Re: Obituary: Franco Modigliani and the savings rate: annuities

["Niggle, Christopher" <Christopher_Niggle@xxxxxxxxxxxx>]

Barkley, others interested.  Another complication in estimating savings
rates across age groups:  The NIPA saving rate estimates probably don't
capture flows into 401K-like instruments very well...Savings is estimated as
a residual after income (from tax flows) and consumption are estimated...and
personal income includes imputations for housing etc.  The Fed's FOF
estimates for savings are probably more meaningful and consistently show
higher personal savings rates.

Chris

-----Original Message-----
From: Barkley Rosser [mailto:rosserjb@xxxxxxx]
Sent: Monday, September 29, 2003 3:05 PM
To: pkt@xxxxxxxxxxxxxxxx
Cc: Greg Nowell
Subject: Fw: Obituary: Franco Modigliani
Importance: Low


     This is forwarded from Greg Nowell who is unable
to post to pkt for reasons I do not know.
      My response is that I do not know how annuities
are handled, but incomes of the retired are down from
the pre-retired, no matter how you count annuities. I
seriously doubt any accounting oddity with that is
what is going on here (and a majority of the retired
do not have annuities anyway).
      The statement that people do not save for their
retirement may be generally true today, but it has
not always been true.  Savings rates have fallen,
although I am curious as to how those who view
savings as something entirely endogenous to
the income and product accounts rather than
reflecting conscious decisions of people might
explain this finding in the paper cited by Paul
Davidson.
Barkley Rosser
----- Original Message -----
From: "Greg Nowell" <gnowell@xxxxxxxxxx>
To: "Barkley Rosser" <rosserjb@xxxxxxx>
Sent: Sunday, September 28, 2003 7:18 PM
Subject: Re: Obituary: Franco Modigliani


