The Life-Cycle Model of Consumption and Saving

T he life-cycle framework is the standard way that economists think about the intertemporal allocation of time, effort and money. The framework has a venerable history in the economics profession, with roots in the infinite horizon models of Ramsey (1928) and Friedman (1957) and the finite horizon models of Fisher (1930) and Modigliani and Brumberg (1954). Developments since the 1950s have considerably increased the breadth, depth and coherence of the framework so that the modern version provides a guide to thinking about the modeling of many life-cycle choices—such as consumption, saving, education, human capital, marriage, fertility and labor supply—while taking account of uncertainty in a rigorous way. However, the life-cycle framework is held in increasing disrepute within the economics profession. We believe that reports of the demise of the theory—or even its ill health—are much exaggerated. In this article we provide a defense of the life-cycle framework as a source of models that can be taken to the data. We emphasize this distinction between the life-cycle framework (or tradition) and particular life-cycle models with empirical content. The life-cycle framework is a conceptual framework within which we can develop useful models; in this view, there is no such thing as the life-cycle model, only particular life-cycle models. In its most general formulation, the life-cycle framework simply asserts that agents make sequential decisions to achieve a coherent (and “stable”) goal using currently available information as best they can. This catholic view does not rule out many models which would not be consistent with earlier restrictive models in the