The Influence of Age on Consumption

Ageing societies influence the development of industrialised countries. A changing age composition of the population not only affects pension and social security systems but also infrastructure, housing market, available workforce and consumption pattern. Though the process proceeds only slowly, it has nevertheless considerable influence on economic growth. The demographic impact on final demand is of special interest in this study. Based on the life cycle theory (Fisher (1907, 1930), Ramsey (1928), Modigliani and Brumberg (1954)) it has been already shown by several studies that the saving rate and hence the consumption vary with the age group of the consumer (Masson et al. 1998, Horioka 1997). Fair and Dominguez (1991), Attfield and Cannon (2003) and Erlandsen and Nymoen (2008) explored the direct relationship of consumption, income and demographic effects. Their findings show that the age structure of the population has significant influence on aggregate consumption. Using the approach of age structure effects on the average propensity to consume the intention of this study is to detect the influence of different age groups on the composition of consumption for Germany. The results are used to show the quantitative consequences of demographic change. The ageing German population alters its consumption behaviour due to different habits and needs as well as a changed income situation. Consequently, the demand for the consumption purposes changes and hence also aggregate final demand. The analysis is based on long time series of the System of National Accounts (SNA). The demand will be estimated as aggregate and separately for eight consumption purposes. Following the procedure of Fair and Dominguez (1991) and Erlandsen and Nymoen (2008) consumption is supposed to depend on net wages and salaries, property and entrepreneurial income, transfer payments, prices, interest rate, and the different age groups. If the coefficients of the single age groups are significantly different from zero, the distribution of the age groups among the population has impact on the aggregate amount consumed. The population composition thus matters for final demand and its structure. Furthermore, the coefficients indicate the influence of each age group on the average propensity to consume. Combining the resulting coefficients with forecasted time series of income and population composition can give a hint on the development of consumption expenditures. The inter-industry macro-econometric model INFORGE provides the estimated time series for income. The population development is taken from the 12th coordinated population projection for Germany generated by the National Statistical Office. Finally, the monetary value of the demographically induced change in demand can be quantified. The average propensity to consume should be lowest for middle aged people (35 to 65 years) and highest for very young and very old persons. So the expenses for consumption in relation to income should be higher if the society is ageing, i.e. the number of persons aged 65 and older increase. In absolute terms aggregate consumption will most probably decline as income of the aforementioned older age groups is considerably lower than that of the middle aged. As concerning the several consumption purposes there might be a redistribution of the assigned consumption basket amounts. Especially the expenses for food, beverages and tobacco, clothes and footwear as well as furnishings and equipment should decline in proportion to income while the share spent for housing, energy and maintenance of the dwelling most probably will grow.