Islamabad: According to a new World Bank study, Pakistani households accumulate considerable net worth, but overwhelmingly in the form of residential buildings, accounting for approximately 80% of the wealth generated by the age of 60 to 65.
Between the ages of 25 and 65, the average Pakistani household’s net worth increases by 60 months of consumption (5 years). Most of this gain comes from residential properties, whereas other forms of wealth, such as land, durables, business and agricultural values, and financial assets, remain stagnant over the life cycle. As a result, asset accumulation is slower early in life and accelerates between the ages of 40 and 65.
According to the study “Life Cycle Savings in a High-Informality Setting — Evidence from Pakistan,” released earlier this week, the combined forces of population aging, weakening family and village risk-sharing networks, and low formal pension coverage will make financing elderly consumption a significant challenge in the future.
The fact that households save predominantly on real estate and land indicates that this is a safe investment compared to other available possibilities. Moreover, according to the study, the housing may be a mechanism to store resources in the long run that cannot readily be stolen or seized by other family members.
According to the study, this could be due to a lack of access to safe, high-return, and trustworthy long-term saving mechanisms. In addition, participation in other types of savings might be hampered by a lack of financial literacy, numeracy, and familiarity with traditional banking institutions.
Pakistan has been significantly slower than other neighboring countries in expanding financial inclusion, and the report emphasized that these hurdles must be addressed.
While safe housing is a highly illiquid asset, diverting resources away from short-term consumption smoothing. According to Findex, only 3% of persons aged 15 and up in Pakistan can rely on savings for emergency finances, while 49% think it is impossible to come up with emergency cash.
According to 41 percent of the population aged 15 and up, the primary source of emergency finances is family or friends; 25 percent borrow for medical expenses.
Policies that allow for increased use of real estate assets as collateral for borrowing through formal financial institutions might lower the requirement for precautionary liquid savings and free up resources for retirement savings. Such measures, however, may foster over-indebtedness and lead to evictions.
A lack of other safe, liquid savings forms can also limit self-employment’s earning potential. The self-employed are typically older than informal wage employees but have comparable levels of education. Almost half of the self-employed people have no formal education. Because most self-employed businesses are founded with their own money, the greater age of the self-employed may imply that the initial working years are spent accumulating start-up cash. According to Findex polls, only 11% of adults aged 15 and up borrow to start or build a business.
According to the study, increasing chances for safe long-term savings outside of housing through government-sponsored or subsidized old-age savings instruments could result in greater independence in the old life and less stress on younger families.
“We find that typical net worth accumulation accelerates midway through the working years, roughly around age forty,” according to the study.
While some of this accumulation may be due to inheritance patterns, we show that active saving likely plays a significant role around that time, household income growth begins to outpace household consumption growth, and the saving rate increases by 20 percentage points between the ages of 40 and 65.” This shows that programs that encourage formal saving may be most successful among people in that age group.