Life-Cycle Hypothesis (LCH)

The Life-Cycle Hypothesis (LCH) is an economic theory that pertains to the spending and saving habits of people over the course of a lifetime. The concept was developed by Franco Modigliani and his student Richard Brumberg. LCH presumes that individuals base consumption on a constant percentage of their anticipated life income. An example supporting the hypothesis is that people save for retirement while they are earning a regular income (rather than spending it all when it is earned).

The Life Cycle Hypothesis concludes that the average propensity to consume is greater in both young and aging individuals, since they are borrowing against future income (in the case of young individuals) or using savings (as with aging or retired individuals). Middle-aged people, on the other hand, have a greater propensity to save and a lower propensity to consume, enhanced by a typically higher income.