# **3. Aging and Saving**

How will the saving rate evolve when the population is aging in Brazil? That is the main question of this paper. It is well known that population aging is likely to reduce the saving rate because there will be a larger share of elderly who may not have an incentive to save very much. What if, however, the LCH is not supported in Brazil when the elderly also save? In that case, a larger share of elderly will not reduce the saving rate; in fact, population aging may then increase the saving rate, and since the share of children in expected to fall in Brazil in line with falling fertility that would further increase the average saving rate.

To confirm or reject the LCH for Brazil — and to project the most likely trajectory for the future saving rate — are the two main purposes of this section. The section therefore offers a systematic treatment of the partial equilibrium dynamics of household saving rates over the period 2010 to 2050. The analysis builds on the latest 2008 POF household expenditure survey and the PNADE household survey, and a partial equilibrium model is employed to simulate the implications for household saving rates under various scenarios for income inequality. The analysis assumes that saving rates at the household level do not change as a response to aging.

Based on the following discussion, it is found that age-specific saving rates increase up to the age of about 40, after which they remain virtually unchanged on average. As is evident from Figure 1b it matters a great deal to the measure of age-specific saving rates whether or not public pensions are included as part of income. The literature is quite clear on the subject: private pensions should be deducted from the measure of income, but social security pension benefits should not (Bosworth et al., 1991, and Miles, 1999). Mason and Lee (2010) furthermore argue that pensions paid to public workers are components of labor income and simply a cost of producing public goods. As a result, they should be included in the income measure used for evaluating saving rates.

Despite the analyses and views of Bosworth et al. (1991) and Miles (1999), the argument could still be made that gross income over the entire life should not be used to calculate age-specific saving rates — even though private pensions are deducted: A worker’s gross income should be deducted any social security contribution that is associated with a PAYG pension scheme, such only his retirement income includes this item. Otherwise, the same income is counted both in the working and retirement-periods, respectively. Therefore, we adjust gross income for private pensions, all taxes, and social security contributions.

Consequently, net income, including public pension benefits, is used for all age groups. Whatever one receives as a PAYG transfer in old age will therefore not be double-counted. The trajectory of the saving rate in Figure 1b, for which income includes public pensions, is therefore assumed to be the correct measure to use; while the measure that excludes public pension benefits is equivalent to evaluating the LCH relative to labor income.

Since the saving rates by age follows the trend in Figure 1b, the LCH is contradicted in the case of Brazil with the key implication that saving rates (and potentially economic growth) will not necessarily be depressed by population aging as would traditionally be expected. This pattern of saving is not unique to Brazil; rather, in several developing countries the saving rates do not decline in old age as they do in most developed countries as suggested by, for example, Poterba (1994), Gregory, Mokhtari and Schrettl (1999), Weil (1997), and Miles (1999). In particular, Attanatio and 8