# **2. Life cycle wealth accumulation in developing countries**

Underlying this research is the life cycle hypothesis (LCH), originally proposed by Modgliani and Brumberg (1954, 1979), which posits that individuals will save and dissave to smooth consumption over their lifetime.<sup>2</sup> One recent approach, used in the Findex surveys, consists in asking households directly whether they save for old age. Demigurc-Kunt et al. (2016) show that in South Asia this fraction maxes out at around 10%-15% when individuals are in their 50s. However, larger fractions report saving more generally, and much of those savings may be multipurpose, with old age consumption constituting a secondary, less urgent motive. Some components of household net worth such as housing may not be identified as savings by respondents, even though they are indirectly consumed in old age in the form of saved rent payments and, while relatively illiquid, could be sold as a last resort.

A much larger literature has taken a different approach and analyzed the main prediction of the LCH, which is that household consumption should be disconnected from income fluctuations (see Deaton, 1997, for a review). Comparing consumption and income over the life cycle, the literature finds that consumption generally tracks income more closely than would be implied by the theory (Carroll and Summers 1991, Attanasio and Davis 1996). Some studies have examined the extent to which liquidity constraints (Deaon, 1991), precautionary savings (Carroll, 1997), and cohort effects (Deaton and Paxson, 1994) can explain this puzzle.

When wealth is analyzed directly, households appear to save too little (Deaton, 1997) and concerns abound that households do not adequately prepare for retirement (e.g., Mitchell and Moore, 1998 for the U.S.). These findings prompted theoretical developments in behavioral economics aimed at capturing departures from rationality or time-consistency such as hyperbolic discounting (Laibson, 1997, Harris and Laibson, 2001). However, others have argued that properly modeling household consumption decisions (buffer stock behavior, end-of-life uncertainty, medical expenditures, asset-tested public transfers, family structure, etc.) can rationalize the saving behavior of American households (Scholz et al., 2006, Gourinchas and Parker, 2002).<sup>3</sup> Most of the literature describing how household net worth changes with age (e.g. Lydall (1953), Shorrocks (1975), Wolf (1981) or more recently Cagetti (2003)) uses data from rich countries and we are not aware of lowincome country descriptions of how the value and mix of assets owned by households evolve over the life cycle. An obvious reason is data scarcity. Such a description requires comprehensive data on household assets, but typical representative household surveys only ask about durable ownership and housing characteristics. Second, controlling for time and cohort effects requires repeated cross-sections spanning large periods of time, which are rarely available in low-income settings.

Here we are able to use detailed data from Pakistan to examine life cycle wealth accumulation, to understand trends in old-age savings and the changes in potential demand for long-term saving schemes.

> 2 Surveys of the literature on household saving decisions include Browning and Lusardi (1996) and Attanasio and Weber (2010).

> 3 Another related puzzle is that households do not dissave enough in old age, compared to what the LCH would predict and that consumption tends to drop after retirement (Banks et al. 1998). The literature has attempted to quantify the role of possible explanations including bequests, asset illiquidity and longevity and health expenditure risk (e.g De Nardi et al. 2010, Poterba et al. 2011, Nakajima and Telyukova, 2016).

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