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UK Economy

Intergenerational precautionary savings in Europe

18 October 2021

The extended family can act as an insurance tool against adverse events. In our latest post, Francesco Scervini and Serena Trucchi document a new channel for saving, namely the effect of uncertainty in the offspring’s income on parental savings and illustrate its role in the framework of the COVID-19 outbreak.

During the COVID-19 pandemic, household saving rates increased in many advanced economies.

This change is reviving the interest of economists and policy makers in the factors that determine household consumption and saving interests.

These factors are key to understanding the consequences in such a rise in aggregate savings on both individual welfare, the effectiveness of policy interventions to stimulate aggregate demand and the levels of employment and activity after the pandemic crisis.

Other studies have shown that precaution is one of the main factors for the increase in household savings during the recent COVID-19 outbreak. The last two years have been characterised by great uncertainty around jobs, household income and the overall health of the economy going forward.

This increase in uncertainty fostered savings, which may be used as a buffer to face possible negative shocks in the future.

In a recent study, we analysed the link between savings and income risk from an intergenerational perspective. In particular, we investigated whether, and to what extent, the income uncertainty of younger generations impacts the savings of their parents.

In this case, workers at a late stage of their working life may increase their precautionary savings in response to a rise in income uncertainty, even if they are less affected by income uncertainty (because they rely on less volatile income sources, such as retirement benefits, and on a relatively large amount of wealth).

Therefore, the intergenerational precautionary motive for saving may contribute to explain wealth and saving trajectories of individuals in the late stage of the life cycle, namely retirees or workers approaching retirement age.

In our study, we analysed saving decisions of individuals older than 50 years in a sample of European countries. We found that future income uncertainty fosters savings, not only by the individuals affected by uncertainty but also by their parents.

If the income uncertainty of the offspring increases by 1%, the savings of the parents rises by about 0.4%. Our results point out a significant heterogeneity in the strength of the intergenerational precautionary motive for saving across countries. This channel is stronger under weaker welfare systems, which is consistent with some degree of substitutability between (intergenerational) private and public insurance to income risk.

This result has relevant policy implications. Public welfare policies, such as unemployment benefits and stimulus packages, may substitute for family ties and informal networks, generating a positive spillover beyond the target of the policies.

Francesco Scervini is an Associate Professor at the University of Pavia (Italy).
Serena Trucchi is a Lecturer in Economics at Cardiff Business School.

Findings discussed in this post are based on Scervini and Trucchi (2021) “Intergenerational Precautionary Savings in Europe”, forthcoming on the Oxford Bulletin of Economics and Statistics.