Pension Wealth and Household Saving in Europe
The demographic challenge of ageing populations has led and will lead European countries to reform their pension systems. For policymakers, understanding the effect that pension reforms will have on household and national saving is crucial. In particular, the effect of changes in pension wealth on private wealth is vital information for assessing the welfare effects of these reforms.
The life–cycle model suggests that generous social security benefits will have a negative effect on the accumulation of private savings if households save only for retirement. However, the extent to which households offset pension wealth with reductions in other forms of wealth accumulation is difficult to gauge. From a theoretical point of view, the extent of the offset depends on a variety of other factors, such as the presence of binding liquidity constraints, the distortional effects of taxation and the fact that households might save for reasons other than retirement or may lack a basic level of financial literacy. From an empirical point of view, the econometric identification of the offset is made difficult by the lack of data on lifetime earnings and by the fact that pension wealth is typically measured with error in surveys.
In this paper we estimate whether and to what extent European households offset pension wealth with reductions in private savings. An innovative aspect of our paper is that we use retrospective data from the third wave of the Survey of Health, Ageing and Retirement in Europe (SHARELIFE), which collects information on the entire job and wage histories of older workers and retirees in 13 European countries: in this way we are able to construct measures for both the present value of past and future earnings and pension wealth at the individual level, a feature missing in most empirical studies of the displacement effect.