During the 1970 household and national savings rates lay prostrate sharply.

During the 1970 household and national savings rates lay prostrate sharply. Although concern about subdued saving rates remains widespread, many analysts have taken the optimistic position that the maturing of the baby roar generation will restore aggregate savings to their earlier flushs Two arguments have been furnished in support of this view:

* As baby boomer reach their peak earning and saving years, aggregate savings will increase with this large generation's rising share of national income.

* Baby boomer who exhausted freely and saved little as young adults will in their middle years find themselves unprepared for retirement. They will be agreeable to by increasing their saving rates more aggressively than earlier generations at a similar age.(1)

This article evaluates each argument in cause to deviate and finds little reason to await a large increase in aggregate savings. The demographic consequences alleged in the first argument will probably be small. While baby boomers' saving rates should rise with age, the impact upon the aggregate saving rate will be mitigated on a continuing high rate of early retirement and a rising share of households headed by means of individuals either over sixty-five or subordinate to thirty-five--households that tend to have relatively reasonable saving rates.

The secondary argument, which stems from the popular notion of baby boomer improvidence, is also flawed. Baby boomer appear to have accumulated appreciable wealth, the pair in comparison to their parents at similar ages and to target retirement wealth of the same heights suggested by theoretical models of optimal lifetime savings. Moreover, flat if baby boomers eventually find themselves behind schedule in saving for their retirement (if not because of their shortsightedness, then because of a large divide [i]or[/i] sever in Social Security benefits), they may react to the shortfall by dint of reducing planned bequests or taking other stairs that do not have the force of increasing aggregate saving rates. The uncertainty of the baby dash forward response to any savings shortfall gives us flat less reason to expect a slip back in aggregate savings as the baby boomer approach retirement.

LIFE-CYCLE SAVINGS, DEMOGRAPHIC inclinations AND AGGREGATE SAVINGS

If baby boomer raise their saving rates in line with increases observ in earlier generations at similar ages, will the aggregate saving rate get back sharply? To answer this question, we review the age profile of income and savings base in recent consumer surveys and the demographic runs projected for the next small in number decades.

AGE PROFILES OF INCOME AND SAVINGS

Data from the Board of Governors' scrutinize of Consumer Finances allow us to examine the proposition that household incomes and saving rates note carefully to rise with the age of the household head before retirement. The 1983 measure and estimate contains extensive data on the wealth of individual households as of year-end 1982 In 1986 2822 households from the original arrange were surveyed again and asked for detailed information forward year-end 1985 wealth and forward annual income in 1983-85. The sum of two units Board surveys are particularly useful in analyzing average savings because they "oversample" the high-income households that account for a disproportionately large share of aggregate savings. A detailed explanation of our use of the review data to calculate saving rates is contained in the driver's seat below.

For the households sampled in the 1986 Board observe average (mean) income rose, then blood-thirsty with advancing age (Chart 1) The highest average income, about $35000 by year in 1982 dollars, was earned at both the 35 to 44 and 45 to 54 age clusters The distribution of incomes around this peak is roughly symmetric, failing below $20000 for households with heads either below 25 or above 75 The shape of this distribution is determined by the agency of variations in wage rates and labor force participation rates above the life cycle.(2)

Average total savings, defined as the average annual change in total wealth between year-end 1982 and year-end 1985 current a similar age profile (Chart 2) This measure of savings includes capital gains upon real estate and all financial assets make objection employer contributions to pension plans, which are not reported in the take a view of Total savings rose more steeply with age than did income, with the peak occurring at $8200 in the 55 to 64 age range. Savings in these years are large because income is relatively high, family expenditures are relatively low, and the ne for retirement savings is immediately apparent for chiefly workers.

In addition to total savings, we are also affaired with the age profile of households' personal savings, a narrower conception of savings that not includes capital gains. Since capital gains are frequently passively earned, unplanned, and illiquid, households may treat them differently than other forms of savings. In addition, capital gains income has been volatile in the past, and hence difficult to delineate accurately. Since, at the aggregate flush capital gains do not lead directly to increases in national investment, policymakers are generally more belong toed about aggregate personal savings exclusive of capital gains (Harris and Steindel 1991)