CONCEPT PAPER:

SAVINGS BEHAVIOR AND

PREFERENCES

Gmelia Guiang

March 2006
 DISCLAIMER

“The views expressed in this report are strictly those of the authors and do not necessarily reflect those of
the United States Agency for International Development (USAID) and the Ateneo de Manila University”.
 Abstract

Proper analysis of savers’ behavior requires household or micro level data on saving patterns and
preferences as well as direct estimates of household savings. Such information will help financial
institutions and policy makers mobilize savings and increase investments. This concept paper
surveys theories on the determinants of savings to aid the Ateneo-EPRA project’s nationwide
survey of households’ saving behavior as a rider to the Family Income and Expenditure Survey
(FIES) of the National Statistics Office. Improved knowledge of saving patterns will prove
valuable to policy makers and private financial institutions in the analyses of several issues such
as whether the proposed Personal Equity and Retirement Account bill will yield additional
savings, the interest rate and tax rate elasticities of various savings and investment instruments,
how non-bank financial institutions can leverage on the savings of Filipinos, and the implications
of saving patterns on the development of the Philippine economy.
 CONCEPT PAPER: Saving Behavior and Preferences 1

Gmelina Guiang
March 2006

Background

Savings play an important role in economic development. Growth theories 2 have shown that
savings is a necessary ingredient to finance investment which will enhance a country’s
productivity. Also, cross- country and time series data have shown the close link between
household and national saving rates. Thus, it would be important to look at the determinants of
household saving to fully understand economic growth.

Household savings, in particular, assist in smoothing out unexpected variations in income of

household, minimizing the impact of shocks on consumption. In a country like the Philippines,
where a lot of households are engaged in agriculture and face uncertainty from weather and
natural calamities, it would be helpful to understand how people deal with fluctuations in
incomes. Further, savings serve as a vehicle of social mobility and of enhancing future income-
earning possibilities. Savings indeed have implications in the welfare of households, macro-
economy, growth and development.

In the Philippines, however, it has been noted that the savings rate is low compared to its
Southeast Asian neighbors. On the other hand, there is a possibility that Filipinos are actually
saving more but not through formal financial instruments. Previous studies 3 on savings look at
differences in the saving behavior of Urban and Rural households. Some studies 4 focus on the
forms and determinants of rural savings. With the surge of remittances, many institutions would
like to examine the spending and saving attitudes of OFW families. Due to the inadequacy of
recent and comprehensive data and information regarding the behavior of household savers
through time, the formulation of policies designed to increase savings proves difficult.

Most of the data employed in previous studies of Philippine savings are derived from the gross
domestic product (GDP) figures or from household surveys on expenditure and income. Good
quality micro data are limited. The data collected from the Family and Income and Expenditure
Survey (FIES) of the National Statistics Office (NSO) do not allow for an extensive study on
saving behavior for savings is only measured as a residual. Also, some expenditure items such as
durables, housing, education and health have saving and investment components. Proper analysis
of savers’ behavior requires household or micro level data on saving patterns and preferences as
well as direct estimates of household savings. Such information will help financial institutions
and policy makers mobilize savings and increase investments.

1
By Gmelina Guiang, RAAG-EPRA, with substantial inputs from EPRA-FMD’s Subject Specialist, Dr.
Emmanuel Esguerra and EPRA-FMD Consortium Partner Carol Patacsil
2
See Harrod-Domar and Solow Growth Models
3
Romeo Bautista and Mario Lamberte, “Comparative Saving Behavior of Rural and Urban Households in
the Philippines,” (PIDS Working Paper Series no. 90-15, 1990)
4
Rhenee Blanco and Richard Meyer, “Rural Deposit Mobilization in the Philippines 1977-1986,”(PIDS
Working Paper Series no. 88-15, 1988) and Jocelyn Alma Rodriguez and Richard Meyer, “The Analysis of
Saving Behavior: The Case of Rural Households in the Philippines (PIDS Working Paper Series no. 88-20,
1988).

