The effect on the Italian private pension market of increased uncertainty concerning public pension provision

This paper examines the effect on the demand for private pensions in Italy of the recent strong increase in uncertainty concernin future public pension provision. Theory suggests that such increase uncertainty will increase the demand for all forms of private sector saving, and, in particular, the demand for private pensions — despite the present generosity of the Italian public pension arrangement. This theoretical proposition is confirmed by an empirical test. The implications are important.     

On myopia as rationale for social security

It has been argued that “paternalistically motivated forced savings constitutes an important, and to some the most important, rationale for social security retirement systems.” This paper revisits the role played by myopia in generating a theoretical rationale for pay-as-you-go (PAYG) social security in dynamically efficient economies. If the competing asset is linear storage and myopic agents are allowed to borrow against future pension benefits, there is no welfare-rationale for PAYG pensions. Sufficiently strong myopia may justify such pensions only if agents cannot borrow against their future pension, but then they are at a zero-saving corner. With enough myopia, co-existence of positive optimal pensions and positive private saving is possible if the return to saving declines with saving, as in a model with a neoclassical technology.     

Do private pensions increase national savings?

This paper discusses how private pension programs differ from public social security in their likely impact on aggregate saving. Although private pensions are likely to reduce direct saving by employees, this should be offset by the combination of companies' partial funding and the shareholders response to unfunded liabilities. In contrast to several earlier empirical studies that implied that social security does depress national saving, the current time series evidence suggests that the growth of private pensions has not had an adverse effect on saving and may have increased saving by a small amount.     

ANNUITIZED ASSET ADEQUACY IN JAPAN: THE DEMAND FOR INDIVIDUAL PENSIONS

In this paper, I analyze the impact of social security wealth, retirement payments, and living expenses during retirement on people's retirement savings in general, and on their individual pension holdings in particular, using micro data from a 1996 Japanese household survey. I confirm a replacement effect of social security on saving for all types of households and on individual pensions for self‐employed households only. This suggests that the social security assets of self‐employed households are less than their optimal level of annuitized assets and that they would increase their demand for individual pensions if social security benefits were to be reduced.     

A SAVINGS SUBSIDISATION SYSTEM IN A MODEL OF ENDOGENOUS FERTILITY AND ENDOGENOUS GROWTH: AN EXTENSION OF WIGGER (1999)

Population ageing is now an established demographic characteristic of many economies. Economists working in the endogenous growth theory tradition have sought to model the relationship between public pensions, financed on a 'Pay-As-You-Go' basis, and the growth in per capita incomes. The resultant intergenerational wealth redistribution from young to older people seems to decrease private savings, diminish capital accumulation, and lower the growth of per capita incomes. The underlying transmission mechanism appears to be a crowding out effect in private capital markets contingent upon the introduction of public pension systems. A growing literature exists on the interrelationships between public pension schemes, fertility rates and endogenous growth. Following Wigger's (1999) pioneering overlapping generations endogenous growth model, we extend this model to examine the effects of a savings subsidisation system on the rate of per capita income growth, fertility and voluntary intrafamily wealth transfers, where parents view children both as an insurance good and a consumption good. Moreover, children care about the consumption levels of their parents. An increase in contributions to a savings subsidised public pension scheme will crowd out private intergenerational transfers from the young to the old and thereby negate the usefulness of children as an insurance good.     

Do tax subsidies for retirement saving affect total private saving? New evidence on middle-income workers*

We exploit exogenous variation from a pension reform in Denmark to estimate the effect of tax subsidies on total private saving. We present new evidence on individuals in the middle of the income distribution and show that a reduction in tax subsidies for retirement saving reduces total private saving. The reform changed the tax incentives for saving in the pension scheme that holds the highest tax advantage for middle-income workers in Denmark. We find that for each unit of reduced saving in this pension scheme, only 64 percent is substituted to other types of saving.     

Pension reforms and saving gains in the United Kingdom

The empirical validity of the effect of pension reforms on domestic savings in the UK has been investigated using an Auto‐regressive Distributed Lag (ARDL) model capable of testing for the existence of a long‐run relationship regardless of whether the underlying time series are individually I(1) or I(0). The total savings response to change in pension savings is positive and significant, but an increase in occupational pension saving appears offset by a decrease in other forms of saving. This paper concludes that there is no firm evidence that aggregate savings increase considerably because of privately funded pension schemes.     

