Abstract:

As is well known, the US population has grown much older and is expected to continue to age. The share of adults age 65 or older—16 percent in 1980—has been rising steadily and is projected by the US Census Bureau to reach 22 percent by 2020. Given differences in saving rates and marginal propensities to consume (mpc’s) over the life cycle, demographic shifts could materially affect the relationship among macroeconomic aggregates such as income, consumption, and saving. A key question is how large these effects might be. Some past studies have used time series data to try to quantify these effects (for example, see Alan S. Blinder 1975), but demographics change more gradually than other determinants of aggregate spending, making it difficult to obtain precise estimates of the effects from such data. Our paper contributes to the literature by drawing lessons on how population aging might change the relationship between macroeconomic aggregates from household-level data. Household-level data enhance our ability to identify the effects because of the rich variation in consumption, saving, and income that we observe across households.