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1. Introduction
In the early 1950s Franco Modigliani, with Richard Brumberg and Albert Ando, formulated the life-cycle theory of consumption and savings that enjoyed a huge and undisputed success for at least three decades. It replaced Keynes's 'fundamental psychological law' of savings, according to which the marginal and average propensities to save grow as income rises. On the other hand, the life-cycle theory maintains that the level of savings depends on the age of consumers, and hence on the demographic structure of society rather than on the level of family income.
But, since the early 1980s, the life-cycle theory has increasingly come under attack, for at least four reasons. One reason is the existence of an important inter-generational transmission of wealth, to be imputed to motives that are exogenous to the life-cycle model. The second reason is the growing evidence that the rich continue to save more than the less fortunate, as Keynes in fact maintained. The third reason is that there is growing evidence, at least in Western Europe and Japan, that young families in their twenties and thirties save a positive and increasing proportion of their income, which is in sharp contrast with the original version of the life-cycle theory. Finally, a number of empirical works have found that pensioners put by a very high proportion of their income, a fact that is closely linked to the first reason. Even taking into account Modigliani's argument that pensioners' saving rate should include also the 'drawing down' of the capital stock of the pensions schemes, then the latter should be added to the saving rates of the active period. Quite apart from the 'nonliquidity' of such schemes, we may note that in so doing the 'hump' of savings might in many cases disappear, because of the mainly positive saving rate of the young cohorts of workers. The empirical evidence that has emerged in the last twenty years points in this direction, especially in Western Europe and Japan, but also, to some extent, in the USA. This requires a serious rethinking of the life-cycle approach. This has a bearing on economic analysis, as well as on economic policy. In fact the strong inter-generational nature of assets accumulation calls for a differentiated fiscal treatment of the...