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Pension Uncertainty and Demand for Retirement Saving

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Abstract

According to the life-cycle model, if there is an expectation that social security benefits will fall, demand for retirement saving should increase. In precautionary saving models, the risk associated to future benefits matters and, if benefits become more uncertain, individuals will react by increasing their demand for retirement saving. To assess the empirical relevance of this mechanism, we rely on unique Italian data to obtain individual level measures of the subjective distribution of the social security benefit replacement rate. Italy is an interesting example, because of the frequent changes to eligibility rules and benefits implemented in the past thirty years, fueling individual uncertainty about future pension outcomes. We find evidence of wide cross-sectional heterogeneity in both the location and scale of the subjective replacement rate distribution. Our results indicate higher participation in private pension funds among individuals who expect lower and more uncertain replacement rates. JEL Classifications: D12, D14, E21

Suggested Citation

  • Tullio Jappelli & Immacolata Marino & Mario Padula, 2019. "Pension Uncertainty and Demand for Retirement Saving," CSEF Working Papers 526, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  • Handle: RePEc:sef:csefwp:526
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    1. Bottazzi, Renata & Jappelli, Tullio & Padula, Mario, 2006. "Retirement expectations, pension reforms, and their impact on private wealth accumulation," Journal of Public Economics, Elsevier, vol. 90(12), pages 2187-2212, December.
    2. Luigi Guiso & Monica Paiella, 2008. "Risk Aversion, Wealth, and Background Risk," Journal of the European Economic Association, MIT Press, vol. 6(6), pages 1109-1150, December.
    3. Lusardi, Annamaria & Mitchell, Olivia S., 2007. "Baby Boomer retirement security: The roles of planning, financial literacy, and housing wealth," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 205-224, January.
    4. van Santen, Peter & Alessie, Rob & Kalwij, Adriaan, 2012. "Probabilistic survey questions and incorrect answers: Retirement income replacement rates," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 267-280.
    5. Luigi Guiso & Tullio Jappelli & Mario Padula, 2013. "Pension Wealth Uncertainty," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(4), pages 1057-1085, December.
    6. Jappelli, Tullio & Padula, Mario, 2013. "Investment in financial literacy and saving decisions," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2779-2792.
    7. van Santen, Peter, 2016. "Uncertain pension income and household saving," Working Paper Series 330, Sveriges Riksbank (Central Bank of Sweden).
    8. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-926, Sept./Oct.
    9. Paiella, Monica, 2016. "Financial literacy and subjective expectations questions: A validation exercise," Research in Economics, Elsevier, vol. 70(2), pages 360-374.
    10. Fornero, Elsa & Monticone, Chiara, 2011. "Financial literacy and pension plan participation in Italy," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(04), pages 547-564, October.
    11. Adeline Delavande & Susann Rohwedder, 2011. "Individuals' uncertainty about future social security benefits and portfolio choice," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(3), pages 498-519, April.
    12. Jeff Dominitz & Charles F. Manski, 2006. "Measuring Pension‐benefit Expectations Probabilistically," LABOUR, CEIS, vol. 20(2), pages 201-236, June.
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    Keywords

    Pension uncertainty; Retirement saving; Subjective distributions; Social security.;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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