Household savings and wealth in New Zealand
Despite plenty of discussion on the subject of household savings and wealth in recent years, and a raft of data from recent surveys, there are plenty of unanswered questions and a lot of confusion around this important topic. A key issue bothering economists has been the statistics showing a decline in the household savings rate over the past 20 years with households apparently now consuming more than they are earning in income. Of particular concern, this decline in the household savings rate has accelerated over the past five years. Is this really the case or are the statistics somehow misleading us? If it is happening, what are the mechanisms that are causing households to spend more than they are earning through income? How long can the process continue, and does it really matter that the savings rate remains so low?
This is an issue that the Reserve Bank has been devoting much of its research effort to recently. We think we've learned a lot about household savings behaviour from this research, but there are still areas of murkiness. The purpose of this paper is to discuss what we've learned as well as highlight those areas where further work is required.
The structure of this paper is as follows. Section 2 defines the term `saving' and explains how a country's saving relates to its current account balance. It presents the record of national saving over recent years and estimates of the breakdown of saving by sector. Section 3 goes on to explain the difference between saving and wealth and discusses the composition of wealth within the household sector. It also notes some of the challenges we face in actually measuring household wealth. Section 4 goes on to look at the steep decline in household savings over the past two decades, discussing a range of factors that we think have enabled this decline to occur. Section 5 considers whether a negative household savings rate is sustainable and what the limits might be, while section 6 looks at why the Reserve Bank has viewed the declining household savings measure with some concern. Section 7 concludes.