds; trusts and estates; other assets; and other debt. The definition of personal net worth in PSID closely parallels that used in HRS and AHEAD, but fewer and somewhat broader categories are used.
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From page 116... ...
One approach to monitoring household savings and wealth accumulation over time relies on yearly data provided by the Federal Reserve on household balance sheets (Flow of Funds [FOF]
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From page 117... ...
conclude that use of this simple device increases estimates of total nonhousing net worth in the population by amounts on the order of 20 percent for the HRS sample. As is almost always the case, increases in net worth estimates bring them more in line with external control totals, and this is a quality gain.
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From page 118... ...
It is therefore important that the measures of net worth used in household surveys be as comprehensive as possible.3 The main issue that arises here concerns the number of questions that must be asked to obtain a comprehensive measure.
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From page 119... ...
(1995) , for example, report that median private wealth (net worth)
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From page 120... ...
This doubling of income appears to be a quality gain since it aligns reported income from assets with the national accounts. Repeated Measurement in Panel Surveys A final data quality issue concerns panel use of these wealth modules to evaluate household savings behavior.
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From page 121... ...
(1993) shows that item nonresponse leads to an underestimation of total net worth of households in SEP.
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From page 122... ...
These categories have varied somewhat across the duration of the panel. The definitions of net worth, housing equity, and financial assets are quite close to those used in the major U.S.
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From page 123... ...
Net worth is the sum of household financial assets and net real assets. Financial assets include transaction and savings accounts, certificates of deposit, government bonds, corporate bonds, stocks, mutual funds, life insurance, cash value of defined-contribution pension funds, and foreign assets.
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From page 124... ...
Savings behavior has not been a major focus of the GSOEP questionnaire, and the only information on wealth that has been requested systematically in a panel is the presence of a set of assets (stocks, bonds, savings certificates, mutual funds, life insurance contracts, building society savings contracts, other financial assets, and real estate)
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From page 125... ...
Comparisons between aggregates obtained from NSFIE and FOF and National Accounts data suggest a 40 percent underreporting of financial assets in NSFIE. Kitamura and Takayama offer three explanations for the discrepancy: (1)
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From page 126... ...
and a wealth measure from the data. Net worth is calculated as the sum of net financial assets, net housing assets, and consumer durables.
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From page 127... ...
Many of the European countries, as well as Japan, have no panel wealth data, so individual-level decisions on wealth accumulation cannot be modeled. Moreover, most European and Japanese household surveys have not yet attempted to integrate measures of employer-provided pensions into their household data.
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From page 129... ...
In the United States, the most common comparison is with the FOF accounts. Such comparisons have been conducted for a number of household surveys, in particular PSID and SCF.
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From page 130... ...
They find that the CSS data indicate a 12 percent higher average net worth than that suggested by the IPS data. This discrepancy is due in part to what appears to be an underestimation of home ownership in the IPS data.
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From page 131... ...
Even with similar national incomes, some countries have high levels of household wealth, while others exhibit little evidence of much private wealth accumulation. Second, there is also a great deal of variation across countries in the constraints, incentives, and institutions that affect the private savings decisions of households.
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From page 132... ...
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.
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From page 133... ...
. 220 200 180 <~, 1 60 o° 140 so 120 oh In o 100 80 60 40 20 o 20 133 10 20 30 40 50 60 70 80 90 100 Percentiles of Financial Wealth FIGURE 4-2 Distribution of financial wealth in the United States: 1994.
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From page 134... ...
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. To illustrate, in PSID, the median value of the total net worth of households in the median income decile is approximately $37,000.
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From page 135... ...
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 43, provides data for total net worth as well as financial wealth.
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From page 136... ...
. Total net worth estimated by visual inspection.
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From page 137... ...
Median household and financial wealth is actually less in the United States than in Italy or Germany. Wealth Inequality The second salient aspect of household wealth holdings is that they are distributed quite unequally across households.
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From page 138... ...
All countries in these tables are characterized by considerable household wealth inequality, but there also exists much variation across countries in the extent of this inequality. Inequality in financial wealth is clearly much higher in the United States than in any of the other countries TABLE 4-7 International Comparisons of Wealth Inequality for Total Financial Net Worth (deciles relative to median)
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From page 139... ...
In this ranking, the United Kingdom is a distant second, with households in the 90th percentile having 20 times as much financial wealth as the median household. Thus while wealth inequality is thought to be high in the other European countries and Japan, it is considerably lower than in either the United States or the United Kingdom.
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From page 140... ...
In the United States, for example, housing equity represents one-third of total net worth, but even this statistic severely understates the role of home equity for most Americans. Home ownership is even more salient for the typical household, often being its only asset of much value.
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From page 141... ...
The result is a very low rate of home ownership among younger Italians as they struggle to save for this purpose. The relatively high rates of wealth accumulation in Italy shown in Table 4-4 can best be understood as a consequence of the high rates of household savings required for home ownership.