DISCLAIMER
“The views expressed in this report are strictly those of the authors and do not necessarily reflect those of the United States Agency
for International Development (USAID) and the Ateneo de Manila University”.
Rationale

In this regard, the Ateneo-EPRA Project seeks to institutionalize panel data gathering to find out
the major determinants of Filipino savings and its forms. If Filipinos are not saving enough, what
policies are needed to provide incentives for people to save? This may be done through a
nationwide survey of households’ saving behavior as a rider to the Family Income and
Expenditures Survey (FIES) of NSO. A special survey on savings on the subsample of the FIES
survey (similar to the APIS) may be done annually. In particular, Ateneo-EPRA aims to get data
on the amount and percentage of income being saved, forms of saving, reason for choosing a
particular form of saving, awareness of and reasons for not choosing other savings instruments
and responsiveness to financial incentives.

The above information will yield better and more accurate analyses on the determinants of
savings by earning profiles, demographics, and savings preferences. Savings data on a micro level
will also allow for the testing of various theories on savings.

Further, improved knowledge of saving propensities along with other determinants based on
different saving behavior and preferences will prove valuable to policy makers in the areas of tax
and interest rate policy and to financial institutions in creating savings and investment products.
Particularly, the data on savings behavior and preferences will aid in the policy analysis of several
issues:

a. Assessing whether the proposed Personal Equity and Retirement Account

(PERA) bill in Congress will yield additional savings
b. Interest rate and tax rate elasticity of various savings and investment instruments
c. Determining how non-bank financial institutions can leverage on the savings of
Filipinos
d. Savings behavior and preferences of Filipinos over several periods in their
lifetime and the implication of these on development and the Philippine economy

The next section briefly describes basic models of savings function to provide a general
framework for generating savings data on a household level. The models below also serve as
examples of how savings data are crucial in yielding credible economic policy analysis. The
availability of reliable information on the saving behavior of households by income class, type of
savings, education level, and demographics will allow for valid tests pertaining to savings,
interest rates, taxes, and income (Mikesell and Zinser, 1973).

Determinants of Savings: A cursory review of literature

Keynesian Savings Function

The earliest and most basic savings function is that of Keynesian savings function. Savings is a
function of total income and marginal propensity to save. The marginal propensity to save tends
toward zero as
income increases. An explanation for this is that the transition from low to higher income levels
brings an increased awareness of modern consumption opportunities (Mikesell and Zinser, 1973).

DISCLAIMER
“The views expressed in this report are strictly those of the authors and do not necessarily reflect those of the United States Agency
for International Development (USAID) and the Ateneo de Manila University”.
Permanent Income Hypothesis and Life-Cycle Theory

Further studies on savings and consumption in the 1950s yielded to two major models of savings:
permanent income hypothesis and life-cycle hypothesis. The two are quite similar.

The “permanent income” hypothesis was developed by Milton Friedman in 1957. A characteristic
feature of Friedman’s hypothesis assumes that total income consists of permanent income and
transitory income. Permanent income refers to long-term expectation of income, while transitory
income refers to unexpected changes in income or the difference between actual income and
permanent income. In this model, savings depend on the marginal propensity to save out of
permanent income and the marginal propensity to save out of transitory income. The feature of
Friedman's hypothesis is that the permanent part is the determinant of decisions about
consumption and saving. Friedman argued that Keynes' proposition was incorrect since it was
derived from empirical observations of cross-section data referring to total, not permanent,
income. Some studies measure the impact of permanent income effects on savings by employing
variables relating to education attainment. Friedman's ideas were well received by most
economists, and for several years the permanent income hypothesis played a dominating role
among existing theories of aggregate saving. 5

Three years before Friedman published his “permanent income hypothesis”, Franco Modigliani,
Richard Brumberg, and A. Ando, had already built their “life cycle hypothesis”, which postulates
that people save to provide consumption during retirement years. In its simplest form, this model
assumes that individuals are far-sighted and base their decisions on future events that are known
with certainty.

In addition, under the life-cycle hypothesis, capital markets are assumed to be perfect, making it
easy for individuals to borrow to finance current consumption when they are not saving. This
theory also presupposes that individuals only save in their middle years when they have income
and dis-save during early and retirement years. Thus, individuals plan no net life-time saving but
attempt to spread their life-time consumption evenly over their lives by accumulating enough
savings to maintain consumption levels during retirement years. Further, there would be no
aggregate net personal saving since dis-saving of the retired would offset the savings of the
employed.

