ISLAMABAD: Pakistani households accumulate significant net worth but overwhelmingly in the form of residential buildings: on average, nearly 80 percent of the wealth accumulated by age 60-65 is comprised of residential buildings, says the World Bank.
The bank in its latest report, “Life Cycle Savings in a High-Informality Setting Evidence from Pakistan”, stated that Pakistani households accumulate significant levels of wealth (relative to their consumption levels) and that most of that wealth is relatively illiquid. The average Pakistani household’s net worth grows by 60 months’ worth of consumption (5 years) between ages 25 and 65.
The bulk of this increase in the form of residential housing, whereas other forms of wealth such as land, durables, business and farm values and financial assets remain stagnate over the lifecycle.
Asset accumulation is slower early in the lifecycle and picks up speed between ages 40 and 65. This is corroborated by our findings on the age profiles of consumption, income, and the saving rate.
Until age 40 consumption and income grow at identical rates, but consumption slows down relative to income thereafter, increasing the rate of saving. Land is an important part of rural households’ portfolio but grows little over the lifecycle (10 months’ worth). More liquid forms of wealth such as financial wealth or durables also grow with age, but in much more modest amounts.
The study further noted that the combined forces of population aging, weakening family and village risk-sharing networks, and low formal pension coverage will make financing elderly consumption a major challenge for the future. Life expectancy has increased significantly since the early 1990s.
In Pakistan, it went from 60.1 years in 1990 to 67.11 in 2018. While still relatively high compared to peer countries, the fertility rate in Pakistan has almost halved over the last thirty years, from 6.2 births per woman in 1990 to 3.5 in 2018, increasing the dependency ratio and reducing the availability of family or network members for support.
Formal pension coverage is likely to remain low as a fraction of the labour force, as large cohorts of young workers enter the labour market, exceeding the availability of formal jobs offering fringe benefits, even if GDP growth is strong. In sum, these socioeconomic trends further emphasize the need to understand the patterns of wealth accumulation over the lifecycle in Pakistan and, thus, the assets and resources available in old-age in Pakistan.
The fact that households primarily save in real estate and land signals that this is considered a safe investment, relative to other available options. Housing may be a way to store resources for the long run in a way that cannot easily be stolen or appropriated by other family members.
It could also reflect a lack of access to other safe, high return, and trustworthy long-term saving instruments. Low financial literacy, numeracy, and familiarity with formal banking institutions can all create barriers to participation in other forms of saving. Pakistan has been much slower than other neighbouring countries in expanding financial inclusion and the barriers to this must be addressed.
Consistent with improving living standards and expectations that family support may be less available than in the past, the proportion of 65-year-old heads with more than 5 years’ worth of consumption in net worth increased from 30 per cent in 2001 to 50 per cent in 2018. To the extent that pooling all wealth in housing is suboptimal, this pattern suggests a potential demand for long-term saving schemes designed for the informal sector.
While safe, housing is a relatively illiquid asset, which takes resources away from short-term consumption smoothing. According to Findex, only 3 per cent of those aged 15 years and above in Pakistan report being able to rely on savings for emergency funds, while 49 per cent say it is not possible to come up with emergency funds.
The main source of emergency funds tends to be family or friends, according to 41 per cent of the population aged 15 years and above; 25 per cent report borrowing for medical expenditures. Policies that allow greater use of real estate assets as collateral to borrow against, through formal financial institutions, could in theory reduce the need for liquid precautionary savings, and free up resources to save for retirement. However, such initiatives may also encourage over-indebtedness and lead to evictions.
Lack of other safe, liquid forms of saving can also limit earning opportunities offered by self-employment. The self-employed tend to be older than informal wage workers but with similar levels of schooling. Almost half of the self-employed have no education.
The older age of the self-employed might suggest that initial working years are spent acquiring start-up capital, as most of the self-employed enterprises are started using own capital. According to the Findex surveys, only 11 per cent of people aged 15 years and above borrow to start or expand a business.
Improving opportunities for safe long-term saving outside housing in the form of government-sponsored or subsidized old-age savings instruments could yield greater independence in old-age and reduce the burden on younger families. We find that average net worth accumulation accelerates midway through the working years, roughly around age forty.
While some of this accumulation may reflect patterns in inheritances, we show that active saving likely plays a significant part: household income growth starts to outpace household consumption growth around that time, and the saving rate increases by 20 percentage points between ages 40 and 65. This suggests that programs that aim to encourage formal saving may be most successful among individuals in that age range, it added.
Copyright Business Recorder, 2022
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