Modigliani's life-cycle theory of savings fifty years later

Abstract

In the 1950s, Modigliani proposed a theory of spending in which people make intelligent choices about their spending at each age limited by the resources available over their lives. By using assets and debts, working people can provide for their retirement and tailor their spending to their needs at each age independent of income at each age. The theory predicts that national saving depends on the growth of national income, not its level, and that aggregate wealth depends on the length of retirement. Fifty years later, the life-cycle hypothesis remains an essential part of economists' thinking. Without it, we would have much less to say about the private and public provision of social security, the effects of the stock market on the economy, the effects of demographic change on national saving, the role of saving in economic growth, and the determinants of national wealth. JEL Codes: B21, B22, B31, D91, E21