Household savings and consumption decisions


 
The Consumption-Savings Puzzle and Intra-Household: Evidence from Administrative Panel Data

Title: The Consumption-Savings Puzzle and Intra-Household: Evidence from Administrative Panel Data

Participant: Arna Olafsson (FI, CBS)

Description: In total, this paper makes four primary contributions. First, I develop a panel dataset featuring comprehensive and high-frequency financial data from nearly 50,000 households where I observe individuals within these households, including individuals around retirement. To the best of my knowledge, this is the first administrative data set that has information on both income and expenditure of individuals for a long period of time around retirement. Second, I observe income and expenditure of both single individuals and members of collective households. This gives me a unique opportunity to conduct an empirical test of the potentially different influence that the retirement of men and women have on household spending. Third, I observe how individuals spend within certain subcategories of spending, giving me an opportunity to test whether consumers substitute toward cheaper but more time consuming goods when they retire. Forth, I investigate whether differential household consumer debt levels can partly explain the timing of retirement.

A Mean-Variance Benchmark for Household Portfolios over the Life Cycle

Title: A Mean-Variance Benchmark for Household Portfolios over the Life Cycle

Participant: Claus Munk (FI, CBS)

Description: I embed human capital in Markowitz' one-period mean-variance framework. By solving the Markowitz problem for different values of the ratio of human capital to financial wealth, I can study life-cycle effects in household portfolio decisions. The portfolio derived with this approach is very similar to the optimal portfolio derived in the much more complicated dynamic life-cycle models. An application of this simple method illustrates that young households may optimally refrain from stock investments because a house investment combined with a mortgage is more attractive from a pure investment perspective.

Do Savings Mandates Cause Debt Accumulation? 

Title: Do Savings Mandates Cause Debt Accumulation?

Participant: Asger Lau Andersen (University of Copenhagen), Henrik Yde Andersen (ECON, CBS) and Søren Leth-Petersen (University of Copenhagen)

Description: In Denmark -- as in many other countries -- defined contribution pension schemes have gained increasing importance. In a recent study Chetty et al (2014) use population-wide Danish data with information about savings and total wealth to show that these savings mandates lead people to increase their total savings, even if they have enough financial wealth that can be adjusted to keep total savings constant. This happens because they respond passively to the savings mandates. In the short run passive responses imply that households adjust spending when they are exposed to savings mandates. However, nothing is known about the long run consequences of savings mandates. Do they lead to increased (mortgage) borrowing so that people can maintain their original consumption level, or do people reach the retirement age with higher levels of net wealth? The purpose of the present project is to answer:

Do people, who save extra because they responded passively to a savings mandate, take out more mortgage debt to maintain their original level of spending, or do they end up with more wealth when they approach retirement? To answer this question, we will make use of Danish administrative registry data with information about jobs, income, wealth and pension savings for the entire Danish population since 1980. To quantify the size of the savings mistake following a savings mandate we will use the event-study design proposed by Chetty et al. (2014). Specifically, we will consider job switches associated with a change in mandated savings rates and show that mandates generate a sharp change in savings that pass-through to total asset accumulation. Changing jobs can be associated with a change in total compensation. It is straightforward to control for this as the tax records hold detailed information about this. The design exploits the longitudinal dimension and massive size of the data, and the institutional structure where mandated retirement savings rates vary significantly across firms because of differences in collective bargaining agreements. In Chetty et al. (2014) we show that total savings rates are completely stable in the period leading up to the job switch and change sharply at the job switch. Unless preferences for savings change sharply at the job switch, this is consistent with the assumption that preferences for saving are orthogonal to job switches.

To test the hypothesis that passive decision makers target spending we measure whether savings mandates generate an increase in total accumulation of assets that can predict the uptake of mortgage debt after the job shift. Because we observe all components of the household budget constraint we are able to quantify the costs (in consumption equivalents) associated with being a passive decision maker. Another possible margin of adjustment is that people end-up retiring at a different point in time compared to people who are not exposed to savings mandates, or to have a different level of spending in retirement. Because labor market activity and complete household balance sheets are observed in the administrative data it is possible to investigate all of these alternative hypotheses.

Reference: Chetty; Friedman; Leth-Petersen; Nielsen; Olsen. 2014; Active vs. Passive Decisions and Crowd-Out in Retirement Savings: Evidence from Denmark; Quar. J. Ec. 129(3).

Essays on Pension Savings

Title: Essays on Pension Savings (PhD project)

Participant: Henrik Yde Andersen (ECON, CBS)

Description: The project is comprised of three self-contained chapters concerned with the interplay between pension saving systems and household saving and debt decisions.

Chapter 1, “Do Tax Incentives for Saving in Pension Accounts Cause Debt Accumulation? Evidence from Danish Register Data", investigates if tax incentives for saving in pension accounts affect individual debt accumulation. Applying a quasi-experimental research design on a Danish 2010 policy that reduced tax incentives for saving in annuity pension schemes, we show significant substitution of savings from retirement accounts to gross debt repayments. We find that for every 1 Danish Krone that retirement savings are reduced about 30 cents go to debt repayments. Taking into account all types of savings, we find full crowd-out. Consistent with previous findings, we document that the effect is driven by a minority, about 23%, who actively rebalance their savings.

