Baby-boomers are big savers, Central Bank analysis finds

Maltese baby-boomers and those from the pre-war generation have the highest saving rate, a survey by the Central Bank has confirmed.

It’s a finding that contradicts the so called ‘life-cycle hypothesis’, which implies a “hump-shaped” profile of savings throughout a person’s life: negative at a young age, positive at middle age and negative again after retirement.

The apparent contradiction is down to the fact only old people still living in their homes were surveyed, since their expenditure tends to be lower than those paying their incomes to retirement homes; but also because their sudden drop in income on retirement also causes them to reduce their consumption.

Household median saving rate: % of median income; numbers in percentages below groups are the proportion of respondents for each household falling within that group

People who spend more than they earn, bridge the gap by borrowing cash: usually the young. Then as income grows at a faster rate than consumption, they repay cash borrowed and start saving for retirement: at middle-age. Upon retirement, they draw down on the accumulated funds to sustain consumption. Life-Cycle Hypothesis

But elsewhere, Malta’s saving rate was found to be positively related to the real deposit interest rate, and negatively related to the wealth-to-income ratio.

The saving rate for the retired was over 20% of median income. Home ownership is also a factor which influences the saving rate of households, as house­holds which own a house have a higher saving rate than households which rent property.

Less weaker was the effect of government deficits on savings. In theory, households save more when they see government debt rising, since they anticipate the repayment of that debt in future.

Interestingly, the growth in consumer credit and the old-age dependency ratio did not play a role in influencing saving decisions of Maltese households in twelve years since 2000.

“Another factor which could influence saving behaviour is education. Higher levels of edu­cational attainment are expected to lead to higher income and hence to a higher saving rate,” the Central Bank said. “This pattern is not evident across different levels of educational attainment in Malta, although respondents with the highest level of education also had the highest saving rate.”

With the median age rising from 41 in 2015 to just over 46 by 2045, Malta will experience an increase in the old-age-dependency ratio, from 27.7% to 42.4% over the same period.

“Such a development is bound to have an effect on aggregate sav­ing in the future, unless individual saving rates rise. In this light, incentives aimed at increas­ing saving rates appear warranted. Such saving would also compensate for the drop in social security contributions that could accompany the ageing of the Maltese population and which would lower public saving,” the Central Bank warned.

“On the other hand, having a more educated, employed and home-owning workforce could raise the average saving rate. In this respect, the family friendly measures that have been promot­ed during past years, such as the four-week maternity leave exten­sion and greater avail­ability of affordable childcare, could also help to improve the prospective trend of household sav­ing behaviour in Malta.”