An Analysis on the Effect of Old Age Dependency Ratio on
Domestic Saving Rate
Jinwoo Hyung
Under the direction of Professor Ronald Lee
University of California, Berkeley
Department of Economics
December 2013
Abstract
As continuously studied by numerous papers, demographic factors are expected to be crucial components that affect the saving rates of countries. This paper investigates the correlation between the domestic saving rates and the old age dependency ratio, by examining the data set of 15 high income countries from 1975 to 2010, based on hypothesis that old age dependency ratio is negatively correlated with the domestic saving rate. Other four explanatory variables, young age dependency ratio, short-term interest rate, unemployment rate, and GNI per capita, are also used as regressors in econometric models. The results of this paper, however, illustrate that the OADR has no significant effect on the domestic saving rates, while GNI per capita is found to be a sole factor that is statistically significantly correlated, consistently throughout the regression results.
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Acknowledgement
Most of all, I would like to convey my sincerest gratitude to Professor Ronald Lee, who guided, supported, and encouraged me through every step of the research. Also I am very grateful for the willingness of Professor Ronald Lee, to answer my questions. It is definitely impossible to successfully present this paper without his honorable help and it is my privilege to have him in my academic life. Also, I would like to thank Harrison Dekker, who provided me with effective way to collect the data set used in this paper. I thank the economics department of University of
California, Berkeley, for providing a valuable opportunity. This thesis is dedicated to the memories of my grandparents, the people I respect and love the most.
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I.
Introduction
Saving rate has been continuously investigated by economists, since it is regarded as one of crucial components that determines the long-term economic growth of countries. If consumption of any subject equals or exceeds production, no capital will be accumulated to generate or handle enough investment that is necessary for economic growth. Thus, failure to achieve sufficient saving rate will jeopardize the sustainability of growth, even when the economy is booming at the certain period.
While there are numerous factors, such as interest rates, size of real disposable income, consumer confidence, and etc., which affect the saving rates, this paper mainly examines and focuses on effects of demographic factors, especially the old age dependency ratio, on domestic saving rate, using various econometric approaches to figure out the correlation between independent variables and dependent variable. Thus, this paper explore how economic burdens due to increasing old age dependency ratio affects the saving rate of households, and, further, the saving rate of countries.
Historically, there have been many researches that explore the relationships between saving rates and demographic factors. Coale and Hoover (1958) introduced the youthdependency thesis1, which argues that higher ratio of the youth in population distribution will induce lower saving rate. Also, Fry and Mason (1982) and Mason (1988) state that presence of children induces households to increase consumption and decrease saving. The lower saving rate due to high youth-dependency ratio, however, has been somewhat mitigated in most developed
1
Note that this paper uses the term ‘young age dependency ratio’ rather than youth-dependency ratio.
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and rapidly developing countries, throughout the decades, as fertility rates have been gradually declined in most high-income countries.
Due to longer life expectancy and sustained lower fertility rate, characteristics which are seen in most developed and rapidly developing countries, old age dependency ratio (OADR) is gradually increasing, implying lower saving rate.
