35

A typical life cycle can be regarded as the life cycle line on the horizontal axis in the figure:

Young, single young couple with no children young couple with children
middle-aged couple with children middle-aged couple without dependent children
elderly couple elderly, single (probably widowed)
If we are speaking of a life cycle in general, this is usually what we imagine, and this will be
the basic concept in the rest of the book as well. At the same time, it is important to note the
exceptions, which appear in the graph as deviations from the main axis. It is possible to get
a divorce while one is still young, with or without children. It is possible to get married more
than once. Perhaps a couple by choice or not will not have any children, or someone
may not get married. Furthermore, the figure does not include some increasingly popular (or
at least more common) cases, such as a lifelong partnership without marriage, or that of
having children without marriage or a lifelong partner, or the more rare cases of long-lasting
relationships between two people of the same gender, or communes28.
In terms of financial planning, it is very important to be aware of these possible variations,
and in concrete cases one must seriously consider them. As we will see, in the financing of
the life cycle it matters how many children one raises, and whether one does so alone or
with a husband or wife (or lifelong partner), or whether the children come from a single or
multiple marriages? From a social perspective: if a married couple raises two children, then
they pretty much pay back to society what had been spent on raising them themselves. More
than two children29 can be regarded as a net contribution to the welfare of society. At the
same time, single people or married couples without children have a lesser burden, they can
achieve a higher standard of living, but they do this by failing to fulfil their obligation to
society.30
2.5. THE CASH FLOW OF THE LIFE CYCLE
The life cycle can be divided into the following economic stages:

inactive active inactive

birth 20-25 years 60-65 years
In the active phase of the life cycle, a person makes enough income for current needs, and
usually more than that. In the economically inactive phase, there is no current income from
work, so either he depends on financial support from others (parents, relatives, goodwill
organizations, the state) or lives from his own (inherited or saved) assets and its interest.
Since we are also the parents, relatives, and tax payers who support the state, a country
does well overall if its citizens individually make enough income not just for their current, but
their lifetime consumption, or somewhat more than that. If some people make less than that,
then there are reasons and consequences:
Living off of other people (or being a parasite) or
Living up the inherited assets, or
An inherited or received physical or mental disability (being handicapped, or
mentally retarded) in the case of which society accepts the consumption of the

28
After all, the figure was made in 1979, and it reflects the beliefs of the time period.
29
An important constraint! Only if they did not just give birth to the children, but also raised them in a satisfactory
way, and they received proper socialization so that they can become useful members of society. Someone who
has a child or children without being able to fulfil these criteria is actually not paying back, but rather increasing
their debt to society!
30
A possible solution to this could be a childlessness tax, which is really a way of getting back the cost of raising
and schooling from those who are trying to avoid paying back their debt. The amount would be equivalent to the
cost of raising a child.

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 36

product of others work without contribution (or with a lesser contribution) to the
creation of goods out of solidarity31, or
Early death, which keeps one from beginning the active phase or from completely
covering ones consumption up to that point.
If it becomes the norm in a society for active people to generate less income than what
they consume during their lives, then that society:
Uses up the assets compiled by earlier generations,32 or
33
Systematically robs other countries, or
Has compiled assets34 that it can live off of without losing the assets (and without
currently making an effort).
None of the above cases are typical, so the original concept can be upheld with some
clarification:
A society is all right financially if its members who are capable of work and have
average lifespan make as much income as they consume during their entire life cycle,
and beyond that enough so they can contribute to society (in the amount needed) to
support the members who are unable to work.
Further clarification: it is implicitly assumed in the above that the reserves that are freed up
when the people who produced them died at the end of their active phase before they could
consume them compensates for the shortage caused by those who died earlier. If this is not
the case, so if more people die too early, this shortage will increase the solidarity burden
weighing on those who had average-length life spans. If, on the other hand, there are more
reserves freed up by those who died at the end of their active phase than what is needed for
the above compensation, then the next generation of the society will start out better off than
35
the previous one.
The following figures represent the above relations:

