Why Do People Really Save?

If Americans are to be induced to save more, policymakers need to understand savings behavior. And as a study by economists William G. Gale of the Brookings Institution and John Karl Scholz of the University of Wisconsin in the Journal of Economic Perspectives suggests, such behavior is more complex than many observers imagined.

The original life-cycle theory of savings, developed by Nobel laureate Franco Modigliani, was that people accumulated assets in their working years mainly so that they could consume them in retirement. Back in the 1970s, economists began to realize that the so-called bequest motive--the desire to leave wealth to one's dependents and children--was also a powerful stimulus to salt away savings.

Gale and Scholz focus on another aspect of the savings puzzle: so-called inter vivos transfers, or transfers of assets between living people. While some bequests are accidental--in that they occur because someone died earlier than anticipated--all inter vivos transfers are intended and thus a clearer departure from the simple life-cycle model.

Not unexpectedly, the two economists' analysis of household financial data found that most of such transfers involve gifts to children or grandchildren. But they also found that inter vivos transfers (excluding college expenses) actually represent no less than one-third of all transfers and account for at least 20% of U.S. wealth.

All of this suggests that inter vivos transfers, like bequests, are an important motive for saving. It also implies that many future retirees could conceivably choose to reduce their gift-giving if they find their savings inadequate to support their lifestyles.