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

The Age Saving Profile 165
tion. Similarly, the average terminal wealth is the weighted average of the wealth
of each group, while the average wealth at t - 1, W(t - 1), is only the wealth of
the survivors, W s (t - 1). One can then readily verify that the change in average
wealth is:
Wt ()-Wt ( -1)= St ()+[ W( t-1)-W( t-1)
]( N N)
e s e
(5.3)
Thus, the growth of wealth will exceed average saving if the new entrants are
wealthier than the survivors. Again, we have no direct (or indirect) information
about the average initial wealth of the two groups; but in figure 5.10 we observe
that there is a large excess of asset growth over saving. We are lead to wonder
whether it might reflect a not implausible, but relatively higher wealth of the
entrants together with a high rate of entry.
7 Hump Wealth, LCH, and the Bequest Motive
The search for an explanation of the discrepancies between saving flows and
changes in wealth has brought out a number of possible causes. With one exception,
which is discussed below, these causes do not seem to go very far in explaining
the empirical discrepancies revealed by figure 5.10. Indeed, some suggest a
discrepancy opposite to that observed. The one possibly plausible explanation,
which could be quantitatively large, is inter vivos transfers. It is substantiated
by independent evidence on the timing and importance of intergenerational
transfers.
When the two measures are in conflict, which of them provides more useful
information? We suggest that there is no unique answer. The two measures focus
on somewhat different things, thus which is best depends on what is to be measured.
If one is interested in the life path of wealth, one should use the wealth
measure and by the available evidence agree that wealth tends to decrease after
retirement. If, on the other hand, one is interested in measuring the extent to which
in old age, discretionary wealth continues to accumulate through saving—or is
decumulated through consumption above income—than the appropriate measure
of accumulation is saving. For the case of Italy we must conclude that discretionary
saving remains positive, although small.
This conclusion does not have any direct implications for our test of LCH, but
it is relevant for an understanding of bequest behavior, and of the relative contribution
to national saving of Life Cycle accumulation versus accumulation for
intergenerational transfers. It should be remembered in this connection that, contrary
to a common perception, some accumulation for bequests is not inconsistent
with LCH. The distinctive feature of this model is not the absence of