The Life - Cycle Hypothesis and the Consumption Behavior of the Elderly

The life-cycle hypothesis (LCHO) is based on the common-sense idea that households do not make saving or dis saving decisions solely on the basis of their current income and wealth, but that they also take into account their expected future circumstances and are affected by their past experience. In particular, because people can anticipate that their incomes will fall sharply when they retire, they save when younger and dissave after retirement so as to maintain, more or less, their previous standards of living. This paper presents new data on income and consumption that are more appropriate for testing the LCHO than the data used in previous studies. Then we examine the average propensities to consume of the elderly and nonelderly and show how they do not accord with the LCHO. The LCHO predicts that the elderly dissave, or at least that they have a significantly higher average propensity to consume, at a given level of income, than the nonelderly. In fact, we found strong evidence to the contrary; i.e., the elderly not only do not dissave to finance their consumption during retirement, they spend less on consumption goods and services (save significantly more) than the nonelderly at all levels of income. Moreover, the oldest of the elderly save the most at given levels of income. After testing some adjustments that attempt to salvage the LCHO, we suggest alternative explanations for the observed higher average propensities to consume of the elderly.