Working Paper: NBER ID: w10888
Authors: Arthur Kennickell; Annamaria Lusardi
Abstract: We assess the importance of the precautionary saving motive by relying on a direct question about precautionary wealth from the 1995 and 1998 waves of the Survey of Consumer Finances. In this survey, a new question has been designed to elicit the amount of desired precautionary wealth. This allows us to bound the amount of precautionary accumulation and to overcome many of the problems of previous works on this topic. We find that a precautionary saving motive exists and affects virtually every type of household. Even though this motive does not give rise to large amounts of wealth for young and middle-age households, it is particularly important for two groups: older households and business owners. Overall, we provide strong evidence that we need to take the precautionary saving motive into account when modeling saving behavior.
Keywords: precautionary saving; household wealth; Survey of Consumer Finances
JEL Codes: D91; E21; C21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| precautionary saving motive exists (D14) | affects virtually every household (D10) |
| precautionary saving motive exists (D14) | particularly pronounced in older households and business owners (D14) |
| precautionary saving motive does not lead to substantial wealth accumulation among younger and middle-aged households (D14) | accounts for significant portion of desired wealth in older cohorts and business owners (D14) |
| desired precautionary wealth constitutes approximately 8% of total net worth (D14) | desired precautionary wealth constitutes approximately 20% of total financial wealth in the economy (E21) |
| existing theoretical models are inadequate for characterizing consumer behavior (D10) | fail to capture heterogeneity in precautionary accumulation across different households (D15) |
| models must be enriched to account for varying wealth holdings and risks (G51) | particularly those nearing retirement or engaged in business ownership (J26) |