Demographic Influences in the Life Cycle Model

We have omitted much of the richness of individual lives in the simple two period models that we looked at earlier in this chapter. But this richness affects both consumption and savings. The profile of income over individual lives is likely to be uneven and, as a consequence, we can expect people's savings behavior to be different at different points in

12.9 Demographic Influences in the Life Cycle Model 315

their life cycle.Most people earn low amounts in their teens and often into their twenties as they get a formal education. They then (usually) start work, and their income tends to rise as they become better at what they do and get promoted. At some point, productivity declines and earnings fall. The profile of earnings over working life depends on the work people do. Professional football players' productivity declines sharply in their 30s, but a professor of English literature might not peak until her late 50s (at which point she can understand Finnegan's Wake). The Rolling Stones' earnings seem to rise as they move into their 60s. But usually income tails off sharply as people move near or into retirement.

Consumption is also likely to vary dramatically over the life cycle. Most people are single in their early adult life, during which period consumption is relatively low. However, as they become older they may have a family, with consumption increasing as a result. Eventually children grow up, leave home, and (hopefully) stop relying on parental income, at which point household consumption falls. During retirement, consumption tends to continue to fall (perhaps the desire for extravagant skiing holidays in Aspen declines as the ability to get out of bed in the morning diminishes).

Support for these demographic shifts in consumption and income is shown in Figure 12.20 and Table 12.3 and 12.4. These show how consumption and income vary across a large sample of 107,000 U.S. households as the age of the reference adult in the household varies. The income profile is exactly what we outlined, except that income remains significant at the end for people older than 75 because measured income in this survey includes interest earnings and pension payments.9

60,000

40,000

30,000

20,000

10,000

40,000

30,000

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