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COPYRIGHT 2000 MIT Press Journals
I. Introduction
THE LIFECYCLE THEORY of saving and consumption predicts that changes in an economy's rate of economic growth will affect its aggregate saving rate. In the simplest version of the model--in which young people save for retirement and old people consume their previously accumulated assets--an increase in the rate of economic growth will unambiguously increase the aggregate saving rate, because it increases the lifetime resources (and saving) of younger-age groups relative to older-age groups. More complicated and realistic versions of the model yield ambiguous conclusions about the relationship between saving and growth. For example, young people may have low current income but high lifetime wealth, and may therefore borrow to finance current consumption. If they borrow enough, then, at sufficiently high rates of economic growth, their lifetime wealth will be high enough relative to that of their elders so that further increases in the rate of growth will decrease the aggregate saving rate. Whether higher growth increases or reduces the aggregate saving rate depends on whether the age profile of saving is negatively correlated with age, which is an empirical matter.
The results of recent studies of lifecycle saving behavior have not been favorable to the lifecycle model's interpretation of the positive correlation between growth and aggregate rates of saving. (See, for example, Poterba (1994), Paxson (1996), and Deaton and Paxson (1997).) Cohort studies in both developing and developed countries have used time series of cross-sectional household surveys to trace out consumption and saving behavior of birth cohorts, and have not found evidence of the required negative relationships between saving rates and age. Estimated age-saving profiles are typically fairly flat, so that increases in economic growth that redistribute resources toward the young will have either very small positive effects (or sometimes small negative effects) on the aggregate saving rate. This micro-based evidence is not consistent with international cross-country evidence that indicates that a 1 percentage point increase in the rate of per capita growth is associated with an increase of roughly two percentage points in the saving rate, which leads to the conclusion that the aggregate relationship between growth and saving is caused by something other than growth driving saving through the lifecycle mechanism.
There are (at least) two major unresolved problems with cohort methods of estimating age-saving profiles, one of which is explored in this paper. The first problem, which we do not deal with here, is that household surveys typically do not collect comprehensive information on contributions to private and public pension funds. Contributions made by employers on behalf of employees are usually missed altogether, so that the saving of those in employment is understated. Pension income is frequently aggregated with other income, which misclassifies the component of annuity disbursement that is not income but comes from running down the underlying asset, with the result that saving is overstated among the elderly. Calculations for Italy in Jappelli and Modigliani (1998) indicate that the age-saving profile is much more "hump shaped" after adjusting for flows into and out of pension funds. When this issue is ignored and computations are done in the standard way, the effect of growth on saving may be seriously understated. In this paper, we state this problem but make no contribution to its solution; our concern here is with middle-income and poorer countries in which social security is absent and where very few people receive pensions from previous employment. Even in Taiwan (China), from where much of our evidence comes, the provision for retirement by employers is a recent phenomenon, and usually takes the form of a lump sum paid at the time of retirement. Pensions are less common in Thailand and Indonesia, which are the other two countries which we examine.
The second problem with the cohort approach lies in the way that cohorts are defined. Household surveys collect consumption for households, not individuals. Even for income, it is often difficult to attribute earnings to individuals, especially when the household's major source of income is a family business. Because measurement at the individual level is difficult, the usual approach is to work with household income and consumption--and to track cohorts of households defined by the age of the household head, rather than by the age of individuals. This method might be acceptable if all people (or married pairs of same-aged people) became household heads at adulthood and remained so for the rest of their lives. However, in many countries, individuals often live in multigenerational households so that household income and consumption combine data for people at different lifecycle stages, obscuring the individual age profiles. For example, a 45-year-old household head may save for retirement, but if he lives with his 20-year-old son and 70-year-old mother, both of whom save negative amounts, the net saving for the entire household could be zero or negative. More generally, the "flat" age-saving profiles that have been estimated could be the result of combining consumption and income information across different-aged individuals within households.
In this paper, we propose a method of estimating "individual" age-saving profiles using household income and consumption data. We apply this method to data from Taiwan and Thailand, and compare our results with those based on the more standard "household-based" approach. We find that the individual method yields results that are more favorable to the lifecycle model than those from the household method. In both countries, individuals appear to save in middle age and to dissave at very young and very old ages. This general hump-shaped age pattern of saving is consistent with both positive and negative effects of economic growth on the aggregate saving rate. Our results illustrate the point. For Taiwan, the results indicate that increases in growth can result in large increases in saving rates, particularly when the rate of population growth is low. By contrast, the results for Thailand indicate that, for most combinations of rates of economic and population growth, increases in economic growth raise the wealth of the very youngest individuals, who are dissavers, causing a reduction in the aggregate saving rate.
Our method relies on the assumption that households serve as "veils" for individuals, each of whom consumes and saves according to his or her own lifetime wealth; household membership does not alter individual consumption or income, but only obstructs our ability to measure these quantities. This is obviously a simplification of the role of households in individual behavior. A richer model would recognize the technology of household consumption--for example, the existence of economies of scale--and allow the individuals in a household to consume more in total than aggregate household consumption. It would also recognize that household formation is endogenous and that the behavior of those who choose to live in extended families is likely to be systematically different from those who live by themselves or with partners of similar ages. We do not estimate models that handle these extensions, and they remain important priorities for future work.
The paper is organized as follows. Section II briefly presents the basic theory and reviews existing (household-based) cohort studies from a range of rich and poor countries, and also presents new results for Indonesia. Section III presents a simple model that illustrates how using household-level aggregates can bias estimates of age-saving profiles and lead to incorrect inferences about the relationship between growth and saving. We also document the problems with defining cohorts by age of household head in countries such as Taiwan and Thailand. Section IV lays out the individual model and shows how its parameters can be recovered from household-level data. The model is estimated using data from Taiwan and Thailand and results are presented in section V. Section VI turns to growth accounting and examines the implications of our estimates of age-saving profiles for the relationship between economic growth and the aggregate household saving rate. Section VII concludes.
II. Saving and Growth: Basic Theory and Evidence to Date
We begin with an outline of the theory. In the standard approach, no clear distinction is drawn between a household and an individual (or, more precisely, the theory is developed for individuals and then applied to households). We begin with that individual theory. The literature on lifecycle saving and growth works with a model in which uncertainty is ignored, and in which consumption follows an age-profile determined by the interaction of preferences and real interest rates, with the level of the profile set by the level of lifetime resources. We use the index i to denote an individual, and a to denote age. Lifetime resources, [W.sub.i], are the sum of assets at birth (inheritance) and the discounted present value at birth of future labor earnings:
(1) [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]
where L is the length of life,
r is the constant real interest rate, and
[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] is labor income or earnings by i at age a.
According to the lifecycle hypothesis (LCH), consumption at age a is proportional to lifetime resources, where the constant of proportionality depends only on age and the (constant) real interest rate. Suppressing the latter, we write
(2) [c.sub.ia] = [f.sub.i](a) [W.sub.i].
The effects of economic growth on saving depend on how labor income is affected by growth. In the version we adopt in this paper, which follows Modigliani's original lead, labor income has an age profile that is invariant to changes in the growth rate of the economy, so that productivity growth affects only the distance between the age profiles of earnings for different cohorts and not the age profiles themselves. The assumption is in principle testable given cross-sectional data on earnings profiles from spans of years in which growth...
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