What Is the Life-Cycle Hypothesis?

The life-cycle hypothesis (LCH) is an economic theory that describes the spending and saving habits of people over the course of a lifetime.

The theory states that individuals seek to 澳洲幸运5官方开奖结果体彩网:smooth consumption throughout their lif📖etimes by borrowing when their income is low and saving when their income is high.

The concept was developed by economists Franco Modigliani and his student Richard Brumberg in the early 1950s.

Understanding the LCH

The LCH assumes that individuals plan their spending 🔯over their lifetimes, taking into account their future income.

Accordingly, they take on debt when they are young, assuming future income will enable them to pay it off. They then save during middle age in order to maintain their level of consumption when t🔴hey retire.

A graph of an individual's spending over time thus shows a hump-shaped pattern in which wealth accumulation is low during youth a♚nd old age and hig🍰h during middle age.

LCH vs. Keynesian Theory

The LCH replaced an earlier hypothesis developed by economist 澳洲幸运5官方开奖结果体彩网:John Maynard Keynes in 1936. Keynes believed that saving🔯s were just another good and that the percentage that individuals allocated to their savings would grow as their incomes rose.

This presented a potential problem as it implied that as a nation’s incomes grew, a savings glut would result, and 澳洲幸运5官方开奖结果体彩网:aggregate demand and economic output would stagnate.

Another problem with Keynes's theory is that he did not address people's consumption patterns over time. For example, an individual in middle age who is the head of a family will consume more than a retiree.

Although subsequent research has generally supported the LCH, it also has its problems (see "Special Considerations" below).

Special Considerations

The LCH makes s🙈everal assumpt𒐪ions, some of which could be wrong in certain cases:

1. For example, it assumes that people deplete their wealth during old age. Often, howeve♒r, the wealth is passed on to children, or older people may be unwilling to spend their wealth.

2. The theory also assumes that people plan ahead when it comes to building wealth, 𝓰but many procrastinate or lack the discipline to save.

3. Another assumption is that people earn the most when they are of working age. However♎, some people choose to work less when they are relatively young and continue 🍷working part-time when they reach retirement age.

As a result, one i💫mplication is that younger people are more able to take on investment risks than older individuals, which remains a widely accepted tenet of personal finance.

4. An additional, notab✨le assumption is that those with high incomes are more able to save and have greater financial sav🌃vy than those on low incomes. People with low incomes may have credit card debt and less disposable income.

5. Lastly, safety nets or means-tested benefits for aging adults may discourage people from saving as they anticipate receiving a higher 澳洲幸运5官方开奖结果体彩网:Social Security payment when they retire.

The Bottom Line

The life-cycle hypothesis,🍎 developed in the 1950s, posits that people tend to maintain a consistent spending level over their lifetimes.

Criticisms have been leveled against the LCH. One is that people don't always maintain a consistent pattern of consumption. For instance, someone who is middle-aged with a family of four and a mortgage is likely to consume more than when they are retired and have no dependents and own their home.

However, the LHC is still considered an important part of modern economic theory.