Monthly Report June 2013 51

Household finances, saving and inequality: an international perspective – conference held by the Bundesbank and the Max Planck Institute for Social Law and Social Policy

Financial and real assets are distributed very differently among households of national economies across the globe. There can also be very wide disparities in their composition. Furthermore, there are often considerable differences between countries with regard to the distribution and compos- ition of wealth. With this in mind, the Bundesbank, together with the Max Planck Institute for Social Law and Social Policy, organised a conference which was held on 21 and 22 March of this year. This article summarises the most important findings of that conference. Deutsche Bundesbank Monthly Report June 2013 52

Micro datasets One purpose of the conference was to present that households have selected their assets sub- on the financial the initial findings from surveys of households optimally with regard to return expectations situation of households and in and other euro-​area countries and risk. In actual fact, there are indications their potential in analysis yielding information on their financial circum- that improvements are possible for some cat- stances. Additionally, the conference was to egories of households. ­investigate a series of questions that can be ­answered using relevant data.1 Among the Alongside initial findings from the German Distribution of most important issues to which an answer was panel, an account was given of impressions wealth in the USA more being sought at the conference were gained from the results of European surveys ­unequal than in collected in parallel with the German data. Europe – What determines the composition of house- Firstly, the results for the euro-area​ countries hold wealth? were compared with those for the United States. Secondly, initial attempts were made to – How do households prepare for retirement explain the differences among the countries of in terms of their asset decisions? the euro area. In Europe and the USA, wealth is distributed noticeably more unevenly than in- – What determines the acquisition of prop- come. With regard to both variables, however, erty, which typically accounts for a very sig- Europe is characterised by significantly greater nificant part of household wealth? homogeneity than the United States. Marked differences can also be observed in terms of Two lectures, by Professor Michael Hurd of borrowing: US households are more heavily in the RAND Corporation and Professor Michael debt than households in Europe. Differences in Haliassos of the University of Frankfurt, add- wealth in Europe can largely be explained by itionally dealt with issues which have found three factors: very wide variations in levels of particular interest in connection with the latest home ownership (with a comparatively small financial and economic crisis. number of households living in their own homes in Germany and Austria, while home – How did households’ stock and housing ownership is much more widespread in Spain wealth losses in the “Great Recession” in the and the Slovak Republic). Developments in United States affect their spending behav- house prices have differed considerably over iour? the past few years. Finally, the importance of intergenerational transfers is not everywhere of and equal relevance.

– Do we need to take special precautions to Along with the size and distribution of wealth, Households’ keep households out of financial trouble its composition is of major importance. This portfolio struc- ture and spend- and, if so, what form should such measures can give us indications of whether different ing behaviour important for take? categories of households are restricted, say, in understanding their investment decisions, what their invest- their situation Initial findings of Information on the initial findings of the Panel ment motives are, or how changes in the German and on Household Finances (PHF) has been pro- underlying conditions – such as general infla- European sur- veys on house- vided by the preceding article on “Household tion or price changes in certain markets (such hold finances wealth and finances in Germany – results of as the housing market or stock market) – affect the Bundesbank study” (see pages 23 to 49). households. Several papers at the conference A paper analysing the composition of German households’ wealth was also presented at the 1 A selection of the papers presented and the conference conference. In particular, the paper investi- programme may be found on the Deutsche Bundesbank’s website at www.bundesbank.de/Redaktion/EN/Termine/­ gated the question of whether there are signs Research_centre/​2013/2013_05_24_eltville.html. Deutsche Bundesbank Monthly Report June 2013 53

examined how the portfolio of financial wealth The sharp losses in stocks and housing wealth US households’ changes over the life cycle and what deter- during the recent crisis in the United States consumption reacted strongly mines that change. In general, the results are in were taken by Michael Hurd as a basis for to decline in line with expectations: with age (or with de- asking how the affected households changed house prices clining life expectation), investment in stocks their consumption expenditure in the after- initially increases before falling again upon math. Among other things, it is important that reaching . Conversely, fixed-​ such studies distinguish between households at interest assets then become more important. different stages of life, since older persons, for example, not only possess more assets, but Wealthy house- These observations are consistent with the no- also, given a different life perspective, perhaps holds substitute tion that retirement provision is a key motive make different decisions. Overall, the US data more strongly between private for accumulating assets. Unfortunately, the point to marked reactions in consumption to saving and pen- sion entitlements available information on financial entitlements the losses in stock and housing wealth, al- than poorer after retirement is still imprecise. This applies, in though the reaction to house prices was obvi- households particular, to occupational , which are ously stronger. becoming increasingly important. At the con- ference, an account was also given of the initial In a further presentation, Michael Haliassos Difficult to pro- stages of a project being conducted by the gave an overview of possible precautionary tect households against bad Max Planck Institute for Social Law and Social measures designed to protect households from ­financial Policy together with the Institute for Employ- serious financial problems. In view of the asso- ­decisions ment Research, the Research Institute of the ciated costs, it initially appears obvious that German Federal Employment Agency, which is such measures make sense. On the other hand, aimed at a better reporting and understanding it is apparent that many of the proposed ap- of occupational pensions in Germany. Two proaches may not produce the intended result. other presentations discussed related topics: The proposal that households have to be kept “Can the Dutch meet their own retirement ex- away from certain investment instruments (or, penditure goals” and, relating to households in conversely, that some investments should be Norway, “Heterogeneity in the offset effect of especially recommended to households) seems the wealth on other private wealth”. In to raise problems given that identical invest- both cases, it was stressed that there is a con- ments may be prudent for some households siderable degree of heterogeneity. For example, but not so for others. Nor is recommending wealthy households evidently substitute more better information and education for house- heavily between private saving and pension en- holds in financial matters necessarily without titlements than poor households. This reveals problems: it can be seen that such measures that talking about averages is, in many cases, may lead to households becoming overconfi- of limited information value. dent and developing too great a risk appetite.

Decision to Possessing or seeking to possess property is a Overall, the conference showed that data on ­acquire property particularly important wealth decision. Under- household wealth can supply a great many in- heavily ­influenced by standing this decision is therefore of great sights that can be used to gain a better impres- ­employment ­situation interest. A study for Sweden showed, for ex- sion of the state of an economy. This can then ample, that households attach major import- be the starting point for a better assessment of ance to their own employment situation when the impact of economic policy measures and buying a home. These data can be used to underlying institutional conditions. identify, among other things, how potential risks of becoming unemployed influence the decision to buy a home.