> Barkley:
>
> I'm unclear on all the definitional issues.  It seemss to me, based on
what
> I see, that retired people couold have a higher savings *rate* based on
> factors that are not directly analogous to pre-retirment savings rates.
For
> example, if I annuitize my retirement hoard then my savings *rate* out of
> that income stream (variable annuity) than my savings *rate* may be higher
> than anticipated because social security and the variable annuity itself
> might be higher, allowing me to save out of non-wage income.  I might also
> might not annuitize all my assets, and thus save more out of *income* from
> assets (annuity) while liquidating other assets, which may or may not show
> as dissavings.
>
> In any case the weirdness of an annuity is that in one sense you are
> dissaving (drawing down an accumulated asset) but in another sense it is
an
> actuarily based income stream out of which one might save.  I'm not sure
how
> annuities show up in income statistics.
>
> The other oddity is that most people don't make *any* significant
provision
> for retirement and this must skew data.  They have forced savings as wage
> laborers and zero savings out of income to speak of, but when they retire
> may actually save against rainy day contingencies out of their social
> security because they "get the picture" that they won't easily be able to
> earn more.  Or alternatively scale down lifestyles and pick up extra
income
> as low wage earners and save the money for payments not covered by
medicare,
> etc.   In any case I find it difficult to tie this particular part of the
> "life cycle savings" in with earlier periods in someone's life.
>
> I don't seem able to post to PKT anymore a situat9ion which I suppose I
> could remedy but for other commitments.  Anyhow for some reason I continue
> to RECEIVE PKT stuff and I thought I would pass this on.
>
> regards
> Greg Nowell
>
> ----- Original Message -----
> From: "Barkley Rosser" <rosserjb@xxxxxxx>
> To: "pdavidso" <pdavidso@xxxxxxx>; "Matias Vernengo"
> <matias.vernengo@xxxxxxxxxxxxxxxxxx>
> Cc: <pkt@xxxxxxxxxxxxxxxx>
> Sent: Sunday, September 28, 2003 5:06 PM
> Subject: Re: Obituary: Franco Modigliani
>
>
> > Paul,
> >       That is an unfortunately underappreciated
> > paper, and I am closely acquainted with some
> > of its authors.  It does need more publicizing.
> >       However, there are at least two caveats that
> > need to be noted before using it to simply dismiss
> > the life cycle hypothesis, which is not entirely
> > without empirical support.  The major problem
> > is that the JPKE paper was based on cross-section
> > rather than time-series data (unless I am mistaken,
> > which is possible).  Therefore, if the savings rate is
> > in general declining, which it has been for some
> > time in the US, it is not surprising that older people
> > tend to have higher savings rates.  They might
> > have had still higher ones when younger.  Also,
> > there may be a selection effect, those who save
> > more live longer.  This would also bias the results.
> > Barkley Rosser
> > ----- Original Message -----
> > From: "pdavidso" <pdavidso@xxxxxxx>
> > To: "Matias Vernengo" <matias.vernengo@xxxxxxxxxxxxxxxxxx>
> > Cc: <pkt@xxxxxxxxxxxxxxxx>
> > Sent: Saturday, September 27, 2003 7:11 PM
> > Subject: Re: Obituary: Franco Modigliani
> >
> >
> > > >===== Original Message From Matias Vernengo
> > > <matias.vernengo@xxxxxxxxxxxxxxxxxx> =====
> > > >Obituary: Franco Modigliani by Martin Wolf Published: September 26
2003
> > > >17:41 | Last Updated: September 26 2003 17:41 .l { visibility:
hidden;
> > > >display: block; }
> > > >
> > > >
> > > >Franco Modigliani, who has died at the age of 85, was
> > > >the winner of the Nobel Prize for Economics in 1985 Modigliani made
> > seminal
> > > >contributions to macroeconomics - particularly the "life-cycle"
savings
> > > >hypothesis, which he developed in collaboration with Richard
Brumberg -
> > >
> > >
> > > >The life-cycle theory of savings arose out of an interest in
Keynesian
> > > >economics, which suggested that people would save an ever higher
> > proportion
> > > >of their incomes the richer they became. The consequent excess of
> savings
> > > >could, it was feared, lead to depression.
> > >
> > > >Modigliani's first response, published in 1949, was the idea that
> savings
> > are
> > > >determined more by a person's income relative to his accustomed level
> > than
> > > >by his absolute income in a given period. In 1954, Modigliani
published
> > the
> > > >first paper on the life-cycle hypothesis - co-authored by his pupil,
> > Richard
> > > >Brumberg. In this model, current consumption is determined by
expected
> > life-
> > > >time incomes. As people would, argued the authors, wish to consume
the
> > > >same amount (in real discounted terms) each year, savings would be
> > > >determined by the difference between current incomes and planned
> > > >consumption. Consequently, an individual's life-time savings would
show
> a
> > > >hump: low in early adulthood, high during the middle years and
negative
> > in
> > > >retirement.
> > >
> > >
> > > Unfortunately, the empirical facts do not support the life cycle
> > hypothesis.
> > > Researchers from the Po\verty In stitute of the University of
Wisconsin
> > > reported , in a study published in the JOURNASL OF POST KEYNESIAN
> > ECONOMICS,
> > > that they took a surveys over time of over 6000 households whose head
of
> > > household was 65 years or older -- and found that after adjusting for
> > income
> > > (using several different definitions of income), the average
propensity
> to
> > > save  INCREASED with age .  In essence 70 year olds, cetteris paribus,
> > saved
> > > more than 65 year olds for any given income level, 75 year olds saved
> more
> > > than 70 year olds, etc.
> > >
> > > These facts have never been disputed -- and Modigliani knew about this
> > > published study -- and never even tried to refute! He just ignored
> it --as
> > did
> > > many of his Establishment colleagues at MIT, Chicago, etc.  and he
> > received
> > > the Nobel prize for the life cycle fiction -- even though it was known
> to
> > be
> > > empirically invalid!!
> > >
> > >
> > > And I should point out -- that Franco and I were friends -- not
> enemies --
> > > during our concurrent service on the Brookings Panel and after.
> > >
> > >
> > >
> > >
> > > >The life-cycle hypothesis also has implications for the behaviour of
> > savings
> > > in
> > > >the economy as a whole. Even if individuals consume their entire
> lifetime
> > > >incomes, an economy will have positive savings, provided incomes are
> > rising.
> > >
> > >
> > > But the implications are even greater if the life cycle hypothesis is
> > rejected
> > > by empirical data
> > >
> > >
> > > >Each generation is then richer than its predecessor and so saves more
> in
> > > >middle-age than its predecessor dissaves in its old age.
> > >
> > >
> > >
> > > And if olders do not dissave then what?
> > >
> > >
> > > >Modigliani's work on corporate finance was as path-breaking. In the
> late
> > > >1950s he and Merton Miller produced two papers on the financial
> structure
> > of
> > > >the firm and on dividend policy. The first, published in 1958, argued
> > that
> > > the
> > > >debt-equity ratio of a firm should have no effect on its market
> valuation
> > in
> > > a
> > > >perfect capital market. The second, published in 1961, maintained
that
> > the
> > > >dividend policy of the firm should also have no bearing on its
> valuation.
> > The
> > > >approach taken in these papers is that investors can create leverage
by
> > > >borrowing against shares, they can undo leverage by buying a
company's
> > > >bonds and they can create dividends by selling a company's shares.
> > >
> > > Later on the Modgiliani -Miller corporate finace model was also shown
to
> > be at
> > > oddss with the facts. But who cares?-- as Miller got a Nobel prize or
> > that --
> > > thereby implicitly giving Franco a second Nobel prize.
> > >
> > >
> > > Paul
> > >
> > > Paul Davidson
> > > Editor, Journal of Post Keynesian Economics
> > > University of Tennessee
> > > SMC 503
> > > Knoxville, Tennessee 37996-0550
> > > office phone #;(865)974-4221; office fax# (865)974-1686 or
(865)974-4601
> > > home phone and fax # (865)692-0802
> > > email pdavidson@xxxxxxx
> > > http://econ.bus.utk.edu/davidsonextra/Davidson.html
> > >
> > >
> >
>
>