Life Cycle Saving and Dissaving Revisited Across Three-Tiered Income Groups: Starting Hypotheses, Refinement Through Literature Review, and Ideas for Empirical Testing

33 Pages Posted: 14 Oct 2019

See all articles by Robert Holzmann

Robert Holzmann

University of New South Wales (UNSW)

Mercedes Ayuso

University of Barcelona

Estefanía Alaminos

University of Barcelona

Jorge Miguel Bravo

NOVA IMS

Abstract

The lifecycle approach is the workhorse to model saving decisions of individuals. It conjectures individuals preferring a constant consumption stream across their lifecycle saving till retirement and dis-saving thereafter. The reality is often at odd with this assumption giving rise to our conjectured three-tier life-cycle model by income groups. The low-income tier does little saving and in consequence little dissaving; the high-income tier does save during active life and profits often from bequests, but no dissaving is taking place unless hit by a major shock; only the middle tier behaves broadly as predicted. The drivers for such a differentiated behavior are conjectured to be threefold: External settings such as a multitude of shocks; preferences deviations such a behavioral bias, and institutional settings and interventions, such as minimum income provisions. The paper outlines these corresponding hypotheses, presents some first conceptual and empirical support, and reviews the international literature on the conjectured drivers. The review of international literature does not shatter our conjecture of a broadly three-tiered and reframed applicability of the life cycle model but offers some first precisions and wrinkles. The paper proposes next conceptual and empirical steps, including enriching existing wealth distribution estimates at retirement with sound estimates of social insurance wealth (pension and health), focused hypothesis testing of the key drivers with household panel data, and formulating policy responses if the new hypotheses are not rejected.

Keywords: shocks and saving/dissaving, wealth distribution, financial wealth, property, social security wealth

JEL Classification: D15, D31, E21

Suggested Citation

Holzmann, Robert and Ayuso, Mercedes and Alaminos, Estefanía and Bravo, Jorge Miguel, Life Cycle Saving and Dissaving Revisited Across Three-Tiered Income Groups: Starting Hypotheses, Refinement Through Literature Review, and Ideas for Empirical Testing. IZA Discussion Paper No. 12655, Available at SSRN: https://ssrn.com/abstract=3468603 or http://dx.doi.org/10.2139/ssrn.3468603

Robert Holzmann (Contact Author)

University of New South Wales (UNSW)

Mercedes Ayuso

University of Barcelona ( email )

Av. Diagonal 690
Barcelona, E-08034
Spain
+34 934 021409 (Phone)
+34 934 021 821 (Fax)

Estefanía Alaminos

University of Barcelona

Gran Via de les Corts Catalanes, 585
Barcelona, 08007
Spain

Jorge Miguel Bravo

NOVA IMS ( email )

Campolide Campus
Lisboa, 1099-085
Portugal

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