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Ageing and saving in Asia
20 Nov 2012
Frederic Neumann, Co-Head of Asian Economic Research
That Asia is getting older is a point worth repeating. A direct implication of an ageing nation is more and more citizens becoming dependent on income support from a shrinking workforce. In other words, the number of consumers rises relative to income earners.
The support ratio – which measures the effective number of income-earners versus the effective number of consumers, weighted by population age profiles and age-related differences in income and consumption patterns – is projected to fall sharply in Korea, China, Japan and Thailand*. That contrasts with the moderate decline projected for the US.
Because a fall in the support ratio reflects both the speed of ageing and the shape of the population distribution, a slowly ageing society such as Japan will see its ratio fall as sharply as rapidly ageing China and Korea. Japan already has a lot of old-age people whose consumption needs, as they get older, will increase much faster than the recently retired workers – whereas in Korea and China, the elderly will be more in their 60s than, say, 80s.
The number of Asian consumers rising relative to income earners can mean only one thing: household saving will come under pressure.
The life cycle hypothesis developed almost 50 years ago says individuals aim to smooth consumption during their life time. The theory predicts they will borrow against future income in early years, save during their working lives and dis-save in old age. It is well supported by empirical evidence, even if the degree of smoothing differs between countries.
Applied to China, this analysis shows income peaking between the age of 40 and 50, whereas consumption stays relatively flat throughout the lifetime. Saving thus displays a hump-shaped curve that starts negative with a small dent possibly reflecting educational costs between the ages of 10 and 20, then rising steadily until the early 40s during the prime working years and eventually starting to fall until dipping into the negative again around 60.
The world hasn't enough savings to finance Asia's huge need for investment
China's current median age is near the peak of the saving hump, so household saving will decline in the coming years as the population ages.
But while the shape of the income curve is broadly similar across economies, consumption patterns – and hence saving – differ from country to country. In general, saving declines much more sharply during old age in Japan and Europe compared to the flatter curve of Asian countries with younger populations.
On average, it takes five years for a population's median age to rise by two years in Asia but the continent's median age is fast approaching the turning point where households start to save less. Korea is already more than a decade past the peak saving age. Koreans are still saving, but at a much lower rate. In Japan and Taiwan, more people will start to save less by 2015. China and Thailand have 13 years before saving starts to drop.
The turning points will not be static because household saving behaviours change over time. National regulation increasing mandatory retirement age is one factor that may push back the peak saving age but other factors, though more long-term, include the development of social security systems and more sophisticated financial markets.
The impending drop in household saving rates has important implications for Asia. They account for a substantial share of national savings, which are used to fund investment. But national saving rates are on a downward trend in most places. The decline has been notable in Korea, Japan and Hong Kong. National saving in China, Singapore, Taiwan and Vietnam also recently fell.
So if investment rates are maintained, this will push up the cost of capital. Highly leveraged economies could find this difficult to deal with. For a while, capital inflows may stem the rise in interest rates – but not for long: the world hasn't enough savings to finance Asia's huge need for investment. The road ahead thus looks a little bumpier than the region is used to.
*Research by Lee & Mason (2011), National Transfer Accounts, UC Berkeley and HSBC.