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

156 The Life-Cycle Hypothesis
Family size
1 2 3
4
20
25 30 35 40 45 50 55 60 65 70 75 80
Age of the household head
Figure 5.8
The life cycle of family size
The age dummies are obtained from a regression of family size on age dummies, cohort dummies,
and restricted time dummies
Figure 5.9 reports the life cycle of saving and its component, implied by figure
5.7. The path of total or family savings is sharply humped, reflecting the hump
path of earned income and the flat path of consumption. It becomes increasingly
negative after the mid-fifties, which is a pattern largely consistent with the LCH.
It is also largely consistent with the pattern implied by the change in total wealth
in figure 5.6.
A comparison of the graph of earned and disposable income reported in figure
5.7 brings to light how conspicuous subtractions from, and additions to, earned
income for Social Security contributions and pensions have the effect of largely
smoothing and eliminating the humps in earned income (which is of course what
they were designed for). As a result, the humped life cycle of earned income is
turned into a remarkably flat path of disposable income, very similar to the life
cycle of consumption. In fact disposable income and consumption stay very close,
so that the path of discretionary saving in figure 5.9 is itself quite flat. What is
surprising is that disposable income is consistently above consumption, which
means that discretionary saving remains positive throughout the life cycle, or at
least until the age of 80.