Life cycle welfare: evidence and conjecture

doi:10.1016/S1053-5357(01)00092-0

The Journal of Socio-Economics

Volume 30, Issue 1, 2 January 2001, Pages 31-61

https://doi.org/10.1016/S1053-5357(01)00092-0 Get rights and content

Abstract

At a point in time subjective well-being is positively related to income; over the life course subjective well-being is constant despite substantial growth in income. This paradox is explained by new evidence on consumption aspirations. At a point in time aspirations vary fairly little by income level; over the life cycle, aspirations increase about in proportion to income. These shifts in aspirations also affect assessments of past and future well-being in such a way that the choices underlying behavior (based on what psychologists call “decision utility”) turn out not to have their expected welfare effects (experienced utility). Of the two influences shaping consumption aspirations – comparisons with others and with one’s past experience – the former appears more salient early in the life cycle and the latter, later on.

Introduction

Life is a progress from want to want, not from enjoyment to enjoyment. Samuel Johnson, 1776

Do people typically feel better or worse off as they move through the life cycle? Or does well-being perhaps follow a U-shaped pattern, positive or inverted? What are the causes of the life cycle pattern of welfare, and how important is one’s economic condition in shaping this pattern? These are the concerns of this paper – the nature of subjective well-being over the life cycle and the causal role of economic status. In what follows, I shall use the terms subjective well-being, happiness, satisfaction, utility, and welfare interchangeably.

The implications of economic theory for life cycle welfare are ambiguous. Subjective well-being depends largely on concerns that are most immediate to people’s personal lives – material living levels, family circumstances, health, and job attributes Andrews 1974, Campbell 1981, Campbell and Philip E Converse 1976, Cantril 1965, Veroff and Elizabeth Douvan 1981. Because material living levels depend chiefly on income, one might suppose, following Pigou (1962), that the substantial growth of income during the working ages would, other things equal, bring with it a corresponding growth in happiness, perhaps followed, in retirement, by a decline in well-being as income levels off or diminishes. On the other hand, the life cycle hypothesis, which sees people as stabilizing their consumption stream in relation to age, would seem to imply a constant level of happiness over the life cycle (Modigliani & Brumberg, 1954).

In what follows, I shall suggest that the empirical implication of the life cycle model is correct, but that the underlying theory is contradicted by evidence on how people view their past and future well-being. I shall suggest an alternative interpretation of the life cycle stability in well-being, and present some supporting evidence.

I start with a brief review of prior work, followed by a sketch of the data and the technique of life cycle measurement used here. I then present the substantive results on life cycle welfare, followed by a tentative analysis of determinants. Thus I proceed from evidence to conjecture.

Section snippets

Prior research

The measurement and analysis of subjective well-being has a half century history in the social sciences (a bibliographical survey by Veenhoven (1993) contains about 2500 references). In the past, contributions by economists have been relatively slim (Abramovitz 1979, Easterlin 1974, Frank 1985a, Frank 1985b, Morawetz et al 1977, Ng 1978, Scitovsky 1976, Scitovsky 1986, and van Praag & Kapteyn, 1973). Recent years, however, have seen a flowering of work, including a valuable symposium on

Data and methods

The measurement of life cycle well-being is based here on the happiness data from the General Social Survey. The happiness question noted in the preceding section was asked in all twenty-one years between 1972 and 1996 that the survey was taken. The life cycle pattern of happiness is obtained by following birth cohorts through the adult ages, linking appropriate age data for successive years, a technique that was originated by demographers a half century ago. Thus to trace the life cycle

How well-being varies with income: a new paradox

At a point in time, subjective well-being varies directly with income; over the life cycle subjective well-being is constant, despite substantial growth in income. This new paradox of happiness is evident in the data both on happiness and the chance of achieving the good life.

Aspirations, attainments, and subjective well-being

I have noted three empirical regularities that need to be explained. At a given time those with higher incomes are happier, on average, than those with lower incomes. Also at a point-in-time, respondents typically feel that they were less happy in the past and will be happier in the future. The tentative explanation, to which I now turn, involves taking account, not only of people’s income, or more generally, their attainments, but also their aspirations, and how both aspirations and

Aspirations, attainments, and subjective well-being by level of education

I have noted that at young adult ages material aspirations differ little by level of education. We also know, as a general matter, that income – which is crucial to the fulfillment of material aspirations – varies positively with education.⁸ Hence, by dividing the early, mid, and late life cycle cohorts according to level of education, it is possible to observe more fully the interplay between aspirations and attainments in determining the cross section and life cycle patterns of well-being.

What drives the growth in material aspirations?

If rising material aspirations are responsible for offsetting the life cycle effect of income on well-being, then the question naturally arises, what causes the growth in aspirations? Although the literature indicting mass consumerism sees advertising, TV, and the like as responsible, I shall suggest that a more important part of the mechanism is that desires tend to grow directly as a result of the growth in income and the greater number of goods that higher income brings. In the words of one

Summary

I have tried in this paper, first, to get some idea of the real world nature of the life cycle pattern of subjective well-being. To this end, I have used the accumulating social survey data on happiness by age to trace the subjective well-being of birth cohorts throughout their adult years. The result is straightforward: subjective well-being is, on average, remarkably constant throughout the entire adult life cycle.

These data also show the well-established positive relation between subjective

Acknowledgements

I am grateful for the excellent assistance of Donna H. Ebata and John Worth, and for helpful suggestions to Richard H. Day, Nancy Easterlin, Timur Kuran, Jim Martin, Bentley McLeod, Vai-Lam Mui, Jeffrey Nugent, Lynwood Pendleton, and James Robinson. Financial support was provided by the Andrew W. Mellon Foundation and the University of Southern California.

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