What Determines Savings?

What determines savings? The question is timely and important. The U.S. saving rate is less than half that of Japan Germany and other developed countries and the imbalance in saving rates across countries is responsible in large part for the imbalance in international trade. This book examines a number of important determinants of wealth accumulation including retirement bequests and precautionary saving motives demographics the tax structure social security and insurance institutions. Using a blend of theory empirical research and simulation methods it reaches some surprising conclusions about what determines savings.. Kotlikoff notes that most of U.S. wealth is due not to life cycle saving for retirement but rather to bequests and other intergenerational transfers. The process of passing wealth from one generation to the next may be explained in large part because of imperfect annuity arrangements.. In addition to life span uncertainty the author points out other types of uncertainty such as uncertainty about future medical expenditures can greatly stimulate saving. Fiscal policies such as unfunded social security can dramatically alter a country's wealth although the process can take many years. Unfortunately Kotlikoff observes official fiscal deficits are intrinsically unreliable for measuring the government's stance of fiscal policy. He also concludes that the baby busts currently underway in the United States Europe and Japan are likely to improve overall economic welfare despite their detrimental impacts on social security systems. Laurence J. Kotlikoff is Professor of Economics at Boston University and a Research Associate of the National Bureau of Economic Research.