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

170 The Life-Cycle Hypothesis
to the cost of living. For the currently retired we compute the present discounted
value of pension benefits, based on current pensions (including old age, social,
and disability pensions). Survival probabilities refer again to women.
Notes
1. When measuring the aggregate saving rate, defining saving as earned income minus consumption
or as disposable income minus consumption does not make a great difference. Gale and Sabelhaus
(1999, table 2) adjust NIPA figures for the United States and point out that adding net saving
in federal, state and government retirement plans raises the aggregate saving rate by less then 1.5
percentage points over the entire 1960–98 period. The reason is that government pension
saving is fairly stable and that in the aggregate mandatory contributions largely offset mandatory
benefits.
2. It should be noted that their study is based on an unusual and questionable attribution of resources
to individuals, not households, which is an approach that rests on a number of assumptions. First of
all, that households are a veil for the individuals who live in them. Second, that there are no public
goods within the family. Finally, that there are no economies of scale in consumption.
3. The decline in the aggregate saving rate is not peculiar to the 1989–2000 period, but follows a
trend starting just after the period of high and sustained growth of the fifties and sixties. In previous
work (Modigliani and Jappelli, 1990) we emphasize that the reduction in productivity growth is the
main factor explaining the trend decline in the Italian saving rate, particularly after the 1973 oil shock.
Rossi and Visco (1995) argue that the accumulation of social security wealth due to the transition to
a pay-as-you-go social security system and the increasing generosity of the system also explain a substantial
portion of the fall in household saving. Other explanations focus on the reduced need for precautionary
saving due to the increased availability of social insurance schemes.
4. Reasons for such behavior include mortgage market imperfections, which prevent young households
from borrowing (Guiso and Jappelli, 2002).
5. Two macroeconomic episodes characterize our sample period. The economy went into a recession
in 1991–93. Afterwards the economy began a mild recovery, with the growth rate picking up in 2000.
6. One should keep in mind that wealth accumulation also depends on households’ preferences, the
interest rate, the life-cycle variation in household size and composition, and the rules governing retirement.
Additional control variables (such as education, gender, or region of residence) do not change
the qualitative results in the next sections.
7. Since the fraction of Italian households that contributes to private pension funds is tiny, they can
be safely neglected. The 1995 pension reform of the social security system implements gradual
changes in eligibility rules, accrual rates and pension age. Our estimate of social security wealth
abstracts from these institutional details. It provides a rough estimate of expected contributions and
benefits whose main purpose is to obtain a benchmark indicator to be compared with discretionary
wealth. The assumed replacement rate and contribution rates are, respectively, 70 and 25 percent. See
the appendix for details.
8. Sabelhaus and Pence (1999) use a time series of cross-section wealth surveys to measure how
wealth accumulation varies across age in the US. They apply a technique similar to ours to the 1989,
1992 and 1995 Survey of Consumer Finance and are therefore able to purge the age-wealth profile
from cohort effects. They also compute the change in wealth as a percent of disposable income and
find positive saving rates in the order of 20 percent until age 60, and negative saving afterwards,
ranging from -20 percent at age 65 to -50 percent at age 75.
9. For employees the contribution rate increases from 26 percent of gross earnings in 1989–93 to 27
percent in 1995–2000. The contributions are split between the employee and the employer. But clearly
this is immaterial: in both cases it is the employee who actually bears the burden of paying the contributions
(and finally receives the benefit). For the self-employed the contribution rates are set at 15
percent of gross earnings.