Pension Uncertainty and Demand for Retirement Saving

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