WANTED: MORE SAVERS
Why falling savings rates could spell trouble for Asia.
By Don Durfee

Raise the topic of aging populations, and one problem springs to mind – the staggering cost of providing healthcare and pensions to retirees. But there is another, less noticed, worry. As the average age of a country’s population climbs, its savings rate slips, since people typically begin to spend their savings in retirement. Also, because the younger generation in many countries doesn’t save as much as its elders did, there are fewer new savings to take the place of what’s being spent.

Research from McKinsey Global Institute, which reviewed savings rates in Germany, Italy, Japan, and the US, shows that by 2024 household financial wealth in those four countries will be US$31 trn less than it would have been if earlier trends had continued.

Lower savings rates would have an ominous implication for Asia. Economic studies conducted in the 1990s – most notably by economist Alwyn Young – examined the causes of Asia’s remarkable economic expansion up to that point. As UBS economist Jonathan Anderson explains in an article that appeared last year in the Far Eastern Economic Review, the cause wasn’t greater productivity. It was, quite simply, Asia’s high rate of investment.

And what drove that investment? It wasn’t government-directed investment, but high levels of savings. From 1965 to 1995, the US gross domestic savings rate averaged 18% of GDP and the economy invested 17% of GDP. Over the same period, by contrast, Asian countries saved 32%, on average, which allowed them to invest 31%.

In other words, lower savings will translate into lower growth. And for companies, lower growth means fewer opportunities.

What can be done to bolster savings? The McKinsey study suggests that the usual solutions, including allowing more immigration, promoting higher birthrates, and lifting the retirement age aren’t likely to make much difference. What would help is achieving higher rates of return for savings and encouraging young people to save more. Neither is simple. Higher rates of return could require further liberalizing financial services, among other steps. Higher savings might be helped by requiring automatic enrollment for young workers in retirement schemes. It’s not too early to start stemming the effects of old age.