A study on the determinants of savings among low income Korean families

Purpose: Recently, Korea introduced an asset program, Child Development Accounts (CDA), which provides financial assistance to poor children in the form of matching funds to their saving. To make the policy successful, it is important to know factors associated with the savings of low income families and to consider them in designing the details of the program, because benefits are decided based on saving amounts in the CDA. For example, if savings are strongly associated with income in low income families, less poor family can get more benefits because they can save more. In this case, the policy systematically provides more help to less needy people rather than to more needy people, which is not desirable in general. Hence, the purpose of this study is to find factors associated with the amount of savings among Korean low income families.

Methods: This study uses the data from 2004 which was the 7th wave of the Korean Labor and Income Panel Study that started in 1998 with a national sample of 5,000 households living in urban areas. The final sample includes 3,646 households and is categorized into three sub-groups for comparison: poor family (N=590), near-poor family (N=255), and middle/high income family (N=2,801). Tobit analysis is used. A dependent variable is the saving amount. The following family characteristics were considered as independent variables: earned income, other income, living expense, the number of children, family size, home ownership, and welfare recipiency. Head's age, squared age, and education were entered for statistical adjustment.

Findings: Similar results are found in poor and near-poor families. About two third of them had no savings while only 20% of middle/high income families are non-savers. According to Tobit analysis, earned income, other income, and living expense (all at p<.001) are positively associated with saving amount in poor and near-poor families. Family size is also a significant factor negatively associated with it. However, other income and family size are not significant in middle/high income families; for the families, home ownership (p<.001) is significantly associated with savings.

Implications: In Korean context, the savings are highly associated with family characteristics, specifically among low income families. Considering the findings of this study, fixed matching rate can make the CDS an inappropriate anti-poverty program because it has a mechanism of providing more help to less needy families. Hence, authors suggest to apply various matching rates based on family income and other characteristics which are significantly associated with savings in low income families.