The Effects of Pensions on Household Wealth: A Reevaluation of Theory and Evidence

Retirement expectations, pension reforms, and their impact on private wealth accumulation

“…In households with more than one member, we define the household expected pension wealth-to-income ratio at retirement as the weighted sum of both partners' expected pension wealth-to-income ratio. 17 The individual expected pension wealth-to-income ratio is adjusted by the factor suggested by Gale (1998). This factor rescales the expected pension wealth and depends on the number of years people have contributed to their pension plan as well as for when in their life cycle they have experienced some shock that should have made them revise their consumption and savings plans (the reforms, in our case).…”

“…The adjustment depends on the utility function that is chosen for the underlying life-cycle model and on the values for the discount rate, the interest rate and the time preference rate. We use the adjustment developed in Gale (1998) for the constant relative risk aversion utility function and set the discount rate and the interest rate equal to 2 percent; details are reported in an Appendix that is available on request. Table 9 presents OLS estimates of the relation between pension wealth and private wealth.…”

“…Feldstein (1974) and Feldstein and Pellechio (1979) pioneered the analysis of the displacement effect of pension wealth on national saving using U.S. time series and microeconomic data, respectively. Since then, a growing literature has used individual level data to provide evidence on the degree of substitution between discretionary accumulation and pension wealth in the U.S. and other countries imputing pension wealth from legislation (see Gale (1998) and Bernheim (2001)). Existing microeconometric evidence suggests that pension wealth crowds out discretionary wealth, but at a rate of considerably less than one-for-one.…”

The Economics of Social Security: An Old Keynesian Perspective

“…The empirical evidence suggests that there is a considerable degree of private saving displacement by social security wealth (Feldstein, 1974: Gale, 1995. This evidence suggests that households view social security as wealth, and therefore implicitly view social security contributions as part of their compensation.…”

Retirement and Wealth

“…Even when pensions are counted as part of wealth, fundamental questions remain. Gale (1998) argues that it is important to measure properly pensions, wealth and lifetime earnings, and to include indicators of the stage of the life-cycle if one is to correctly estimate the pension offset in a wealth equation. Consistent with an uncomplicated life cycle model, he finds indications of large offsets when using data from the Survey of Consumer Finances.…”