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Pensions, Household Saving, and Welfare: A Dynamic Analysis

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  • Blau, David M.

    ()
    (Ohio State University)

Abstract

Empirical analyses of the effects of public and private pensions on household saving impose strong assumptions in order to obtain a tractable empirical model: fixed retirement and pension claiming ages, no borrowing constraint, little or no uncertainty, and no institutional restrictions on pension claiming. I specify a richer version of the life cycle model that relaxes these assumptions. I calibrate, solve, and simulate the model and use the results to study three issues: (1) How much household wealth is crowded out by pensions? (2) Can linear regression analysis accurately estimate the magnitude of crowdout when the assumptions used in the empirical analysis are invalid? (3) How valuable are pensions to households? Simulation results indicate that private pensions in the US crowd out less than $0.15 of household saving per dollar of pension wealth. Crowdout by Social Security is larger at $0.33, but far smaller than the one-for-one offset predicted by a stylized version of the life cycle model. Regression estimates of crowdout using the simulated data are systematically larger than simulated crowdout, indicating that empirical estimates of crowdout are quite sensitive to the assumptions required in order to use the regression approach. The welfare analysis implies that, conditional on Social Security, DB pensions are worth less than their expected present discounted value to households, while DC pensions are worth more than their dollar value. In the absence of a private pension, Social Security is worth 50% more to households than its expected dollar value.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5554.

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Length: 57 pages
Date of creation: Mar 2011
Date of revision:
Handle: RePEc:iza:izadps:dp5554

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Keywords: pensions; saving; retirement;

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  1. Eric French, 2005. "The Effects of Health, Wealth, and Wages on Labour Supply and Retirement Behaviour," Review of Economic Studies, Oxford University Press, vol. 72(2), pages 395-427.
  2. Gourinchas, P.O. & Parker, J.A., 1997. "Consumption Over the Life Cycle," Working papers 9722, Wisconsin Madison - Social Systems.
  3. Luc Behaghel & David M. Blau, 2012. "Framing Social Security Reform: Behavioral Responses to Changes in the Full Retirement Age," American Economic Journal: Economic Policy, American Economic Association, vol. 4(4), pages 41-67, November.
  4. van der Klaauw, Wilbert & Wolpin, Kenneth I., 2008. "Social security and the retirement and savings behavior of low-income households," Journal of Econometrics, Elsevier, vol. 145(1-2), pages 21-42, July.
  5. Courtney Coile & Jonathan Gruber, 2007. "Future Social Security Entitlements and the Retirement Decision," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 234-246, May.
  6. Hamish Low & Costas Meghir & Luigi Pistaferri, 2008. "Wage risk and employment risk over the life cycle," IFS Working Papers W08/06, Institute for Fiscal Studies.
  7. Orazio P. Attanasio & Agar Brugiavini, 2003. "Social Security And Households' Saving," The Quarterly Journal of Economics, MIT Press, vol. 118(3), pages 1075-1119, August.
  8. Giovanni Mastrobuoni, 2006. "Labor Supply Effects of the Recent Social Security Benefit Cuts: Empirical Estimates Using Cohort Discontinuities," CeRP Working Papers 53, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  9. Michael Hurd & Pierre-Carl Michaud & Susann Rohwedder, 2009. "The Displacement Effect of Public Pensions on the Accumulation of Financial Assets," Working Papers wp212, University of Michigan, Michigan Retirement Research Center.
  10. John Karl Scholz & Ananth Seshadri & Surachai Khitatrakun, 2006. "Are Americans Saving "Optimally" for Retirement?," Journal of Political Economy, University of Chicago Press, vol. 114(4), pages 607-643, August.
  11. David I. Laibson & Andrea Repetto & Jeremy Tobacman, 1998. "Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 91-196.
  12. Orazio P. Attanasio & Susann Rohwedder, 2003. "Pension Wealth and Household Saving: Evidence from Pension Reforms in the United Kingdom," American Economic Review, American Economic Association, vol. 93(5), pages 1499-1521, December.
  13. Gary V. Engelhardt & Anil Kumar, 2011. "Pensions and Household Wealth Accumulation," Journal of Human Resources, University of Wisconsin Press, vol. 46(1), pages 203-236.
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