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Relationship between Wealth Share and Private Saving Rate by the Wealth Class

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The Relationship Between Wealth Share and Private Saving Rate by the Wealth Class
Introduction
The widening gap between the rich and the poor has puzzled scholars and policy makers
for many decades. The association between wealth share and private saving, or spending habits,
can provide insights into why some few households have accumulated vast amounts of wealth
while the majority have little to no savings. It is widely believed that wealth accumulation and
consumption habits are positively related, such that those who save more tend to be wealthier
than those who do not save or save little from their earnings. However, private savings is not the
only variable that can be used to explain the huge income disparity between the top rich
households and the bottom poor. The purpose of this paper is to model the relationship between
wealth share and private saving rate. The aim is to investigate whether saving and spending
habits can be used to explain why so much of the world’s wealth is in the hands of a few
households and whether developing a saving culture can help reduce income inequality.
Background Literature
Literature does not provide conclusive evidence about the relationship between wealth
inequality and spending habits across different households. Early studies, like those of
Modigliani (1970) suggest that both the high income and low income households endeavor to
stabilize consumption throughout their lifetime, and therefore saving rates tend to be stable over
time regardless of how much income they get. Other studies have suggested that the high income
gap between the rich and the poor leads to social conflicts, instability and pursuance of taxation
measures and wealth redistribution policies that lower savings.

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Scholars have always been interested in the issue of whether the top income households
save a bigger fraction of their income than the less wealthy households. Despite increased
attention to this issue, there lacks a conclusive answer to date. A study by Dynan, Skinner &
Zeldes (2004), investigated the question whether high lifetime income populations save more of
their income than the low income populations. Using three sources of data – survey consumer
finances, consumer expenditure survey, and income dynamics panel study- the researchers found
that for households with members aged between 30 -59 years, those with high lifetime incomes
save more of their income than the low income households. The study further found no evidence
that the high income households saved less during their post-retirement ages.
In another study, Fagereng, Moll & Natvik (2019) investigated saving rates distribution
and how these change across different classes of wealth distribution. The researchers used
administrative panel data from Norway on wealth and income and documented how savings
change with wealth. It was found that the variation of saving rates with wealth depends on
whether capital gains are included in savings. In the study, active saving rates remained constant
across different classes of wealth, suggesting that the high income households do not save a
bigger fraction of their income than the low income households in the traditional view. Instead,
savings increase dramatically with wealth such that the wealthier households are able to
accumulate more wealth from capital gains. This relationship, according to the study, exists
because the richer households save wealth by maintaining assets that when sold, lead to capital
gains.
A study by Tran, Ong & Nguyen (2020) found a positive relationship between income
inequality and the rate of household savings. The researchers investigated the association
between saving and income inequality and how this association varies from one household group

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to another. Using panel survey of Vietnam rural households between 2008 and 2014, the study’s
findings were consistent with the social status prediction. It was found that income inequality
affects saving rates in considerable ways and the effect of inequality is more intense among the
poor, younger and married headed households than other households.
Dynan, Skinner and Zeldes (2004) showed evidence of high rates of savings among the
wealthier populations when their bequest are immune to regressive tax compared to income tax.
Other researchers have investigated consumption as a means through which inequality
encourages savings. According to Tran, Ong & Nguyen (2020), the rich households save a
bigger fraction of their income while other households have little to save after spending on basic
necessities. Thus, while households get utility from high levels of spending, they are also wary of
the impacts of savings and consumption.
Analysis and Results
This paper tests whether household savings rates and wealth are related. The researcher
will attempt to address the following question: Is there a relationship between wealth share and
saving habits? Data for the study was sourced from Capitalized Income Tax Data, which is
published regularly as part of the United States Distributional National Accounts (Gabriel
Zucman, 2021). Based on the review of current literature on the issue, the hypothesis is as
follows:
H1: High household saving rates is positively related with wealth.
This hypothesis is based on the social status theory, which claims that household savings
increases in response to high rates of inequality. The variables to be used for the empirical
analysis are the savings rates and household wealth. The rate of savings is the independent

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variable while wealth is the dependent variable. Longit...