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The Age-Saving Profile and the Life-Cycle Hypothesis

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Abstract

The life-cycle hypothesis posits that saving is positive for young households and negative for the retired, so that wealth should be hump-shaped. Yet, if one looks at the microeconomic evidence on saving by age, dissaving by the elderly is limited or absent. But the saving measures usually computed on cross-sections or panel data are based on a concept of income that does not take into account the presence of pension arrangements. In fact, disposable income treats pension contributions as taxes, and pension benefits as transfers. But since contributions entitle the payer to receive a pension after retirement, contributions should be regarded as life-cycle saving and hence included back to income. Similarly, pension benefits accruing to the retired do not represent income produced, but a drawing from the pension wealth accumulated up to retirement. We use Italian repeated cross-sectional data from 1984 to 1995 to show the importance of this adjustment for the evaluation of the saving behavior of the elderly.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 09.

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Date of creation: 01 Nov 1998
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Publication status: Published in The Collected Papers of Franco Modigliani - Vol. 6. Cambridge: The MIT Press, 2005, 141-72. Published also in Long Run Growth and Short Run Stabilization: Essays in Memory of Albert Ando, edited by Lawrence Klein. Cheltenham, U.K.: Edward Elgar, April 2006
Handle: RePEc:sef:csefwp:09

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Keywords: Saving; Wealth accumulation; Life-Cycle Hypothesis;

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  1. Paxson, Christina, 1996. "Saving and growth: Evidence from micro data," European Economic Review, Elsevier, vol. 40(2), pages 255-288, February.
  2. Alan J. Auerbach & Jagadeesh Gokhale & Laurence J. Kotlikoff, 1991. "Generational Accounts - A Meaningful Alternative to Deficit Accounting," NBER Working Papers 3589, National Bureau of Economic Research, Inc.
  3. Jagadeesh Gokhale & Laurence J. Kotlikoff & John Sabelhaus, 1996. "Understanding the Postwar Decline in U.S. Saving: A Cohort Analysis," NBER Working Papers 5571, National Bureau of Economic Research, Inc.
  4. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1991. "Why is Italy's Savings Rate So High?," CEPR Discussion Papers 572, C.E.P.R. Discussion Papers.
  5. Guiso, L. & Jappelli, T., 1996. "Intergenerational Transfers, Borrowing Constraints and the Timing of Home Ownership," Papers 275, Banca Italia - Servizio di Studi.
  6. Modigliani, Franco, 1985. "Life Cycle, Individual Thrift and the Wealth of Nations," Nobel Prize in Economics documents 1985-1, Nobel Prize Committee.
  7. Alessie, R.J.M. & Kapteyn, A. & Klijn, F.E., 1997. "Mandatory pensions and personal savings in The Netherlands," Open Access publications from Tilburg University urn:nbn:nl:ui:12-74171, Tilburg University.
  8. Daniele Franco & Jagadeesh Gokhale & Luigi Guiso & Laurence J. Kotlikoff & Nicola Sartor, 1992. "Generational accounting: the case of Italy," Working Paper 9208, Federal Reserve Bank of Cleveland.
  9. Jappelli, Tullio, 1995. "Does social security reduce the accumulation of private wealth? Evidence from Italian survey data," Ricerche Economiche, Elsevier, vol. 49(1), pages 1-31, March.
  10. Tullio Jappelli & Marco Pagano, 1994. "Personal Saving in Italy," NBER Chapters, in: International Comparisons of Household Saving, pages 237-268 National Bureau of Economic Research, Inc.
  11. Feldstein, Martin S, 1976. "Social Security and Saving: The Extended Life Cycle Theory," American Economic Review, American Economic Association, vol. 66(2), pages 77-86, May.
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