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Life cycle savings and consumption constraints

Theory, empirical evidence, and fiscal implications

Abstract

Recent tests of both the pure and the extended life cycle hypothesis have generated inconclusive results on the life cycle behavior of the elderly. We extend the life cycle model by introducing a constraint on the physical consumption opportunities of the elderly which, if binding, imposes a consumption trajectory declining in age. This explains much of the received evidence on the elderly's consumption and savings behavior, in particular declining consumption, and increasing savings and wealth with increasing age. Our analysis of German data gives additional support to our theory. We finally draw the implications of the theory on the incidence of consumption and income (wealth) taxes, and on the recent (inconclusive) tests of intergenerational altruism.

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Additional information

Research in this paper was supported by the National Institute of Aging, Grant No 3 P01 AG 05842-01. The paper was read at the ISPE-Conference on Fiscal Implications of an Ageing Population, Vaalsbroek, The Netherlands, May/June 1990. We are grateful to the conference participants, and especially to Richard Bird, Maurice March and, Carol Popper, and Dave Wildasin for perceptive comments, and Ernst Seiler for able research assistance. Johannes Velling and two anonymous referees provided additional constructive critique.

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Börsch-Supan, A., Stahl, K. Life cycle savings and consumption constraints. J Popul Econ 4, 233–255 (1991). https://doi.org/10.1007/BF00602431

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Keywords

  • Life Cycle
  • Cycle Model
  • Inconclusive Result
  • Extended Life
  • Saving Behavior