31
We will not list here among the cases of solidarity those who are theoretically able to work, but unable to
support themselves due to social (lack of training) economic (regional differences between industry and work
force, an unsatisfactory structure of existing and needed education, general economic recession). In these cases
the need for solidarity is temporary, while those able to work but inactive can re-train themselves, or move to the
appropriate location. Then our general observation will apply to them as well. If such a person still stays jobless
permanently and society is forced into solidarity, then there is something wrong with the socio-economic
apparatus but we will refrain from dissecting this issue further here.
32
Perhaps Spain could be brought up as an example here at the beginning of the New Age. Although it is true
that those compiled assets came from robbery (of America).
33
Behaviour that is typical of the colonial times. See, for example, the one-sided stream of income from India to
England between the middle of the 18th and 20th centuries.
34
Certain oil countries came close to being in this situation. For example, Kuwait (especially before the Iraqi
invasion) but even Norway accumulated certain reserves. At the same time, members of a society that is prone
to being passive and living off the interest of assets will sooner or later be left out of the main flow of events and
be left behind, their assets losing their value.
35
It is advisable then to avoid compensating the excess resources freed up in this way by consumption without
work, perhaps due to a mistaken state solidarity policy (for example, long-term unemployment benefits, without
necessary re-training programs). Important! We are not talking about the Hungarian situation here, or valuing it,
but general relations!

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25,000,000

20,000,000

15,000,000

10,000,000

5,000,000

0
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76
letkor

Fogyaszts Munkajvedelem

Figure 2.3.: The relationship between income and consumption

30 000 000

20 000 000

10 000 000

0
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81
-10 000 000

-20 000 000

-30 000 000

-40 000 000

Age

Jvedelem-fogyaszts klnbsge A klnbsg kumullva

Figure 2.4.: The cash flow of the life cycle

Figure 2.3. shows the general relationship between income and consumption during an
average-length lifespan. The above-mentioned relations can be seen clearly, namely that in
36
the active phase the income is greater than consumption, and in the inactive age either
there is no income from work, or it is well below the consumption.

36
Not counting the indebtedness due to the long-term investments (mainly buying a home)!

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Figure 2.4 shows the cumulated amounts and the long-term equilibrium of income and
consumption.
According to the figure, during our childhood (our first inactive phase) we surmount a huge
and ever-increasing debt to society,37 which we begin to pay back in our active phase, and
which disappears around the end of our middle age, and turns into an ever-increasing
surplus, which in turn is gradually used up in our second inactive phase. (In the figure
showing the relationship of income and consumption, we still assume a significant, though
strongly decreasing income during the retired years, which goes along with the tendency that
todays retired people are healthier, and thus more active38.)
The usual form of form of paying back the debt accumulated during our childhood39 is the
having and raising of children. The debt towards society can be paid off by the raising of
two children by each couple. If there are more than two children, we are paying off the debt
in place of others as well (if the average number of children per couple does not surpass 2)
or we are a part of societys investment in the future (if the average is greater than 2
children per couple), or both (if the number of children we have is above the average).
The figure suggests that the incurred debt is paid off around the time when our children
reach their active phase, and then the net accumulation begins. It is important to call this
accumulation a net accumulation, because the above figure does not reflect the structure
of debt and surplus. So while the children are raised, the creation of the surplus already
begins, but due to the existing large debt at the time the accumulated outcome seen on the
figure is still negative, the paying back of the debt is still going on (so this is during the young
adult stages of our childrens lives for example, during their university years, and
afterwards) when overall the surplus has surpassed the debt.
According to the figure, our lifetime wealth starts from 0 at the beginning of our lives, and
40
goes back to 0 at the end. This and the assumption of a three-phased life cycle itself is
a simplification, behind which there stand a few assumptions, or from which there are some
deviations.
Assumptions:
Since the length of the life cycle cannot be foreseen for each individual, only as an
average for a group, we assume a mechanism that equalizes over the society,
which redistributes the money required for an average-length lifespan according to
the needs (this book deals with such mechanisms regarding the life insurance and
social security)
People are born without any assets and die without leaving behind any assets
The life cycle has three phases and those phases are of normal length, so most
importantly no one dies during their active phase, or loses their ability to work (so
the active phase is not too short).
Possible deviations:

