Analysis of the relationship between age and economic activities may be approached from the standpoint of the individual undergoing aging or from that of the manner in which the behavior of the older segment of the population differs from that of the younger segment. The former approach reveals how the economic behavior of an individual changes as he grows older. The latter approach directs attention to the collective economic behavior of older segments of a population, contrasts their behavior with that of younger segments of the population, and inquires into macroeconomic effects of population aging. In this chapter we deal with the former or life-cycle approach; in other chapters we deal with economic behavior characteristics of older segments of populations. Although the life-cycle approach concentrates upon stages in the life of an individual and the interrelation of these stages, information yielded by the life-cycle approach contributes to an understanding of the group behavior and characteristics of older segments of a population – that is, to macroeconomic aspects of population aging.

Economic stages of human development

During their lives, individuals pass through a series of economic, social, and physiological stages that both influence and reflect their consumption and labor-supply activities (Brennan et al.; Woytinsky). The economics of aging includes explicit recognition of effects associated with change in functional capacity as an individual matures and declines, together with its significance for the social framework of a population (e.g., see Botwinick). Moreover, income transfers and tax liabilities which constitute a significant proportion of lifetime income usually vary with age.