Saving in the Twenty First Century
Population and labor force growth are expected to approach zero in the first half of the next century and this will tend to reduce further an already unsatisfactory level of aggregate saving. This paper investigates the determinants of aggregate saving under these demographic assumptions, with particular emphasis on workers’ strategies for dealing with the risk of outliving their resources after retirement. The permanent income and life cycle models represent different strategies for addressing this risk and are found to differ substantially in their implications for savings. Aggregate saving is found to be unfavorably affected by taxes on labor income, while the effect of taxes on property income is ambiguous. Public and private pension plans have a negative aggregate impact, even though employer plus employee contributions fully support workers’ post retirement benefits. Inheritance taxes have no effect in the cases considered.
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