Low income individuals who are not able to save are some of the most vulnerable people in our society and will be more likely affected by crisis, economic downturns or even bad luck (a disease, for example), representing a public policy issue for official authorities. This recent article by Diário de Notícias discusses how the rich save more than the poor. They say, according to the Bank of Portugal, individuals in the top 20% of the income distribution are responsible for 80% of total household savings in Portugal. Additionally, often times the poorest individuals even have negative saving rates and more educated individuals save more than the less educated ones.
Moreover, I illustrate this important debate with data on individuals’ saving rate across the income distribution in Portugal, using the latest Portuguese household budget survey, collected by INE in 2010/2011. This is an extensive and representative sample, gathering more than 9489 households, and ensuring a high external validity.
According to this data, the average saving rate in Portugal is about 7.7%, although many individuals have negative savings, showing how indebtedness is a part of many people’s lives.
When we look at the different Portuguese regions (at NUTS II level), it is possible to observe substantial differences.
The North has the lowest average saving rate (0.9%), while Azores has the highest (22%). Lisbon area, the biggest metropolitan area in the country, has an average of 6.9%. Both regions including the two biggest Portuguese cities (Lisbon and Oporto) have saving rates lower than the national average.
Controlling for the bottom 10% and top 10% of the income distribution, it is possible to observe differences in the saving rate of both groups.
For the most regions, the bottom 10% show a negative saving rate. The two worse situations are in the regions including the two biggest urban areas, as the North has an average of -18.2% while the Lisbon area has an average of -26.9%. The national average for the bottom 10% is -12.1%. Looking at the top 10% individuals, in all regions the average saving rate is above the national average of 7.7% for all individuals, achieving 24.8%.
When it comes to relative expenditure in healthcare, the lowest 10% individuals spend on average a much higher share of their income (12.4%) than the top 10% (who spend 6.1%). Expenditure with food represents 17.6% of bottom 10% individuals total income, on average, while for the top 10% it only represents 11.2%. Also, the top 10% individuals seem to account for 71% of total savings in Portuguese households.
By decomposing the saving rate among individuals with different labor conditions, unemployed people have, on average, a negative saving rate, when compared to the employed and retired people.
Observing the saving rate of households who receive Rendimento Social de Inserção (RSI), they seem to be financially vulnerable, as for almost every region the average saving rate is negative.
The saving rate indicator was built from households’ total income and expenditures on an annual basis. It’s important to understand that for some time periods throughout the year some households may experience negative saving rates, although the annual average might be positive.
Concluding, it’s not my objective to speculate about the causes of these differences between the richest and the poorer. I only intended to show a clear picture of how the saving rate between the riches and poorer people are substantially different . These observations are also related with the findings of Thomas Piketty on how the rate of wealth accumulation is higher for the top income individuals. Applying this idea to the saving rate, the individuals who are more able to save will also have the capacity to invest more and accumulate higher returns in the future. In opposition, individuals less able to save could get into a “trap”, leading to negligible amounts, or even get worse, if they spend more than their income. Finally, beneficiaries of RSI seem to continue spending more than their income. I hypothesise that the subsidy (together with unemployment benefits or low salaries) are not enough to cover basic needs or, in alternative, these beneficiares could have a lack of financial literacy. Moreover, it could be an interesting policy to provide education on personal finance to the beneficiaries of government transfers who are in risk of poverty or getting indebted. Also, it would be interesting to understand if lower income individuals get more indebted and what are the loan conditions they get with financial institutions.
By Henrique Pita Barros – Master in Economics & Nova Economics Club member (Poverty: Concepts and Challenges course)
(Analyses made on Stata software package)