Facebook Blogging

Edward Hugh has a lively and enjoyable Facebook community where he publishes frequent breaking news economics links and short updates. If you would like to receive these updates on a regular basis and join the debate please invite Edward as a friend by clicking the Facebook link at the top of the right sidebar.

Wednesday, October 19, 2005

Adult Longevity and Saving

Here's another part of the life cycle mystery getting solved. Do oldest old societies save or dis-save. Many think that the life cycle modle predicts dis-saving. Tomoko Kinugasa and Andrew Mason say it shouldn't, it depends on how rapidly life expectancy is rising. Rising life-expectancy produces a behavioural change which (ceteris paribus of course) leads to more saving, people need to support themselves for longer. The paper is based on Kinugasa's PhD research. I need time to think more about this, but my initial impression is that this is definitely a step in the right direction, and helps us understand China a little bit more, since in China, of course, life expectancy is currently rising very rapidly. (Incidentally, this may also have something to offer on the old East Germany, since life expectancy rates jumped dramatically in very few years to a level very close to their counterparts in the west.

Previous research has emphasized two channels through which the demographic transition may influence the accumulation of wealth. First, the transition produces changes in age structure that will have compositional effects if saving rates vary by age.Second, changes in demographic variables may influence behavior.... Empirical research has supports the hypothesis that a decline in the share of the dependent population, the child dependent population in particular, leads to higher saving rates. The magnitude of compositional effects, however, is a controversial and important empirical issue. The controversy is particularly salient in light of East Asia’s successful development experience. Large increases in aggregate saving rates, leading to rapid capital accumulation, is widely recognized as one the key ingredients to the region’s success. Several recent empirical studies, based on the analysis of aggregate cross-national panel data, have identified changes in age structure as the most important or perhaps even the exclusive reason why aggregate saving rates increased (Higgins 1994; Kelley and Schmidt 1996; Higgins and Williamson 1997; Williamson and Higgins 2001).

An alternative approach, employed by Deaton and Paxson (2000), reaches very different conclusions. They use a series of consumer expenditure surveys from Taiwan to estimate individual age profiles of consumption and earning. They combine these estimated profiles with observed and projected changes in age structure to simulate aggregate saving rates over Taiwan’s demographic transition. They conclude that changes in age structure had modest effects on saving rates and can not explain the dramatic increase in aggregate saving rates in Taiwan. One possible resolution of this empirical controversy is that the changes in fertility and mortality have behavioral, as well as, compositional effects.

Labor force behavior varies with fertility. Expectations about old-age support – either from public or familial systems – may shift in anticipation of changes in age structure. The decline in adult mortality may influence saving by affecting the expected duration of retirement. It is the last possibility that is explored in this paper.

The effect of mortality on saving has been explored in a number of previous studies (Yaari 1965; Davies 1981; Zilcha and Friedman 1985; Cutler, Poterba et al. 1990; Kuehlwein 1993; Leung 1994; Borsch-Supan 1996; Schieber and Shoven 1996; Bloom, Canning et al. 2003; Kageyama 2003). Our interest was stimulated in particular by recent simulation results that show that increases in life expectancy can have large effects on aggregate saving if household saving is governed by the lifecycle model (Lee, Mason et al. 2000; 2001a; 2001b).

Changes in adult survival influence aggregate saving in two ways. First, as the survival rate increases the expected duration of retirement rises. Thus, individuals will consume less and save more during their working years in order to support more expected years of consumption during retirement. Second, increases in the adult survival rate lead to an increase in the share of retirees in the adult population. Given that retirees are saving at a lower rate than workers, the compositional effect of an increase in adult survival is to reduce aggregate saving. What is the net effect on improvements in adult survival on aggregate saving?

Providing a clear answer to this question requires a careful examination of the dynamics in addition to the comparison of steady states......

The second important feature of the results is the implication for population aging and aggregate saving. There is widespread concern, though limited empirical support, that population aging will lead to a decline in aggregate saving rates. The empirical results presented do not support that conclusion. If old-age survival rates continue to increase, as is widely expected, our empirical results imply that saving rates will continue to rise.