Saving and consumption patterns of the elderly

The paper provides an empirical analysis of saving and consumption choices of the elderly in Germany, based on the German income and expenditure surveys 1978 and 1983. Main feature of these data is the large sample size making it possible to analyze saving and consumption patterns of the very old (aged 75 and above).The observed age-consumption profiles are very different from those predicted by the pure life-cycle theory. Although wealth is declining between age 60 and 70, it increases again after 70, such that the very old have the highest savings rates among all age groups and accumulate wealth rather than decumulate it. These profiles are not confounded by cohort effects and mortality differences. The corresponding expenditure data suggest the following explanation: due to the generous German pension system and the almost complete coverage of health expenses by the mandatory health insurance in Germany, the declining consumption n very old age cannot exhaust the annuity income of the elderly such that wealth is being accumulated in old age.Research in this paper was supported by the National Institute on Aging, grant no. 3 PO1 AG05842-01. I appreciate the helpful comments by Doug Bernheim, Angus Deaton, Daniel McFadden, Jonathan Skinner, Konrad 'Stahl and David Wise, and two anonymous referees. I am indebted to Hermann Buslei and Johannes Velling who provided most valuable and able assistance.