Comparison of ratios: the example of the saving ratio

The household saving ratio is one of the key variables in the national accounts (see Chapter 1). It equals saving divided by disposable income (and multiplied by 100 X III.), and it represents the allocation of income between consumption and saving, an essential item of information in economic analysis. It turns out that the saving ratio is very significantly lower in the United States and in other countries like Australia (where it is even negative), than in Germany or Italy. Japan is estimated to be somewhere between the two extremes.

Table 3 shows that US households, on average, hardly save at all, allocating almost their entire incomes to consumption. Only 1.4% of net disposable income was saved in 2003. This demonstrates, on the one hand, the strong confidence in the future shown by

Table 3. Household saving ratio in percentage

Net saving, unless otherwise indicated

2000 2001 2002 2003

Australia 2.9 0.8 –2.9 –3.2

Finland 0.2 –0.2 0.3 0.9

Germany 9.7 10.2 10.5 10.7

Italy 9.1 10.1 10.4 10.6

Japan 9.5 6.5 6.3

United Kingdom^* 5.0 6.5 5.3 5.8

United States 2.4 1.8 2.1 1.4

* For the United Kingdom, the gross saving ratio.

Source: National Accounts of OECD Countries, Volume I, Main Aggregates, 1993-2004, 2006 Edition.

StatLink: http://dx.doi.org/10.1787/734511327772

III. In calculating the saving ratio, the “net adjustment to the equity of pension schemes (D8)” should be added to the disposable income in the denominator of the ratio (see Chapter 6).

the saving ratio

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US households and, on the other, their lack of concern regarding the financing of their country's investment. In fact, it is not US households that finance this investment but foreign investors who, having confidence in the US economy, continue to buy large amounts of US Treasury bonds. Some people worry about the dramatic impact on the world economy that could result from erosion of foreign investor confidence, while others think that this imbalance will gradually be reabsorbed without producing a crisis. One should note that the dramatic fall of the saving ratio in the US masks the fact that the potential wealth of households has been increasing given the impressive price increase of dwellings in the recent period. This automatic “saving” is not captured by the saving ratio, which excludes holding gains. Note that this self-confidence is not confined to North America, but is shared also by countries such as Australia or Finland, both of which have posted firm economic growth in recent years.

In contrast, it is striking to note the very different behaviour of German and Italian households, who save more than 10% of their net incomes. Many economists, in the OECD and elsewhere, are trying to find explanations for such wide differences among countries that are basically quite similar. Some economists believe households in Germany and Italy lack confidence in the ability of their economy to guarantee them a job and a good pension.

But other possible explanations have also been put forward, and one of these is based purely on statistics. It is in fact possible to wonder whether differences in statistical methodology or purely institutional differences might explain these wide differences in the saving ratio. On this point, too, the OECD has carried out several studies, including one published quite recently that lists several sources of non-comparability.

The first source of non-comparability relates to the calculation of the saving ratio, which can be calculated in two different ways: 1) the “net” approach deducts households’

consumption of fixed capital (CFC) from both the numerator (saving, denoted as S) and also from the denominator (disposable income, denoted as DI); or 2) the “gross” approach, in which the consumption of fixed capital is not deducted from neither the numerator nor the denominator. The first approach gives a “net” saving ratio equal to: (S – CFC)/(DI – CFC); the second gives a “gross” ratio: S/DI. The first result is mathematically lower than the second.

Table 3 above shows “net” ratios except for the United Kingdom.

While many countries publish “net” ratios, which are preferred by the OECD, the United Kingdom and some others have opted for the “gross” saving ratio. There are reasons for preferring a gross ratio. First, it corresponds more closely to the observed financial flows, whereas the net ratio is artificial in that it incorporates an imputed flow, i.e.

the consumption of fixed capital. Second, it is probable that net ratios are less comparable between countries than gross ratios because of the differing methods used to calculate the consumption of fixed capital. In all cases, however, one must avoid improper comparison of a gross ratio with a net ratio. This is nevertheless the error that might be made by looking at Table 3, since in that table (as indicated in the footnote), the ratio for the United Kingdom is gross while for the other countries it is net.

the saving ratio

Table 4 below rectifies this error by showing net ratios for all countries, including the United Kingdom. As can be seen from this corrected table, saving behaviour in the United Kingdom turns out in to be comparable to that of the United States, and not, as Table 3 incorrectly indicated, somewhere between that of the United States and Germany.

The lesson here is that when presented with international comparisons it is necessary to look closely at all the footnotes in order to avoid errors.

A strictly comparable definition of the saving ratio is clearly a necessary condition for grasping differences between countries, but it is not a sufficient one. Relatively minor institutional differences can result in significantly different measures of saving. One example is the financing of retirement pensions. For the sake of simplicity, let us consider two cases:

financing retirement pensions on a pay-as-you-go basis and on a capitalisation basis. In pay-as-you-go, the contributions of today’s workers pay for the pensions of today’s retirees. In the capitalization approach, the contributions by today's workers go into a fund that belongs to them and out of which their pensions will be paid in the future. In the first case, the national accounts record the contributions as deductions from the income of working households and pension benefits as additions to the income of retired households.

In the second case, the contributions are saving (by today's workers), and the pensions paid are “dis-saving” (or “negative” saving) by pensioners.

For historical and cultural reasons, certain countries (continental Europe, Japan) prefer the pay-as-you-go systems, whereas in others capitalisation systems predominate. The saving ratio calculated by national accountants will therefore differ depending on the institutional approach used to account for pension financing. It is therefore interesting to see to what extent this explains the observed differences in saving ratios. The OECD has made such a calculation for the euro area and the United States. In this alternative calculation, it is assumed that all systems are pay-as-you-go. The following chart shows the result of this calculation. The continuous line shows the difference between the saving ratio

Table 4. Household net saving ratios in percentage

2000 2001 2002 2003

Australia 2.9 0.8 –2.9 –3.2

Finland 0.2 –0.2 0.3 0.9

Germany 9.7 10.2 10.5 10.7

Italy 9.1 10.1 10.4 10.6

Japan 9.5 6.5 6.3

United Kingdom 0.5 2.0 0.4 1.1

United States 2.4 1.8 2.1 1.4

Source: National Accounts of OECD Countries, Volume I, Main Aggregates, 1993-2004, 2006 Edition.

StatLink: http://dx.doi.org/10.1787/337551341040

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