Consumption Structure, Welfare Goods and Retirement Income: Linking the Ageing Puzzles

Najat el Mekkaoui De Freitas, Joaquim Oliveira Martins
2008 Social Science Research Network  
While the empirical evidence tends to support some predictions of the life-cycle theory, a number of puzzles remain: an ageing-consumption, an ageing-saving, a saving-capitalisation and a saving-longevity puzzles have been put forward in the literature. This paper analyses the links between these puzzles and develops a model relating usual life-cycle variables, social transfers (public health care expenditures and the generosity of pension systems) to the level of savings. A reduced-form model
more » ... reduced-form model using a panel of 18 OECD countries is tested, confirming the proposed explanations for the puzzles, together with other factors such as public deficits (Ricardian equivalence) and the population structure. We found that the relative generosity of welfare systems have a significant negative impact on household saving rate. It can also explain why the increase in longevity does not have had in general a positive impact on the household saving ratio. JEL Classification: C68, D91, G10, J11, J26 1. This of course only holds when the age of retirement is fixed and not linked to longevity, which is still the case in most social security systems in OECD countries. 2. To be precise, the consumption profile is hump-shaped across households headed by individuals belonging to different age groups. 3. Due to the lack of data, it will be assumed that the snapshot picture of total consumption per household by age-groups approximates the life-time consumption profile of a cohort (e.g. static ageing as opposed to dynamic ageing). This approach takes an agnostic view on how a combination of various household characteristics in conjunction with institutional factors in each country affects the life-cycle consumption pattern. Fernandez-Villaverde and Krueger (2002) suggest that the bias induced by the use of age-groups instead of cohorts may not be very large for the estimation of the hump-shaped consumption profiles. 4. Attanasio (1999) provides an overview of competing theories of consumption behaviour over the life cycle. Note that when the age-income profile is more hump-shaped than consumption, the above observed ageconsumption patterns are still compatible with some consumption smoothing over the life cycle.
doi:10.2139/ssrn.1145145 fatcat:pzlutjw6ffg57ojurn7hhw674a