"Life Cycle" Hypothesis of Saving: Aggregate ... - Arabictrader.com

152 The Life-Cycle Hypothesis
0 50 100 150
1910
1920 1930 1940 1950 1960 1970
Year of birth
Smoothed profile
Cohort dummies
Figure 5.4
Cohort effect of discretionary wealth
The age dummies are obtained from a regression of median discretionary wealth on age dummies,
cohort dummies, and restricted time dummies. The smoothed profile is obtained by regressing the
age dummies on a third order age polynomial. Wealth is expressed in thousand euro
polynomial to the original coefficient estimates. In figure 5.3 discretionary wealth
rises until age 60, the peak retirement age in Italy. It then declines slowly, but
remains substantial even in old age.
Figure 5.4 plots the estimated cohort effect in wealth—that is, the coefficients
of the 64 cohort dummies. Even though the estimated coefficients exhibit some
noise, the smoothed profile is remarkably stable, increasing by about one thousand
euro per year of birth. The most natural explanation for the shape of the
cohort effect is that it reflects the increase in productivity (and therefore
resources) of each successive generation.
In figure 5.5, we plot pension wealth and total wealth, the sum of discretionary
and pension wealth. Pension wealth is the difference between the discounted
values of social security benefits and contributions. 7 Constructing pension wealth
thus requires assumptions about expected benefits and expected contributions,
since they depend on projected income, demographic trends, and future legislation.
The concave shape of pension wealth is not surprising, since the pension
system collection and payment are designed to be an imitation of the LCH saving
and dissaving.