Examining the Interaction between Saving and Contributions to Personal Pension Plans: Evidence from the BHPS*
| Published date | 01 April 2009 |
| Date | 01 April 2009 |
| Author | Mariacristina Rossi |
| DOI | http://doi.org/10.1111/j.1468-0084.2008.00525.x |
253
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OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 71, 2 (2009) 0305-9049
doi: 10.1111/j.1468-0084.2008.00525.x
Examining the Interaction between Saving
and Contributions to Personal Pension Plans:
Evidence from the BHPSÅ
Mariacristina Rossi
Department of Economics, University of Rome II, Rome, Italy and CeRP Center for Research
on Pensions and Welfare Policies – CCA Collegio Carlo Alberto
(e-mail: rossi@economia.uniroma2.it)
Abstract
This paper analyses the effects of social security reforms on saving in Britain. We use
the British Household Panel Survey to investigate the interactions between voluntary
additional contributions to personal pension plans (PPP) and saving in conventional
forms. In particular, we test whether contributions to the PPP crowd out saving or con-
stitute additional saving. Results suggest that not only have private pension schemes
not crowded out private saving, but actually they have increased it too.
I. Introduction
The UK household saving rate has been stable at around 5% since 2000, after having
reached its peak in 1992 (at 11%) and having then gradually declined until 1999.1The
persistence of low saving rates has always worried economists, mainly because of the
concern that Working age individuals are possibly mistargeting the resources neces-
sary for them during retirement. In order to avoid the consequences of this concern,
government policies often aim at promoting retirement saving. The lack of resources
during retirement, in fact, would entail a big burden both for the elderly left without
vital resources and for the society as a whole.
The rationale behind the introduction of a public pension system can be traced back
to the paternalism principle (Diamond, 1977), according to which public provisions
ÅI wish to thank an anonymous referee for very useful guidance in revising the paper; R.Alessie, W.Arulam-
palan, R. Bailey, O. Castellino, E. Fornero, A. Guariglia, J. Richmond, all participants at CHILD conference
in Turin, BHPS annual conference, NETSPAR conference and the Economics Department in Verona for their
comments and suggestions. The usual disclaimer applies.
JEL Classification numbers: D12, D91, E21.
1See also, Attanasio and Banks (1998).
254 Bulletin
of pension income streams replace income flows during retirement. According to
this view, public provision of retirement insurance appears superior from a social
welfare point of view. However, as highlighted by Disney, Emmerson and Wakefield
(2001), a comprehensive state pension provision has become unaffordable, given
the demographic transitions characterizing industrialized countries.2A shift away
from a comprehensive state pension provision to a partially funded system allows
households more freedom in their savings for retirement decisions. Individuals have,
in fact, more discretionary power in determining their personal saving for old age.
This freedom in saving choice spontaneously raises economists’ worries on whether
household saving is sufficient to keep households’consumption at its permanent level
after retirement.
The UK system, in contrast to the average European pension system, allows
employees to have a high degree of choice in determining how much to save for
retirement. However, consumers’ choice can be affected by such irrational attitudes
as myopia, leaving the household prone to the risk of being left without vital resources
for the future. Wouldthis discretion in choosing how much to save for retirement leave
consumers alone in facing the consequences of wrong retirement planning, and, if so,
to what extent?
In Britain, the percentage of households which do not save any resource for future
consumption in conventional forms has increased over the past decade. This could be
due to the crowding-out effect of the introduction of personal pension plans (PPP),
the returns of which are higher than the market rate. The crucial issue in analysing the
interaction between conventional saving and retirement saving in voluntary contri-
butions to the PPP is whether contributions to the PPP crowd out saving or constitute
additional saving.
Substitution between pension wealth and other forms of assets has been tested
several times. After the seminal work of Feldstein (1974), a great deal of empiri-
cal economic literature has tested the substitutability between household saving and
pension wealth. According to Feldstein, a large amount of the resources saved is
displaced by the introduction of pension plans.
The aim of this paper is twofold. First, it aims at contributing to this literature
by analysing how the two saving decisions, in the form of conventional savings and
voluntary contributions to pension plans, are determined. Secondly, it detects whether
the degree of substitutability between retirement savings (in the form of addi-
tional contributions to pension plans) and other forms of savings might have been
2Social protection expenditures constitute a major part of public spending in all countries belonging to the
European Union. Population ageing is a common factor among EU countries and it will impose an additional
burden on European fiscal balances. Public pensions in most Westerncountries constitute a consistent fraction
of GDP. For the 15 EU countries this amounted to 10.4% in the year 2000, peaking at 14% forAustria and
Italy. The only exceptions among the EU countries are the UK and Ireland, with a ratio of 4.6% and 5.5%,
respectively (OECD, 2003). This difference is hardly explained by different demographic structures of the
countries. The composition of private and public pension provision, the structure of the pension benefits, and
the age of retirement are the crucial factors in determining the discrepancy of the pension burden among
countries.
©Blackwell Publishing Ltd and the Department of Economics, University of Oxford 2008
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