37
We could also say that, contrary to our parents, we do not pay them back, or only in a small part, and also by
raising us they were paying back their own debts.
38
This does break down somewhat the theoretical basis for the separation of active-inactive phases, but thats
life: we can only more-or-less speak of active and inactive phases, not with clarity!
39
Usual, because we can also imagine an institutionalized form of this as well. This could mean that everyone
pays the costs of their upbringing to a common fund in the form of taxes or fees, and this is then used to pay for
the upbringing of every child born (as a kind of child support). This solution which is, after all, being
implemented by some Scandinavian countries has the advantage that every child receives the financial
resources needed for their upbringing, to some degree independently from their parents financial situation. Its
drawback is almost the same thing, in that it assumes that there are no income differences within the given
society. In the case of large income inequality it is difficult to determine a normative support that would not be too
little for the wealthier classes, or tempt the poorer classes to use the money received from the common funds for
some other purpose. In such cases as in Hungary the usual solution remains, which the existing child
support cannot change much.
40
So the inactive-active-inactive phases follow each other!

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There are some people who do not start out with zero, but rather a significant

amount of inherited wealth, and during their life cycle they either increase this
further, or use it up, so they leave more or less to their children41 (or: they may even
leave a debt behind)
It is possible in fact, highly probable that consumption fluctuates much more
during the life cycle than suggested by figure 2.3. The timing of children may be at
very different stages of our lives as well, or due to the differences in the ages of
children, the paying back of the debt could be prolonged for a long time.
The life cycle consists only of an incomplete inactive, or a full young inactive and an
incomplete active phase.
Of the possible deviations, the last one is most significant from the point of view of this
book. The next chapter deals with this deviation and its consequences, as do the sections
dealing with different personal insurance forms in detail. For now lets just say that during the
active phase of the life cycle, not only do we need to produce enough income for our
consumption over life, but beyond this enough to cover the consequences of any unexpected
occurrences that may keep a person from paying back their debt (or raising their children),
from producing the goods needed to support themselves, and from performing the
necessary accumulation.
2.6. THE STRUCTURE OF CASH FLOW DURING THE LIFE CYCLE
The above aggregated cash flow must be examined in its composition, in particular what
the sources of our revenues are, and exactly what our expenditures are for. This structure
depends on two factors:
age and
socio-economic situation.
The structure of outgoing cash flow depends strongly on the current phase of the
individuals life cycle (which can be best represented by age)42, their social situation, and
also on which version of the possible life cycles the individual is living. First we will
concentrate on the differing structure of expenditures during the different phases of the life
cycle assuming a typical middle-class life cycle.
Life cycle phase Description of Typical expenditures Financial
(age) phase decision maker
1-6 Small child age Basic necessary goods (food, Parent
clothing, shelter) (=necessary) (guardian)
7-18 Elementary and Necessary + educational + parent +
high school recreation independently
regarding
pocket money
19-23 University Necessary + educational + parent, state,
recreation + travel independently
24-27 Young entry- Necessary + educational + Independently
level worker, recreation + travel (with different , state
single ratios!)
28-30 Young married Necessary + educational + same
without children, recreation + home buying (also
beginning of different ratios!)

41
It should be noted that leaving an inheritance is not necessarily a voluntary decision. If, for example, the state
taxes its citizens significantly, and from that builds roads etc., then someone can leave a significant amount to
the next generation even if he dies seemingly without a penny to his name.
42
But is should be known that at the same age especially in the adult ages different people are at different
stages of their life cycles. Some are already parents at age 18, some only after 30. Some reach the pinnacle of
their career by age 25, some move forward gradually, etc.

JZSEF BANYR: LIFE INSURANCE