Life Cycle, Individual Thrift, and the Wealth of Nations

• Published in: The American economic review Vol. 76; no. 3; pp. 297 - 313
• Main Author: Modigliani, Franco
• Format: Journal Article
• Language: English
• Published: Menasha, Wis The American Economic Association 01-06-1986; American Economic Association
• Subjects: ACCESS TO GOODS AND SERVICES; Age; Aggregate income; Bequests; COMPARISON OF NATIONS; Consumer economics; Consumption function; Economic growth rate; Economic policy; ECONOMIC THEORY; Economics; Hypotheses; Keynesian theory; Life cycle hypothesis; Life cycles; NATIONAL GOVERNMENT; Personal finance; Retirement; Savings; Savings Investments; Savings rates; Wealth
• ISSN: 0002-8282; 1944-7981

The theory of the determinants of individual and national thrift, known as the life cycle hypothesis (LCH) of saving, is reviewed and applications to current policy issues are discussed. The theoretical foundations of the model in both its original formulation and a later amendment are presented. Crucial empirical tests at both the individual and the aggregate level are reviewed. It is found that the basic version of the LCH has aided in the understanding and the prediction of many aspects of individual and aggregate saving and wealth-holding behavior. However, 2 of the assumptions encompassed by the stripped-down version, a deterministic length of life and the absence of a bequest motive, appear to be counterfactual. Substantial evidence indicates that wealth declines slowly in old age; this implies that households leave substantial bequests relative to peak wealth. Policy implications also are discussed.