Economics professor Laurens Cherchye mapped out Belgian families who spend their entire disposable income every month. Eighty percent of them appear to be wealthy. ‘Because there are no tangible savings, they feel more vulnerable than they actually are.’
In 2022, Belgians saved an average of 12.5 percent of their disposable income. In 2001 that was still 18.1 percent. A quarter of a century ago we were among the best savers in Europe; Today we are in the middle bracket.
Economist Laurens Cherchye, affiliated with KU Leuven, together with colleagues Bram De Rock and Frederic Vermeulen, was commissioned by the National Bank to look for the profile of those Belgian families who are currently unable to put a nest egg aside. Their findings are quite remarkable: 25 percent of all Belgian families consume their disposable income every month. 80 percent of them are not poor, but rich.
You describe those families as ‘living from hand to mouth’.
“That is a translation of the English common expression hand-to-mouth consumers. Almost every euro that hand-to-mouth families receive in a month is spent that same month. Moreover, these families have little liquid assets (money that is immediately available, or shares that can be quickly converted into cash, ed.).
“Within that category we distinguish two types: the poor and the ‘rich’ families. This was not taken into account in economic literature for a long time. Until ten years ago, it was assumed that families living hand-to-mouth were poor anyway.”
What is a poor ‘living hand-to-mouth family’?
“These families do not have illiquid assets, such as a house, and sometimes they have more debts than assets. Their monthly income is barely enough to keep their heads above water. American economists Greg Kaplan and Giovanni Violante published a study in 2014 that showed that not all hand-to-mouth consumers are poor by definition. They showed for the first time that a large group of relatively wealthy families are also part of that category. We used the method of Kaplan and Violante to analyze the Belgian situation.”
So what exactly did Kaplan and Violante discover?
“For decades, classical economic theory made a distinction between permanent and temporary changes in income. According to that theory, if a family income changes permanently, this has a lasting impact on consumption behavior. The reasoning behind this is that after, for example, a promotion, the family will live on a higher level for the rest of its existence. According to the same theory, a temporary change in income resulted in much less additional consumption.
“Empirical research from 2013 and 2014, however, showed that these statements were not always correct. It emerged that American families almost immediately spent a quarter of the temporary subsidies they received from the government on non-durable consumer goods.
“Greg Kaplan and Giovanni Violante looked for an explanation for this and came up with a new theory in which they made the distinction for the first time between poor and rich families living from hand to mouth. In the old economic model, the rich were not included. This incorrectly assumed that only poor families react strongly to temporary income changes.
“But rich hand-to-mouth consumers are also adjusting their consumption expenditure, which is precisely what we saw happen in Belgium during the corona and energy crisis. Many support measures then flowed directly to households’ current accounts and thus temporarily increased their income. Almost all families living from hand to mouth adjusted their consumption and spent that extra government support almost immediately.”
But why have rich hand-to-mouth consumers Do you need extra government support in times of crisis? Since they apparently spend it all again right away?
“That support makes sense if the government’s explicit intention is to stimulate or keep the economy running in a crisis, such as during corona. Exactly because rich hand-to-mouth consumers Spending money almost immediately and injecting it into the economy will have the greatest effect. If all consumers did not live from hand to mouth, all these temporary measures would indeed not make much sense.”
So temporary government measures in times of crisis are not of much benefit to people with savings?
“People who do not live from hand to mouth automatically build up a buffer with which they can finance an additional expense in the event of an emergency. Temporary government support measures are more likely to increase their liquid assets than make them consume more at times of crisis. Bee hand-to-mouth consumers they do have an effect. That is precisely why the distinction between ‘hand-to-mouth’ and ‘non-hand-to-mouth’ is important for the government to be able to correctly estimate the effects of some measures.”
When do economists consider someone ‘rich’ or wealthy?
“As soon as you have positive non-liquid assets, you are considered ‘wealthy’ or ‘rich’. This usually concerns a house and no distinction is made between a large villa or a modest terraced house. Only the net value of your house, after deduction of the mortgage and other loans, determines whether you have positive illiquid assets. That house is then your piggy bank. As soon as someone has a positive non-liquid asset, he is less vulnerable.
“Families living from hand to mouth consume their entire income, which can cause them to get into trouble in the event of a financial setback. Especially if they are poor and have no buffer in the form of property. Poor hand-to-mouth consumers without illiquid assets are therefore very vulnerable. ‘Rich’ hand-to-mouth consumers Even though they don’t have a penny left at the end of the month, they do build a buffer. Because they are paying off their own house at the same time.”
If there is a hefty mortgage on their house, does most of their monthly income go towards it?
“With the rich hand-to-mouth consumers Indeed, most of the income goes directly to paying off the house. Moreover, they often save for pensions or have life insurance. Even if there is no money left to put in a savings account, they still work on a reserve. But with no tangible savings, they may feel more vulnerable than they actually are. They underestimate the assets they have.”
If there is a serious setback, perhaps their own house has to be sold and they are back to square one?
“At best, they might be able to buy a smaller house. The big difference between poor and rich families who live from hand to mouth is that the rich make a conscious choice not to have any extra money left at the end of the month. They have different priorities than families who do put money aside. Families with low incomes do not have that luxury.”
According to your research, twenty-five percent of Belgian families live ‘from hand to mouth’. That seems like a lot.
“Compared to other Western countries, Belgium is in the middle bracket. In the United Kingdom and the United States, 35 percent of families fail to save, while in Australia, France and Spain the proportion is 20 percent.”
The myth has it that the Belgians are a thrifty people.
“That myth is not built on loose sand, because no matter how you look at it: of that 25 percent, the 80 percent of rich ‘hand-to-mouth’ families also save. Not by depositing a substantial amount into a savings account every month, but by paying off that house, building up that life insurance policy or saving for pension. However, it doesn’t feel like saving if there is nothing left over on the last day of the month.
“Seventy percent of all Belgian families have their own home. Sixty percent of all homeowners are paying off a mortgage on their home. It is therefore not surprising that there are so many rich people hand-to-mouth consumers are.”
Have you also investigated what the 80 percent of the ‘rich’ spend their remaining income on every month?
“No. We don’t know how much they spend on food, clothing, travel or culture. We also do not know the differences in spending patterns between the rich and the poor hand-to-mouth consumers and the non-hand-to-mouth families. What we can deduce from our data is that rich hand-to-mouth and non-hand-to-mouth families have a number of characteristics in common. They have a similar monthly income that is much higher than that of poor hand-to-mouth families. They also tend to be better educated and are less likely to be single. They are also much less dependent on government benefits.”
Are you a hand-to-mouth consumer?
“To a certain extent, yes. (laughs) I have three studying children in my room, which means quite a few fixed costs. So there is not much left at the end of the month. We don’t mind that, because that’s how we invest in the future.”