The Effects of Hartz IV Reform on Precautionary Savings

Using the reform on unemployment benefit II system in 2005 in Germany this paper verifies precautionary saving motives of German households. Based on first difference and random effects Tobit model using two years of GSOEP panel data, this paper found an increase in benefit amount by one unit (1,000 Euro) decreases household's saving rates from 1.2 to 2 percent point depending on applied specifications. Though the magnitude of estimated results is quite moderate compared to the results from previous researches, through consistent findings which show negative relation between simulated benefit amounts and household saving rate, this paper concludes that there exists a moderate precautionary motive in savings for German households. It gives an important policy implication in a sense that unfavorable benefit cut makes individual take more financial responsibility at household level