Household Finance and Contractual Saving in Germany | Munich Center for the Economics of Aging - MEA


Macroeconomic Implications of Demographic Change

Household Finance and Contractual Saving in Germany

The idea that households smooth their consumption in order to keep its marginal utility constant over time is a cornerstone of the life-cycle model of consumption and saving. Within this framework, household saving represents just a residual leftover after all the expenditures have been subtracted from current income. As such, saving is passive and should react more strongly to transitory changes in household income whereas temporary shocks should have only a very small effect on consumption. The empirical evidence, however, shows that this is not the case. Household consumption tracks current income more closely than household saving, which reacts only modestly even to big shocks. A possible explanation for this puzzle is that household finances are dominated by contractual saving which is relatively stable over long time periods. In this project, we provide empirical evidence for this explanation, using several waves of the SAVE study, a survey focused on household saving behavior in Germany. The panel character of the data will allow us to measure how much saving has reacted to shocks at the micro and macro level, and to test if the presence of contractual saving has significantly contributed to explain the low elasticity of savings to micro and macro shocks. The SAVE study has four particularly interesting features which we will exploit to shed new evidence on this old puzzle: first, the panel character of the data exhibits within-individual variation of current income as well as changes in household composition (“micro shocks”); second, the data span the financial crisis of 2008/2009 as an example of a large macro shock; third, the data distinguish various forms of discretionary and contractual saving; and fourth, the data contain information which allows us to see whether saving is an independent object of active decision making rather than a passive residual.

Prof. Dr. h.c. Axel Börsch-Supan, Ph. D.