A new World Bank study says Pakistani households accumulate significant net worth but overwhelmingly in the form of residential buildings, and on average nearly 80 percent of the wealth accumulated by age 60 to 65 is composed of residential buildings.

The average Pakistani household’s net worth grows by 60 months’ worth of consumption (5 years) between ages 25 and 65. The bulk of this increase is in the form of residential housing, whereas other forms of wealth such as land, durables, business and farm values and financial assets stagnate over the life cycle. Asset accumulation is slower early in the life cycle and picks up speed between ages 40 and 65.

The combined forces of population aging, weakening family and village risk-sharing networks, and low formal pension coverage will make financing elderly consumption a major challenge for the future, says the study, “Life Cycle Savings in a High-Informality Setting — Evidence from Pakistan”, released earlier this week.

The fact that households primarily save in real estate and land signals that this is considered a safe investment, relative to other available options. Housing may be a way to store resources for the long run in a way that cannot easily be stolen or appropriated by other family members, observes the study.

The study says it could also reflect a lack of access to other safe, high return, and trustworthy long-term saving instruments. Low financial literacy, numeracy, and familiarity with formal banking institutions can all create barriers to participation in other forms of saving.

Pakistan has been much slower than other neighbouring countries in expanding financial inclusion and the barriers to this must be addressed, the study emphasised.

While safe, housing is a relatively illiquid asset, which takes resources away from short-term consumption smoothing. According to Findex, only 3 percent of those aged 15 years and above in Pakistan report being able to rely on savings for emergency funds, while 49pc say it is not possible to come up with emergency funds.

The main source of emergency funds tends to be family or friends, according to 41pc of the population aged 15 years and above; 25pc report borrowing for medical expenditures.

Policies that allow greater use of real estate assets as collateral to borrow against, through formal financial institutions, could in theory reduce the need for liquid precautionary savings, and free up resources to save for retirement. However, such initiatives may also encourage over-indebtedness and lead to evictions.

Lack of other safe, liquid forms of saving can also limit earning opportunities offered by self-employment. The self-employed tend to be older than informal wage workers but with similar levels of schooling. Almost half of the self-employed have no education. The older age of the self-employed might suggest that initial working years are spent acquiring start-up capital, as most of the self-employed enterprises are started using own capital. According to the Findex surveys, only 11pc of people aged 15 years and above borrow to start or expand a business.

The study suggests that improving opportunities for safe long-term saving outside housing in the form of government-sponsored or subsidised old-age savings instruments could yield greater independence in old-age and reduce the burden on younger families.

According to the study: “We find that average net worth accumulation accelerates midway through the working years, roughly around age forty. While some of this accumulation may reflect patterns in inheritances, we show that active saving likely plays a significant part: household income growth starts to outpace household consumption growth around that time, and the saving rate increases by 20 percentage points between ages 40 and 65.” This suggests that programmes that aim to encourage formal saving may be most successful among individuals in that age range.

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