MPC out of Augmented Wealth in Poland

Abstract

The study attempts to link the descriptive economics with the theoretical
model of permanent income and life cycle hypothesis (PILCH) to shed some light
on a low private savings rate for Polish households. These may be explained
by the households’ belief that the public pension are a collateral to borrow
against, which could discourage the buffer stock effect. The study comprises
two research fields: 1) the estimation of so called augmented wealth, and, 2) the
marginal propensity to consume (MPC) out of different types of wealth with
the permanent income model. The mean augmented wealth (i.e. net wealth
plus public pension wealth) per household in PLN amounted to 705 thousands,
consisting of public pension wealth of 388 thousands and net wealth of 415
thousands. The model perfectly matches the augmented wealth Lorenz curve.
The average MPC out of all types of wealth reaches 10% on average, ranging
6–20%, with a negative MPC to wealth correlation, and 60% of hand-to-mouth
households. The explanation for this perfect match may stem from a high wage
growth (also public pension contributions wedge) that that builds the public
pension wealth. The Ricardian-type households may then mentally account the
future pensions as a collateral (fiduciary money) for current high MPC, which
may implicate crowding out their propensity to save for retirement privately.