Money, Banking and Households: Question 5

Worked solution

Part (a): Identifying age and culture

(i) The likely saving difference between Boluwatife and Ngozi, who earn a similar income but are at very different stages of life, is best explained by age.

(ii) The difference in average household saving between Azurel and Vantoria, which have different expectations about who supports people once they stop working, is best explained by culture.

Part (b): Why age changes Ngozi’s and Boluwatife’s saving

Ngozi is close to the point where her income from work will stop altogether, she plans to retire in only four years. To keep supporting herself once her wages end, she needs to have built up enough savings before then, so she has a strong incentive to save a large share of her income now, while she still has an income to save from.

Boluwatife, by contrast, has decades of future working income ahead of him. Retirement is a long way off for him, so there is far less urgency for him to set aside a large share of his current income to prepare for it. He can direct more of a similar income toward current spending, such as establishing himself in his new job and lifestyle, without seriously threatening his ability to build up retirement savings later.

As a result, even though Ngozi and Boluwatife earn a similar income now, Ngozi is likely to save a larger proportion of it, purely because of where each of them is in their life, or age.

Part (c): Why culture raises saving in Vantoria relative to Azurel

In Vantoria, the state provides only a very limited pension, and there is a long-standing cultural expectation that each individual is responsible for funding their own retirement. With little support to fall back on from either the state or their children, Vantoria’s households have a strong, ongoing incentive to save a significant share of their income throughout their working lives, so that they have enough set aside once they eventually stop earning.

In Azurel, the cultural expectation runs in the opposite direction: adult children are expected to financially support their parents once they retire. This means an individual in Azurel does not need to build up a large personal fund for old age, they can reasonably expect their own children to provide support later, in the same way they may be expected to support their own parents now. This cultural safety net reduces the pressure on Azurel’s households to save out of current income.

Because saving in Vantoria is driven by necessity (no state or family safety net) while saving in Azurel is made less necessary (a family-based safety net exists instead), households in Vantoria collectively set aside a larger share of national income as saving than households in Azurel do, even without any difference in income levels between the two countries.

Final answers

• (a) (i) Age. (ii) Culture.
• (b) Ngozi’s approaching retirement creates a strong need to save now, while Boluwatife’s much longer working life ahead removes that same urgency, so Ngozi saves a larger proportion of a similar income.
• (c) Vantoria’s limited pension and self-funded-retirement culture forces households to save privately, while Azurel’s family-support culture reduces that need, so average household saving is higher in Vantoria than in Azurel.