Essays in Memory of Albert Ando
Edited by Lawrence R. Klein
Chapter 2: The Age–Saving Profile and the Life-Cycle Hypothesis
2. The age–saving proﬁle and the life-cycle hypothesis* Tullio Jappelli and Franco Modigliani 1. INTRODUCTION The life-cycle hypothesis (LCH) posits that the main motivation for saving is to accumulate resources for later expenditure and in particular to support consumption at the habitual standard during retirement. According to the model, saving should be positive for households in their working span and negative for those in retirement, and wealth therefore should be hump-shaped (Modigliani, 1986). Yet, if one looks at the microeconomic evidence on household saving rates by age, dissaving by the elderly is seldom observed. To take just one example, in the introductory essay of a collection of country studies on saving, Poterba (1994) reports that in virtually all nations the median saving rate is positive well beyond retirement, concluding that ‘the country studies provide very little evidence that supports the Life-Cycle model’. Based on the country studies, Poterba also reports that the median saving rate in the age class 70–74 is 1.1 percent in the USA and 6 percent in Canada; and in Italy and Japan for those aged 65 and older it is even higher. These ﬁgures are inconsistent not only with the elementary version of the LCH, but also with more elaborate versions. In its basic formulation, the LCH posits that saving behavior is forward looking and driven by the desire to prepare for future expenditures above later income throughout life. The main foreseeable events in one’s life are old age and retirement. At this...
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