The standard theory of consumer behavior has clear implications for the amount of savings that households will choose to hold. The theory posits that, all else equal, households prefer more consumption to less, smoother consumption to a more volatile consumption profile, consuming sooner to consuming later, and greater certainty about their consumption path. For a given level of expected returns, the desire to smooth consumption over time causes households to hold higher levels of savings when they expect consumption growth to be relatively slow; conversely they save less or try to borrow against future income when expected consumption growth is more rapid. Impatient households postpone the accumulation of savings until they near retirement age. Risk aversion motivates higher levels of savings as a buffer against adverse economic shocks. While the effect of higher expected rates of return on the household saving rate is theoretically ambiguous, under many reasonable modeling assumptions it seems that higher returns draw forth higher saving.
An aging population can affect aggregate savings in a variety of ways. Because older households on average hold more savings than younger households, an aging population will tend to display rising savings per capita. The desire to smooth consumption leads households to save while working so that they can draw down their assets to finance their retirement years. Higher aggregate savings per worker can affect the marginal product of capital—the amount of additional output that is produced from an incremental deployment of capital investment—if it translates into a higher level of capital per worker. Economic models of production imply that when the number of workers per unit of productive capital declines, the marginal product of capital will decline. A lower marginal product of capital would translate into a lower rate of return on incremental investments, which could reduce the incentive to save and partly offset the aging-related increase in savings per capita.
Population aging may also affect household savings by affecting the expected path of productivity growth and thereby consumption growth. Productivity growth is the most important determinant of consumption growth over long horizons. The rates of output and consumption growth over substantial periods of time are roughly proportional to the growth rate of output per unit of labor used in production. Chapter 6 reviews the evidence of the effects of an aging population on productivity and concludes that there is likely to be a negligible effect of the age composition of the labor force on the level of aggregate productivity over the next two decades.
Another way by which population aging may affect savings is its effect on economic uncertainty. For example, households may increase their sav-