Life-Cycle Savings Model (Essay Sample)

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Life-Cycle Savings Model
The theory was first familiarized by Franco Modigliani and hypotheses that individuals make varied spending throughout their lifetime. However, the spending people make during their lifetime is constrained by the amount of resources available to them. This implies people tailor their consumption patterns to suit their needs at different ages. The persons build up stocks of assets and run them down, or the same persons could set aside some assets as provision for retirement while they are working. The life-cycle hypothesis remains an important tool for economists to explain phenomenon such as effects of demographic change on national savings, function of savings in economic growth, and determinants of public wealth.
According to the life-cycle savings hypothesis, a high savings rate is observable at the middle-aged persons than in younger or older ages. People at younger ages borrow to consume at the present while those at the older ages dis-save from the wealth they accumulate at the middle ages while they are working. Therefore, a low savings rate will show among older individuals. The life-cycle model allows capture the mechanisms at play in the real world simply and coherently. For example, allows capturing of individuals’ habits and satiation, discounting for future consumption, and aversion to fluctuating living standards on the preference side. The model also captures variables such as higher borrowing rates to lending rates, and incomplete insurance markets.
Purpose Statement
The dependent variable, savings, is a determinant of the three independent motives of retirement, rainy day, and holidays. The most important independent variable in this relationship is saving for a rainy day because it showed to be a common factor why a majority of the interviewed individuals saved. The next important reason why those who saved did so was to make a provision for retirement. The holiday motive ranked lowest in the ranking of importance. The amount of savings achieved is a function of the reasons why people decide to save. However, as income increases saving for retirement become the most important reason why people save. This is particularly the case in persons over the age of 45 years. A higher proportion of the young and the old show less saving towards retirement purposes with other motives such as precautionary ranking higher.
Personal Savings = β0 + β1 Retirement + β2 Precautionary + β3 Holidays
Definition of Variables
A dependent variable, which is the personal savings in this case, is a factor that changes because of an effect from an associated factor. The dependent variable changes due to manipulation of the available independent variables. The dependent variable is endogenous in that it is determined within the model unlike independent variables, which are determined elsewhere and, therefore, exogenous. The level of personal savings is determined by the reason why the individuals decide to save. It is crucial to study the savings behavior among salaried individuals. There other factors that influences the saving rate apart from the three chosen in this study. These factors include age, sex, marital status, number of children in a household, and educational levels (Neuberger et. al 34).
The independent variable is the manipulated variables that cause a change in the dependent variable. It is responsible for determining the value of other variables. The alphabet X usually denotes the independent variables while Y denotes the dependent variable. The retirement incentive to saving is the primary determinant of the level of savings by individuals. Savings out of current disposable income is vital for retirement security. There exist different psychological thinking between savers and non-savers. For example, non-savers can view being in debt as normal while the savers view as bad. The need to save for retirement is increasingly important to the long-term savings goals. This is due to the transfer in liability from the government to the individuals (Marriott 7).
The precautionary motive or saving for a rainy day is the act of holding cash or easily redeemable assets to cater for any unexpected events occurring in the future. Some of the unexpected events that individuals save for include medical expenditures, length of life, imperfect insurance markets, and irregular earnings. Current empirical data show precautionary motive to play a diminishing role in the decisions to save. This is because of the institutional differences from one country to another. According to the study, precautionary motive accounts for approximately 30% of saving. Saving for a holiday is the third independent variable that has an effect on the level of personal savings observed. The variable plays a role in the saving rate obtained, but the role is limited compared to other variable in the model. The error term accounts for bias in the study and other variables that do not feature in the model (King 45).
Data Description
To collect data from the households, the research study employs data collection methods, which may not be suitable for macroeconomic analyses. Policy makers could deploy the data to assess the probable impact of the changing savings on the households. The individual household analysis helps to understand the individual saving behavior in a period. Studying the demographic constitution through unbiased sample yields an understanding of the saving decisions at the micro level.
Works Cited
Neuberger, Anthony, and David McCarthy. Pensions Policy: Evidence on Aspects of Savings Behaviour and Capital Markets. London: Centre for Economic Policy Research, 2003. Print.
Marriott, Lisa. The Politics of Retirement Savings Taxation: A Trans-Tasman Comparison. Sydney, N.S.W: CCH Australia, 2010. Print.
King, Jane. Personal Finance: A Practical Approach. S.l.: Oxford University Press, 2013. Print.
Appendix
Total

Retirement

Holiday

Rainy Day

13

9

2

2

15

6

5