Saving for Retirement When the Inflation Rate is Uncertain

Abstract

The paper constructs a simple 'Life-cycle hypothesis" explanation of saving for retirement behavior when the inflation rate and thus the real interest rate is uncertain. Since this type of uncertainty has the effect of making lifetime income also uncertain (even if wage income is certain), the paper is thus a contribution to the literature on the effect of income uncertainty on saving. In contrast to the literature, however, the paper shows that uncertainty does not necessarily increase savings, and gives an elasticity condition which determines whether savings will increase or decrease. (D 11)