The saving behavior of the wealthy has received remarkably little academic attention in the past twenty years or so. This is probably largely attributable to a relative lack of good data: The Survey of Consumer Finances is virtually the only publicly available source of detailed data on wealthy households, and even the SCF has only a few hundred really wealthy households in each triennial wave. Despite recent neglect, the topic is an important one for scholars of saving behavior, for at least two reasons. First, wealthy households should provide a powerful means of testing whether the standard model of consumer behavior, the Life Cycle/Permanent Income Hypothesis, is adequate as a universal model of saving and consumption. This is an application of the general scientific principle that models should be tested under extreme conditions; if they do not hold up, a new model (or an extended version of the old one) is called for. The second reason for studying the wealthy is that they account for a large share of aggregate wealth. In fact, some understanding of the saving behavior of the wealthy is probably indispensable to any credible attempt to account for the magnitude of aggregate wealth.
Although the primary source of evidence in this paper will be the four Surveys of Consumer Finances conducted in 1983, 1989, 1992, and 1995, the inevitable limitations of those data will be apparent. The paper therefore also relies to a considerable extent on unorthodox kinds of evidence, ranging from information in the annual Forbes 400 tabulation of the richest American households, to quotations from and about the very rich, to the results of a “focus group” meeting with a set of wealthy individuals who were directly asked their reasons for saving.
The paper begins by considering whether the standard model of household consumption and saving decisions, the Life Cycle model, provides an adequate description of the behavior of wealthy households. I argue that the Life Cycle model, or at least the traditional incarnation in which the decision-maker saves mainly to finance his own future consumption, cannot simultaneously explain both the behavior of the median household and the behavior in the upper tail of the wealth distribution. The next section of the paper considers whether a “Dynastic” model, in which the wealthy save mainly for the benefit of their heirs, performs better. While the Dynastic model can explain some observations, and probably does roughly apply to some households, I argue that it still does not explain some important facts about the saving behavior of the wealthy. Furthermore, the Dynastic model conflicts with the self-reported motives for saving that many wealthy people voice. Finally, I consider a model in which the wealthy save because, either directly or indirectly, they obtain greater pleasure from possessing an extra dollar of wealth than they would get from an extra dollar of consumption. Following Max Weber (1958) as interpreted by Zou (1994) and Bakshi and Chen (1996), I call this the “Capitalist Spirit” model. I argue that a direct wealth accumulation motive is indispensable in explaining at least some of the observed behavior of the very wealthy.
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Why Do the Rich Save So Much?
