The Most Important Graph in the World: U.S. Life Cycle Deficits, 1888-2003

Gretchen Donehower, University of California, Berkeley

The life cycle deficit – the difference between consumption and income at each age – is a basic problem of social and economic organization, indicating who needs resources and who has them to give. This paper examines trends in life cycle deficits in the United States reaching back as far as the 19th century up to the present. Over this long period we see increasing deficits for older people as their labor income decreases and their own and Medicare’s spending on their health rises steadily. Deficits for the young rise in the most recent period because of later entry into the labor force for greater education. These deficits are financed through transfers from the labor income of working age people but also through borrowing and asset income. The application of age profiles to study the impacts of these trends is discussed.