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The Consumption and Wealth Effects of an Unanticipated Change in Lifetime Resources

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Abstract

In 2000 Italy replaced its traditional system of severance pay for public employees with a new system. Under the old regime, severance pay was proportional to the final salary before retirement; under the new regime it is proportional to lifetime earnings. This reform entails substantial losses for future generations of public employees, in the range of €20,000-30,000, depending on seniority. Using a difference-in-difference framework, we estimate the impact of this unanticipated change in lifetime resources, on the current consumption and wealth accumulation of employees affected by the reform. In line with theoretical simulations, we find that each euro reduction in severance pay reduces the average propensity to consume by 3 cents and increases the wealth-income ratio by 0.32. The response is stronger for younger workers and for households where both spouses are public sector employees.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 354.

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Date of creation: 05 Mar 2014
Date of revision: 23 Jul 2014
Handle: RePEc:sef:csefwp:354

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Keywords: Severance Pay; Consumption; Wealth Accumulation;

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  1. Tullio Jappelli & Luigi Pistaferri, 2010. "The Consumption Response to Income Changes," NBER Working Papers 15739, National Bureau of Economic Research, Inc.
  2. Richard Blundell & Luigi Pistaferri & Ian Preston, 2004. "Consumption inequality and partial insurance," IFS Working Papers W04/28, Institute for Fiscal Studies.
  3. Matthew D. Shapiro & Joel Slemrod, 1993. "Consumer Response to the Timing of Income: Evidence from a Change in Tax Withholding," NBER Working Papers 4344, National Bureau of Economic Research, Inc.
  4. Martin Browning & Thomas F. Crossley, 2001. "The lifecycle model of consumption and saving," IFS Working Papers W01/15, Institute for Fiscal Studies.
  5. Bottazzi, Renata & Jappelli, Tullio & Padula, Mario, 2006. "Retirement expectations, pension reforms, and their impact on private wealth accumulation," CFS Working Paper Series 2006/10, Center for Financial Studies (CFS).
  6. Bottazzi, Renata & Jappelli, Tullio & Padula, Mario, 2005. "Retirement Expectations, Pension Reforms and Their Effect on Private Wealth Accumulation," CEPR Discussion Papers 4882, C.E.P.R. Discussion Papers.
  7. 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.
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