The role of personality traits in pension decisions: findings and policy recommendations

Many countries need to stimulate pension participation and contribution to ensure their citizens are prepared adequately for retirement. Identifying at-risk groups with tendencies of not joining pension plans will help governments target strategies to improve pension awareness and participation. This study investigates the role of personality traits in pension decision making using data from the UK Household Longitudinal Study. Our results demonstrate that Extraversion significantly correlates with non-participation in private pensions, including both employer run and personal pensions. Individuals who are high in Conscientiousness are more likely to participate and pay more into personal pensions. Openness to experience is negatively correlated with saving via personal pensions. Agreeableness and Extraversion correlate inversely with the amount contributed to personal plans. This paper discusses our findings in detail and offers policy implications which may help promote pension participation and ease the problem of old age poverty.     

The German Savings Puzzle

Germany has one of the most generous public pension and health insurance systems of the world, yet private savings are high and remain positive until old age, even for most low income households. How can we explain what we might want to term the “German savings puzzle”? We provide a complicated answer that combines historical facts with capital market imperfections, housing, tax and pension policies. The first part of the paper describes how German households save, based on a synthetic panel of four cross sections of the German Income and Expenditure Survey (“Einkommens- und Verbrauchsstichproben”) collected between 1978 and 1993. The second part links saving behaviour with public policy, notably tax and pension policy.     

THE TREATMENT OF PENSIONS AND INSURANCE IN NATIONAL ACCOUNTS*

In the course of the nearly two decades since the revised SNA was developed, the role of pensions and insurance in the developed western economies has been significantly altered. The United Nations System of National Accounts (SNA) is not fully consistent in its treatment of pension and insurance transactions. This paper examines whether, in view of the changed institutional context, a modification of the SNA treatment of this complex of flows would be desirable. It investigates the impact on household income and saving of adopting a somewhat more consistent transactor/transaction approach for all pension and insurance transactions. Four main topics are covered: (1) social security, (2) private pensions, (3) life insurance, and (4) casualty insurance. Each is considered in terms of the treatment of contributions, the treatment of benefits, and the handling of reserves and the income generated by them. The same sorts of problem arise in all four cases.     

Who is saving privately for retirement and how much? New evidence for Germany

Due to demographic change, the replacement rates of the German statutory pension scheme will decrease over the next decades. Voluntary savings for retirement will therefore increase in relevance as a method of maintaining one’s standard of living during retirement. This article examines the savings behavior for retirement on an individual level in Germany at the extensive as well as the intensive margin. First, the decision to save in general is analyzed, showing that the main determinants for saving are personal income and disposable household income. Furthermore, it is shown that migrants and individuals living in the Eastern part of Germany turn out to be less likely to have additional private savings. Second, the chosen gross saving rates are analyzed using a Tobit model, a log-normal hurdle model and a Type II Tobit model. The results suggest that the decision to save in general, as well as the saving rate, are independent of each other, leading to a loss of information if only a standard Tobit model is used. For example, higher personal income increases the probability to save for retirement, but decreases the resulting saving rate. Modeling both decisions separately thus, leads to a better understanding of the determinants of saving for old-age.     

Age and cohort effects in saving and the German retirement system

As the public pay-as-you-go pension systems of the ageing industrialized countries are likely to become seriously strained under the growing dependency burden, the question arises whether a society should rely on private savings to finance old-age consumption. This is an empirical question about the magnitude and the flexibility of saving rates. This paper argues that saving rates must increase in an unprecedented fashion in order to compensate for the dependency effect.The paper takes the German case as an example. It analyses saving behaviour in Germany using three waves of the Income and Expenditure Survey. It separates age and cohort effects; computes the demographics induced change in the aggregate saving rate; and compares the magnitude of these excess savings with the increasing burden of the pension system. Finally, a macroeconomic simulation model is used to explore possible paths of the cohort effects in saving rates.     

The effect of transfers on household expenditure patterns and poverty in South Africa

This paper uses household level unit record data from South Africa to examine the behavioural and welfare impacts of private and public transfers. We allow for joint endogeneity of resource variables and the expenditure shares. Our results show that crowding out of private transfers as a result of the introduction of public pensions holds only for poor households and not for the non-poor. Both private transfers and public pensions significantly reduce poverty but private transfers have a larger impact on expenditure patterns. The results also reject the hypothesis of income pooling underlying the conventional unitary model by finding that the marginal impact on expenditures are different for public pension received, private transfer received and other resources flowing into the household. The principal conclusions are robust to changes in specification.     

Economic consequences of unfunded vested pension benefits

This paper examines the relationship between unfunded vested pension liabilities and the market value of a firm's shares. This relationship has important implications for the mechanism by which private pensions influence aggregate savings. Attention is paid to modeling the institutional determinants of this relation implied by the ERISA legislation. These considerations require a nonlinear regression model with very special properties that are developed and discussed. Estimation results suggest that ERISA has had an important effect on the relation between unfunded benefits and firm value that previous investigations have neglected.     

