Are older people saving more?
As the demographic change continues, there are still a lot of people who argue that the retiring baby boomer generation will consume some if not all of their savings, leading to lower equity returns and lower savings rates. Yet, so far, we haven’t seen any of this happening. Instead, there is plenty of evidence that older people do not save less than younger.
In fact, it could well be that older people have a higher propensity to safe than younger ones. A new study by a group of researchers from Germany tried to measure the discount rates of people of different age groups. Using the annual Japanese household survey from 2010 to 2018, they could track the time preferences of a large number of people over time. The results are shown in the chart below.
Time discount rate of Japanese people
Source: Kureishi et al. (2020).
They found a strong linear relationship between age and discount rate – but in the wrong direction. If older people would have a shorter time horizon or dissave in retirement, one would expect the discount rate of future events to increase with age (hence making events far in the future less important today than closer events). Instead, the discount rate declines steadily with age, meaning that older people implicitly value the distant future more than the near future.
I cannot stress enough how important these findings are. First, they mean that older people will not dissave in retirement if they can help it. Instead, they will try to save more or try to keep their savings ratios as high as they can. This is good news for anyone who is afraid that baby boomers will have less demand for stocks as they grow older. Most likely they will keep investing in stocks until they die.
Second, it also means that the average savings rate in the economy will likely not decline as the population ages. This is good because a lower savings rate might have pushed real interest rates higher. Instead, we should expect real rates to stay low or even decline as the population ages.
And third – and possibly most heretically – it means that advising older people to have less risky portfolios may not be the best advice for them. Yes, it makes sense to reduce risk as their investment horizon decreases, but only, ONLY, if they really need their savings. Most retirees won’t dip into their savings and instead keep these portfolios for a long time, allowing them to grow and then be inherited to loved ones after their death. The results of the study indicate that it might be best practice to separate some of the savings of older people and put it into a long-term growth portfolio that they can dip in extreme emergencies or otherwise inherit to their children. I know that is heresy, but it is something to consider.