Pension Funding and Saving
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.
|Date of creation:||May 1985|
|Date of revision:|
|Publication status:||published as Bernheim, B. Douglas and John B. Shoven. "Pension Funding and Saving," Pensions in the U.S. Economy, ed. Z. Bodie, J. Shoven, D. Wise. Chicago: UCP, 1988.|
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- Martin Feldstein & Stephanie Seligman, 1980.
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NBER Working Papers
0509, National Bureau of Economic Research, Inc.
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1602, National Bureau of Economic Research, Inc.
- 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.
- Martin Feldstein & Randall Morck, 1982.
"Pension Funding Decisions, Interest Rate Assumptions and Share Prices,"
NBER Working Papers
0938, National Bureau of Economic Research, Inc.
- 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.
- Boskin, Michael J, 1978. "Taxation, Saving, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S3-27, April.
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