Chapter 2, “Mandatory Pension Savings and Household Debt”, asks the question if compulsory pension contributions make homeowners repay less debt or even increase borrowing. Access to individual-level information on pension contributions, bank debt and mortgages allows us to investigate exactly this. We exploit exogenous variation from job changes to identify active changes in mortgage and bank debt repayments. Conditional on increasing mandatory pension contributions when taking up a new job, we argue that decreased debt repayments can be causally linked to increased compulsory pension saving rates.

Chapter 3, “Is there a Housing Wealth Effect”, tests whether unexpected changes in house prices affect individual consumption and savings decision. To do this we use longitudinal survey data with subjective information about current and expected future house prices to calculate unanticipated house price changes. We link this information to high quality administrative records with information about savings in various financial instruments. These data makes it possible to regress spending as well as savings in different types of assets and liabilities on direct measures of anticipated and unanticipated innovations to house prices. Controlling for competing explanations we find that an unanticipated increase in housing wealth that compares to one year’s worth of income leads to an increase in spending (also measured relative to income) of 3-5 percent. The spending increase is followed by a corresponding drop in the following year suggesting that the effect is driven by spending on durable goods. The estimated effect is driven by about 8 percent of the households in the sample who actively refinance their mortgage loan and extract equity to finance the spending increase.

Household Bargaining, Pensions, and Risk Management Schemes for Families

Title: Household Bargaining, Pensions, and Risk Management Schemes for Families

Participants: Jimmy Martinez-Correa and Mauricio Prado (ECON, CBS)

Description: We are interested on how couples make joint risk management choices (e.g., financial investment, insurance, and saving for pension). Such choices are very difficult to identity in Danish Registry data and that is the reason why we ran a unique laboratory experiment that allowed us to study in detail how couples make joint choices and compare them with individuals that have been randomly matched into pairs. This is a unique opportunity to study what is special about how established couples make choices. The outcome of our analysis will shed light on what makes it easier for households to make joint choices. We have preliminary interesting results that could be used, for instance, to make insurance products more appealing to households.

Our most interesting findings so far are the following:

  1. Classical theory of insurance tells us that with zero loading people should choose insurance as long as they are risk averse. So people should choose insurance no matter whether they are couples or not. We find that:

    a. Pairs of subjects in the experiment, no matter whether they are established couples or individuals randomly matched into pairs, demand individual insurance 60% of the times with no loading. In the experiment, pairs of subjects were given the choice to face individually a risky lottery or individually insure fully or partially against the risk of the lottery. Choices had to be made jointly and in a coordinated manner, so it was not possible that in a given pair of subjects an individual chose no insurance and the other chose to insure. Subjects had to either choose to insure or not to insure in a coordinated manner.

    b. However, when there is loading, we observed a significant difference between established couples and individuals randomly matched into pairs. Couples chose more insurance (49% of the times) and non-couples chose less insurance (42% of the times). This difference is statistically significant and implies that couples are more risk averse than randomly matched pairs.
     
  2. An equal-split pricing mechanism makes couples behave more “rational” in the classical sense explained in finding #1. Couples tend to choose more insurance in the zero loading treatment when they are offered the equal splitting pricing. This equal splitting mechanism is a simple pricing mechanism that sums the price of insurance for each individual and then divides this total price by two. This means that the price for each individual is exactly half of the total price to insure both persons. When couples are not offered this equal splitting pricing, and instead are offered individual fair pricing to each subject, they tend to choose to insure less. Therefore, there seems to be something special about this equal-splitting mechanism that makes couples behave more rationally and insure more when they are expected to do so according to theory.  The equal splitting pricing makes, in some sense, the risk-averse households more “rational.”


We are continuing to analyze the data, and soon we will merge our experimental data to the registry data. This will allow us to study in more depth what are the profiles of households, according to demographics and other registry variables, that are important to explain the preliminary results above.

Housing Decisions under Divorce


Title: Housing Decisions under Divorce

Participants: Marcel Fisher (FI, CBS) and Natalia Khorunzhina (ECON, CBS)

Description: We investigate the role of divorce as a risk factor that affects housing decisions and long-term financial consequences in a realistically calibrated life-cycle model. Divorces result in a reduction of homeownership rates, household net worth and increase the risk of poverty during retirement. Given the significant increase in divorces over the last couple of decades, our model proposes new challenges to existing pension systems.

The Pension Gender Gap: Understanding Both Its Composition and Changes over Time

Title: The Pension Gender Gap: Understanding Both Its Composition and Changes over Time

Participants: Moira Daly and Fane Groes (ECON, CBS)

Description: In the first project, we will explore the pension savings behavior of men and women in order to decompose the “pension gap”. Recently the pension gap has been a topic of discussion in the Danish media; Nordea and PFA document that women have saved 64 to 80 percent of what men have. To our knowledge, the determinants of this gap have not been fully investigated. Is this “pension gap” solely explained by lower lifetime earnings or do women tend to manage their savings differently than men? How are these decisions affected by household composition?

In the second project, we will study the effects of a major change in legislation in 2007 that affected how pensions are split between husbands and wives in the event of divorce.  We will determine  whether or not this change in legislation altered the savings behaviour of married men and women, and if so, determine the immediate consequences of this change of legislation on the stability of families, and subsequently, on children.

 

The page was last edited by: Department of Finance // 12/20/2016