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Pension Funding and Saving

In: Pensions in the U.S. Economy


  • B. Douglas Bernheim
  • John B. Shoven


This paper suggests that the nature of the funding of defined benefit pension plans may be an important reason why personal saving has not responded positively to the high real interest rites and tax incentives to encourage saving and investment of the last few years. From a firm's standpoint, funding the promised pension is a target, and higher rates of return permit reaching that target with lower contributions. According to the Flow of Funds Accounts of the Federal Reserve System between 1982 and 1984, net pension contributions declined from 6.02 percent of disposable personal income to 4.02 percent.The paper presents empirical information regarding pension contributions, unfunded liabilities, interest rates, and recent developments in pension funding. It specifies the target saving model of pension funding and derives the theoretical elasticity of pension contributions to changes in interestrates. It then investigates this elasticity with aggregate time series econometrics. In general, the estimated elasticities are consistent with the theory and indicate that one percentage point rise in real interest rates would, in the long run, reduce pension contributions between 20 and 30 percent. Such a large negative elasticity for such an important source of loanable funds in the economy suggests that the pensions funding mechanism should be taken into account in designing policies to increase the economy's saving and investment.
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Suggested Citation

  • B. Douglas Bernheim & John B. Shoven, 1988. "Pension Funding and Saving," NBER Chapters,in: Pensions in the U.S. Economy, pages 85-114 National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:6045

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    References listed on IDEAS

    1. Jeremy I. Bulow & Randall Morck & Lawrence H. Summers, 1987. "How Does the Market Value Unfunded Pension Liabilities?," NBER Chapters,in: Issues in Pension Economics, pages 81-110 National Bureau of Economic Research, Inc.
    2. Summers, Lawrence H, 1981. "Capital Taxation and Accumulation in a Life Cycle Growth Model," American Economic Review, American Economic Association, vol. 71(4), pages 533-544, September.
    3. Boskin, Michael J, 1978. "Taxation, Saving, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 3-27, April.
    4. Martin Feldstein & Randall Morck, 1983. "Pension Funding Decisions, Interest Rate Assumptions, and Share Prices," NBER Chapters,in: Financial Aspects of the United States Pension System, pages 177-210 National Bureau of Economic Research, Inc.
    5. E. Philip Howrey & Saul H. Hymans, 1978. "The Measurement and Determination of Loanable-Funds Saving," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(3), pages 655-685.
    6. Zvi Bodie & John B. Shoven & David A. Wise, 1987. "Issues in Pension Economics," NBER Books, National Bureau of Economic Research, Inc, number bodi87-1, January.
    7. Feldstein, Martin & Seligman, Stephanie, 1981. "Pension Funding, Share Prices, and National Savings," Journal of Finance, American Finance Association, vol. 36(4), pages 801-824, September.
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    Cited by:

    1. B. Douglas Bernheim & John Karl Scholz, 1993. "Private Saving and Public Policy," NBER Chapters,in: Tax Policy and the Economy, Volume 7, pages 73-110 National Bureau of Economic Research, Inc.
    2. Steven F. Venti & David A. Wise, 1990. "Have IRAs Increased U. S. Saving?: Evidence from Consumer Expenditure Surveys," The Quarterly Journal of Economics, Oxford University Press, vol. 105(3), pages 661-698.
    3. A Lusardi & J Skinner & S Venti, 2001. "Saving puzzles and saving policies in the United States," Oxford Review of Economic Policy, Oxford University Press, vol. 17(1), pages 95-115, Spring.
    4. James M. Poterba & Steven F. Venti, 2004. "The Transition to Personal Accounts and Increasing Retirement Wealth: Macro- and Microevidence," NBER Chapters,in: Perspectives on the Economics of Aging, pages 17-80 National Bureau of Economic Research, Inc.
    5. Willman, Alpo, 2007. "Sequential optimization, front-loaded information, and U.S. consumption," Working Paper Series 765, European Central Bank.
    6. Annamaria Lusardi & Jonathan Skinner & Steven Venti, 2003. "Pension Accounting & Personal Saving," Just the Facts jtf8, Center for Retirement Research.
    7. Poterba, James M. & Venti, Steven F. & Wise, David A., 1995. "Do 401(k) contributions crowd out other personal saving?," Journal of Public Economics, Elsevier, vol. 58(1), pages 1-32, September.
    8. Martin Feldstein, 1986. "Budget Deficits, Tax Rules, and real Interest Rates," NBER Working Papers 1970, National Bureau of Economic Research, Inc.
    9. James M. Poterba & Steven F. Venti & David A. Wise, 1996. "The Effects of Special Saving Programs on Saving and Wealth," NBER Chapters,in: The Economic Effects of Aging in the United States and Japan, pages 217-240 National Bureau of Economic Research, Inc.
    10. Boskin, Michael J., 1988. "Lessons from the United States Economy in the 1980s and their Applicability to Europe," CEPR Publications 244419, Stanford University, Center for Economic Policy Research.
    11. Michael J. Boskin, 1988. "Issues in the Measurement and Interpretation of Saving and Wealth," NBER Working Papers 2633, National Bureau of Economic Research, Inc.
    12. Jonathan Skinner & Daniel Feenberg, 1990. "The Impact of the 1986 Tax Reform Act on Personal Saving," NBER Working Papers 3257, National Bureau of Economic Research, Inc.
    13. David A. Wise & Steven F. Venti, 1993. "The Wealth of Cohorts: Retirement Saving and the Changing Assets of Older Americans," NBER Working Papers 4600, National Bureau of Economic Research, Inc.
    14. Leslie E. Papke & Mitchell A. Petersen & James M. Poterba, 1996. "Do 401(k) Plans Replace Other Employer-Provided Pensions?," NBER Chapters,in: Advances in the Economics of Aging, pages 219-240 National Bureau of Economic Research, Inc.
    15. Davis, E.P. & DEC, 1993. "The structure, regulation, and performance of pension funds in nine industrial countries," Policy Research Working Paper Series 1229, The World Bank.
    16. Barry Bosworth & Gary Burtless, 1992. "Effects of Tax Reform on Labor Supply, Investment, and Saving," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 3-25, Winter.
    17. Beverly, Sondra G. & Sherraden, Michael, 1999. "Institutional determinants of saving: implications for low-income households and public policy," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 28(4), pages 457-473.
    18. Michael J. Boskin, 1991. "Issues in the Measurement and Interpretation of Saving and Wealth," NBER Chapters,in: Fifty Years of Economic Measurement: The Jubilee of the Conference on Research in Income and Wealth, pages 159-184 National Bureau of Economic Research, Inc.

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