Precautionary Savings and Income Uncertainty: Evidence from Japanese Micro Data

Abstract

This paper tests the existence of precautionary savings using subjective or self-reported measures of income uncertainty drawn from Japanese household data (primarily from those in their 30s). Two subjective measures are tested: one concerning labor earnings and the other concerning public pension benefits. The results show that, among either nuclear family households or households that do not receive income transfers from parents, there exist precautionary savings due to uncertainty concerning public pension benefits. As the respondents are primarily in their 30s, we find that those households start to save based on precautionary motives early in their lives. The finding that the effect of public pension uncertainty concerning savings is manifested in nuclear family households suggests that intergenerational risk-sharing reduces risk and therefore wealth accumulation. Precautionary savings are found to take the form of relatively low-risk assets; no precautionary savings are found in securities. No evidence has been found for precautionary savings being motivated by uncertainty over labor earnings when economic prospects are utilized as the measure of labor income uncertainty.