Recent Findings on the Determinants of Savings

Nonetheless, finding empirical support for the key assumptions and predictions of the basic life-
cycle and permanent income hypothesis models proves challenging. In reality, households face
limitations to borrow against future income. Loans require marketable assets as collateral, credit
access is limited, and interest rates tend to be high for unsecured loans (Berube and Cote, 2000).
To account for such evidences, more recent theoretical models have emphasized on precautionary
savings, liquidity constraints, and imperfect capital markets. In developed countries and emerging
countries, a large portion of the elderly tend to save out of their retirement income (Attanasio and
Szekely, 2000; Berube and Cote, 2000).

5
http://nobelprize.org/economics/laureates/1985/press.html

DISCLAIMER
“The views expressed in this report are strictly those of the authors and do not necessarily reflect those of the United States Agency
for International Development (USAID) and the Ateneo de Manila University”.
Theories have shown that income and wealth play a very important role in determining the level
of saving. Other findings in the field of saving behavior reveal that different sectors of population
have different savings motives and behavior and capacities to smooth shocks and build assets.
Savings may depend on education level, age, macroeconomic environment, demographics,
region, and family structure, labor participation, and access to pension funds system (Attanasio
and Szekely, 2000). The effect of factors such as the macroeconomic environment, real interest
rate, presence of informal credit markets, cultural factors, financial repression, presence of
remittances, accessibility to banks and financial institutions, and other transaction costs such as
taxes and bank charges is yet to be fully analyzed.

To analyze Filipino saving behavior, the following topics are suggested to be included in the
FIES as questionnaires to determine Filipinos’ savings behavior and preferences:

• Percentage of monthly income placed on savings

• Reasons for placing savings on particular instruments
• Reasons for NOT saving on particular instruments
• Level of knowledge and amount of savings placed in the following over specific periods:
o Cash savings
o Savings Account
o Checking Account
o Pensions and Retirement Accounts
o Mutual Funds, Time Deposits, and Unit Investment Trust Funds
o Stocks, Bonds, and other types of financial investments
o Real Estate
o Insurance
o Collectibles, valuables, and other assets that may be considered as forms of
investments

It is further suggested that surveys on wealth and savings of other countries be examined. The
Research Advocacy and Advisory Group (RAAG) recommends Canada’s Survey of Financial
Security and UK Family Resources Survey.

References:
Attanasi, Orazio and Szekely, Miguel. 2000. “Household Savings in Developing Countries—Inequality, Demographics,
and All That: How Different are Latin America and Southeast Asia”. Inter-American Development Bank Working
Paper #427
Bank.

Bautista, Romeo and Mario Lamberte. 1990. “Comparative Saving Behavior of Rural and Urban Households in the
Philippines,” PIDS Working Paper Series no. 90-15

Berube, Gilles and Cote, Denise. 2000. “Long-term Determinants of the Personal Saving Rate: Literature Review and
Some Empirical Results for Canada”

Blanco, Rhenee and Richard Meyer. 1988. “Rural Deposit Mobilization in the Philippines 1977-1986,” PIDS Working
Paper Series no. 88-15.

Canada’s Survey of Financial Security

Deaton, Angus. 1997. The Analysis of Household Surveys: A Microeconometric Approach to

Development Policy. Baltimore, Maryland: Johns Hopkins University Press for the World

DISCLAIMER
“The views expressed in this report are strictly those of the authors and do not necessarily reflect those of the United States Agency
for International Development (USAID) and the Ateneo de Manila University”.
http://nobelprize.org/economics/laureates/1985/press.html

http://qb.soc.surrey.ac.uk/surveys/frs/frsintro.htm

http://www.statcan.ca/cgi-
bin/imdb/p2SV.pl?Function=getSurvey&SDDS=2620&lang=en&db=IMDB&dbg=f&adm=8&dis=2

Meier, Gerald. 1995. “Leading issues in Economic Development”. New York: Oxford University Press

Mikesell, Raymond and Zinser, James. 1973. “The Nature of Savings Function in Developing Countries”. Journal of
Economic Literature. Volume 11. No. 1, 1-2

Rodriguez, Jocelyn Alma and Richard Meyer. 1988. “The Analysis of Saving Behavior: The Case of Rural Households
in the Philippines,” PIDS Working Paper Series no. 88-20.

UK Family Resources Survey:

DISCLAIMER
“The views expressed in this report are strictly those of the authors and do not necessarily reflect those of the United States Agency
for International Development (USAID) and the Ateneo de Manila University”.