Choosing between subsidized or unsubsidized private pension schemes: evidence from German panel data

Since 2002, the German government has been attempting to increase private old-age provisions by introducing incentives such as supplementary subsidies and tax credits. Since then, the so-called ‘Riester pension’ has grown in popularity. Apart from subsidized pension plans, unsubsidized private pension insurances have – already in the past – been a very important instrument among old-age provision schemes. With data of the German SAVE study for the years 2005–2009, we analyze whether the decision for a ‘Riester pension’ is independent of the decision for unsubsidized private pension insurance using methods for simultaneous equations. Our estimates indicate that decisions on ‘Riester’ and private pensions are not independent and the proposed random parameters bivariate probit model results in efficiency gains compared to separate probit estimations. Regarding governmental subsidies, we find positive incentive effects of child subsidies, whereas low income earners are not seen to increase their old-age provisions. Further, there is strong evidence for a ‘crowding-in’ among alternative assets, i.e., that individuals holding various assets make additional investments in ‘Riester pensions’ or private pension insurances. Finally, when subsidies are given, these subsidies are a clearly stronger saving motive than the aim to make provisions for old age, a result confirmed by the additional fixed-effects estimations.