Precautionary saving under liquidity constraints: evidence from Italy

I empirically investigate precautionary savings under liquidity constraints in Italy using a unique indicator of subjective variance of income growth to measure the strength of the precautionary motive for saving, and a variety of survey-based indicators of liquidity constraints. The main contribution of the paper is twofold. First of all, I attempt to differentiate between the standard precautionary saving caused by uncertainty from the one due to liquidity constraints using an endogenous switching regression approach, which allows me to cope with endogeneity issues associated with sample splitting techniques. Second, I move one step further with respect to previous studies on consumption behaviour by taking explicitly expected liquidity constraints into account. I eventually found the precautionary motive for savings to be stronger for those households who face binding constraints, or expect constraints to be binding in the future. Indeed, a complementarity relation exists between precautionary savings and liquidity constraints.     

Family background and the decision to provide for old age: a siblings approach

The Riester pensions in Germany provide helpful evidence to better understand the determinants of and the barriers to the demand for old-age provision products. The paper argues that families are of key importance in the decision making process to buy such a private pension. Families do not only shape the way we make our financial decisions they can also be a source for cost-effective and reliable information. Depending on certain characteristics some individuals can process this information more easily. Results confirm that individual characteristics, in particular income and education, as well as family characteristics are correlated with Riester ownership. Adding a dynamic element to the analysis I find strong sequential correlations in Riester ownership between siblings. However, these correlations become weaker over time as the number of Riester owners in other social circles grows. Once a critical mass has been reached, positive spillovers can create a social multiplier leading to a higher coverage with private pensions in the future.     

Backing out of private pension provision: lessons from Germany

Financing pensions in the EU is a challenge. Many EU countries introduced private pension schemes to compensate declining public pension levels due to reforms made necessary by demographic change. In 2001, Germany introduced the Riester pension. Ten years after introduction the prevalence rate of this voluntary private pension scheme approximates 37 %. However, numerous criticisms raise doubts that the market for Riester products is transparent. Using the 2010 German SAVE survey, this article investigates terminated and dormant Riester contracts on a household level for the first time. Respectively 14.5 and 12.5 % of households who own or have owned a Riester contract terminated or set dormant their contract. We find that around 45 % of terminated or dormant Riester contracts are caused at least partly by product-related reasons, which is significantly higher than for endowment life insurance contracts. The uptake of a new contract after a termination is more likely if a termination is product-related. Nevertheless, after a termination 73 % of households do not sign a new contract, which can have serious long-term consequences for old-age income. Households with low income, low financial wealth or low pension literacy are more likely to have terminated or dormant contracts. Low income and low financial wealth households also have the lowest prevalence rate of Riester contracts and are at higher risk of old-age poverty.     

Trade Unions and Consumerism

Public pension systems have long been a focus of special attention by neoclassical economics. In a context of intense aging processes, mainstream economists argue that the replacement of the pay-as-you-go pensions systems by unfunded individual savings accounts will have a positive impact, at a microeconomic and at a macroeconomic level, and will protect pension systems of the negative consequences of aging. However, these conclusions depend dramatically on the assumptions of rational expectations and perfect information. When we accept the existence of uncertainty, the presumed positive consequences of these reforms disappear, showing the advantages of pay-as-you-go over funded pension systems.     

Precautionary Savings in Mexico: Evidence From the Mexican Health and Aging Study

Precautionary saving is the additional saving done by individuals to protect them financially in situations of uncertainty and reduce their vulnerability for negative shocks that may affect their consumption levels. This paper investigates the existence and extent of savings motivated by precaution in Mexico for people aged between 50 and 75, using data from the Mexican Health and Ageing Study 2003. The empirical strategy is based on a test of the direct relationship between the accumulated wealth and the uncertainty generated by the social security status, in particular the availability of health insurance, accounting also for the expectation to receive a retirement pension. The endogeneity‐corrected estimates do not yield results that unequivocally support the existence of private savings as a risk protection mechanism, implying that the public protection system has an important role in reducing the vulnerability of the population studied.     

Age-specific entrepreneurship and PAYG: Public pensions in Germany

We present new empirical evidence on the distribution of earnings, income and wealth among entrepreneurs in Germany. We document that both earnings and income are more concentrated among entrepreneurs than among workers and describe a large-scale overlapping-generations model that replicates the age-earnings profiles of these two household types. As an application, we compute the equilibrium effects of a reform of the German pay-as-you-go pension system in which entrepreneurs must also contribute and receive a pension. We show that in the presence of mobility between workers and entrepreneurs, the expected lifetime utility of all newborn households unanimously declines due to the general equilibrium effects of lower aggregate savings, and welfare losses amount to approximately 0.7% of total consumption. In addition, the integration of self-employed workers into the social security system in Germany does not help to improve its fiscal sustainability, and only an increase in the retirement age to 70 years will help to finance pensions at the present level beyond the year 2050.