Almost 80 per cent of the wealth accumulated by Pakistani households by the time they are 60 to 65 years old is made up of residential buildings, according to a recent World Bank study.
Between the ages of 25 and 65, the net worth of the typical Pakistani household increases by 60 months’ worth of consumption (5 years).
According to a DAWN report, residential housing makes up the majority of this growth, whereas other types of wealth like land, durables, business and farm values, and financial assets stagnate over time. Early in life, asset accumulation is slower; it picks up between the ages of 40 and 65.
According to a study titled “Life Cycle Savings in a High-Informality Setting — Evidence from Pakistan” published earlier this week, financing elderly consumption will be a significant challenge in the future due to a combination of factors including population ageing, deteriorating family and village risk-sharing networks, and low formal pension coverage.
When compared to other investment options, real estate and land are a safe bet, as evidenced by the fact that households save primarily in these areas. According to the study, housing may be a way to permanently store resources in a way that makes them difficult for other family members to steal or use against them.
According to the study, it might also be a result of a lack of access to other reliable, safe, and high-return long-term saving options. Participation in alternative saving methods may be hindered by low levels of financial literacy, numeracy, and familiarity with formal banking institutions.
The study emphasised that Pakistan has expanded financial inclusion much more slowly than other nearby countries and that these barriers must be removed.
Despite being a safe investment, housing is relatively illiquid, which depletes funds for short-term consumption smoothing. Only 3 per cent of Pakistani adults (15 and older) report being able to rely on savings for emergency funds, while 49 per cent claim it is impossible to come up with emergency funds.
According to 41 per cent of people ages 15 and older, family or friends are typically the primary source of emergency funds; 25 per cent report borrowing for medical expenses.
Theoretically, policies that permit more real estate assets to be used as collateral for loans made through formal financial institutions could lessen the need for liquid precautionary savings and free up funds for retirement savings. However, these programmes might also promote excessive debt and result in evictions.
Scarcity of other secure, liquid savings options may also restrict the income potential of self-employment. Although self-employed people have similar levels of education to wage workers, they are typically older. Nearly half of self-employed people lack education.
Given that the majority of self-employed businesses are started with their own capital, the older age of the self-employed may indicate that the first working years are spent acquiring start-up capital. Only 11 per cent of people aged 15 and older, according to Findex surveys, borrow money to launch or grow a business.
According to the study, expanding options for secure long-term savings outside of the housing through the use of government-sponsored or subsidised old-age savings instruments could lead to greater independence in old age and lessen the burden on younger families.
The study found that the average net worth accumulation accelerates around the age of forty, roughly in the middle of the working years. We demonstrate that active saving likely plays a significant role, even though some of this accumulation may reflect patterns in inheritances.
Around that time, household income growth starts to outpace household consumption growth, and the saving rate rises by 20 percentage points between ages 40 and 65. This suggests that people in that age range may benefit most from programmes designed to encourage formal saving.