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From page 142... ...
Figure 4-3 shows median net worth and financial wealth, respectively, by age and cohort for the Netherlands. Each line in the figure represents median net worth (top panel)
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From page 143... ...
PRIVATE WEALTH AND INCOME SECURITY 1 20,000 1 1 0,000 1 00,000 90,000 80,000 ~ 70,000 Z 60,000 '0 50,000 40,000 30,000 20,000 1 0,000 1 5,000 M 1 0,000 ._ IL ~ 5 000 ~ ' O -1 1 ·/ 1 ~J53 63,' 68 .1 143 28423~ 18~ __ O— 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 Age ·1 ma -,i hi,. , ~ 68 · 8 33 /\ 20 25 30 35 40 45 50 55 Age 60 65 70 75 80 85 90 FIGURE 4-3 Median net worth and financial wealth by age of household head and cohort in the Netherlands: 1987 to 1996.
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From page 144... ...
144 250 ~ 150 ~ 1: 50 ~ 60 50 0 20 25 30 35 40 45 50 55 60 65 70 75 80 Age 60: , c 40 ~ 20 a c ~7 N G30 C 1 ~ 20, PREPARING FOR AN AGING WORLD 8 8 7 = ~ ~ ~ .q13141 /~¢ WY 250 , `~ 200 i\ ~, 150 ..~. ,, N ~ 100 1 1 1 1 1 1 1 1 1 1 1 1 1 20 25 30 35 40 45 50 55 60 65 70 75 80 Age - 4~ — —2' 1_1 1 1 1 1 1 1 1 1 1 1 1 1 1 20 25 30 35 40 45 50 55 60 65 70 75 80 Age 20 25 30 35 40 45 50 55 60 65 70 75 80 Age 30 , 8 c 20 ; ~,~ ~ 1 0 c 2 ~ o -1 1 1 1 1 1 1 1 1 1 1 1 1 20 25 30 35 40 45 50 55 60 65 70 75 80 Age 20 25 30 35 40 45 50 55 60 65 70 75 80 Age .-1 1 1 1 1 1 1 1 1 1 1 1 1 20 25 30 35 40 45 50 55 60 65 70 75 80 Age FIGURE 4-4 Measures of net worth by age of household head and cohort in Italy: 1989 to 1995.
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From page 145... ...
PRIVATE WEALTH AND INCOME SECURITY 1 0,000 9,000 8,000 7,000 ~ 6,000 O 5~000 lo 4,000 3,000 o 2,500 2,000 ~ 1,500 lo lo lo ~ 1,000 1955- 1950- 1945 L 1940- 1935- 1930Birth Year 1979 ~ 1984 1 1925- 1920- 1915- 19101 989 1 994 o 145 1955- 1950- 1945- 1940 ~ 1979 ~ 1984 1935- 1930- 1925 Birth Year . 1989 1~1 1994 1920- 1915- 1910FIGURE 4-5 Net worth and net financial assets by birth year of household head in Japan: 1979 to 1994.
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From page 146... ...
by the respective governments as well, it generally makes sense to examine the total retirement system, not just the public transfer portion. Retirement Income Security An important policy issue across all Western countries is the extent to which government social insurance programs during retirement substitute for or crowd out private savings (see Smith and Smeeding, 1998, and
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From page 147... ...
Income security policy goals include preventing poverty in old age, encouraging private savings, encouraging work at older ages, and ensuring desired rates of income replacement in retirement. What differs across countries is the extent to which each of these goals is pursued and the costs incurred.
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From page 148... ...
For the median elderly person, German, Dutch, and Swedish social retirement benefits make up 84, 73, and 90 percent of disposable income, respectively. These figures compare with about 60 to 63 percent in the United States and Canada (Smeeding, 1997~.
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From page 149... ...
Financial assets are by far the most unequally distributed component; relative to household income, financial assets are 3.3 times larger among college graduates as compared with those who did not graduate from high school. Pensions are also regressive in their distribution, reflecting the greater prevalence of employer-provided pensions among high-wage workers.
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From page 150... ...
Such data are a high priority since they could go a long way toward reconciling cross-country differences in levels of private household wealth. For example, the fact that many of the continental European countries rely much more heavily on government-financed than employer-provided pensions may explain their relatively low levels of private wealth accumulation.
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From page 151... ...
4-3. Similarly defined microdata should be collected in different countries to exploit institutional differences and advance our understanding of the effects of policies on individual-level wealth accumulation.
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From page 152... ...
1999 The Personal Distribution of Income in Post-war Italy: Source Description, Data Quality, and the Time Pattern of Income Inequality. Temi di Discussione 350.
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From page 153... ...
Jappelli, T., and L Pistaferri 1999 The Dynamics of Household Wealth Accumulation in Italy.
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From page 154... ...
in Why is wealth inequality rising? In Increasing Income Inequality in America: The press Facts, Causes, and Consequences, F
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