Dissaving

Dissaving is negative saving. If spending is greater than disposable income, dissaving is taking place. This spending is financed by already accumulated savings, such as money in a savings account, or it can be borrowed. Household dissaving therefore corresponds to an absolute decrease in their financial investments.

Why people dissave[]

There are multiple reasons why people dissave. The first one is that a person accumulates savings for the purpose of spending them after retirement. This type of dissaving is intentional and voluntary and requires planning how much to save and dissave in order not to run out of money in their savings. Another reason is that a person experiences a shock, e.g. sudden unemployment or medical emergency and is forced to spend more than they earn. This person first dissaves from their personal savings and possibly later has to borrow money to finance their expenses. Third reason is that a person lacks judgment and lives above their means. These people finance their spendings from credit and are the most prone to shocks which may lead to personal bankruptcy.^[1] We can also assimilate a request for credit to early dissaving. Indeed, a household that has a consumer credit for the acquisition of a good commits to repay the loan and the interest on its future income, which reduces its future savings.

Dissaving was reported as a typical response to deficits, for households with normal income and expenditure patterns during the depression of the 1930s.^[2] Although this phenomenon is very rare at the collective level, it is quite common at the individual level since, the purpose of savings is to one day be used for consumer purchases. With a phenomenon of dissaving at the collective level would be bad for the economy of a country since it is used for financing. Zero savings would practically prevent the financing of new investments and therefore potential growth. Dismissals at the collective level would have even more important consequences because the decrease in outstanding investments would lead to a drop in the quotations of financial securities (stocks and bonds) and would risk putting the banks and the systems of collecting savings into bankruptcy. following a liquidity crisis. Massive dissaving to consumption can also lead to inflation risks if the production of consumer goods is not sufficient to meet new demand.^[3]

The life-cycle hypothesis of saving, of Ando and Modigliani, proposes that people work and save when they are young and retire and dissave when they become elderly.^[4] However, this theory is not fully verified, at least in France. The savings rate is falling due to the aging of the population. In fact, the savings rate continues to increase beyond the age of 50, reaching 22.5% for those over 60. This phenomenon is undoubtedly explained in part by the concern to pass on wealth to subsequent generations as well as to cover unforeseen health expenses.^[5]

Relevant studies[]

Hayashi, Ando, and investigated whether the elderly save or dissave and found for the United States that families after retirement dissave on average about a third of their peak wealth by the time of death, leaving the rest (mostly their homes) as bequests.^[6] In contrast they found that for Japan the elderly forming independent households and those living with children continue to save, for all but the most elderly. From age 80 or more and, also the single elderly of all ages, the dissaving patterns were evident.

Later evidence presented by Horioka reinforces the life cycle hypothesis in Japan.^[7]

Clara Fernström researched whether there is any correlation between the dissaving of a person and the person’s age, gender, marital status, income and the probability of surviving until the following year. Her study shows following results and provides possible explanation as follows:

• Annual savings increase with lower survival probability. That might be explained by either bequest motives or the low utility rate of consumption for a person with low survival probability. Person with low survival probability is likely to be ill and not able to enjoy the consumption as much as a healthy person, therefore they decide to consume little.
• People with low income show less dissaving after a shock than people with high income. People with low income usually have low savings, therefore don’t have the possibility to dissave without borrowing. However, people with high savings can choose how much to dissave.
• People with children save more than childless people, which is explained by wanting to leave a bequest for their offspring.
• Married individuals save less than the singles. Unlike people with children, there seems to be no visible intent to save for bequest reasons. Moreover, it is possible that the utility rate of consumption is higher for married individuals, as the utility is shared with their spouse. Moreover, single people save more, because they can’t rely financially on their husband or wife.
• Older people dissave less than younger people, which is probably linked to the fact that older people have generally lower probability of survival.^[8]

See also[]

• Autonomous consumption
• Debt
• Retirement spend down

References[]

External links[]

• Steven Haider, Michael Hurd, Elaine Reardon and Stephanie Williamson, "Patterns of Dissaving in Retirement", AARP, 2000.