Page 52 - Nuvama | IC Report 2023

• DE-GLOBALISATION • DEREGULATION • DEBT • DEMOGRAPHY • DEMOCRACY

Microeconomics of age structure: Life cycle hypothesis
Young working age populations are associated with higher savings rates. Young workers accumulate
If a country’s savings in their bid to use them for life events such as marriage, family planning, education of children,
working age is and other long-term goals, including retirement planning.
growing at a
heathy pace, And if a country’s working age is growing at a heathy pace, aggregate savings tend to rise (savings
aggregate savings as % of national income), which are then intermediated through financial institutions (banks, capital
tend to rise markets) to fund productive investments in the economy. This in turn becomes the engine of jobs
and income generation.

Exhibit 5:
The life-cycle
hypothesis of Retirement
spending $
and saving
Income curve
Consumption
Saving

Student Income Dis-saving
loan

20 40 65 Lifetime
Source: UN, Nuvama Research
In contrast, as workers get old, they start dipping into their savings in order to spend on life events;
in case of retired people, their accumulated savings begin to decline since they spend to maintain a
living standard even as they do not earn.
East Asia is a case in point. Countries such as Japan, China and Korea wallowed in investment
booms and hence high growth rates during their respective phases of large and growing working age
population. This lifted their living standards significantly as they moved from low-income trajectories
to middle/high incomes.

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