STATE PENSIONS AND PERSONAL SAVINGS*

DOIhttp://doi.org/10.1111/j.1467-9485.1978.tb00241.x
AuthorRichard Hemming
Publication Date01 June 1978
Scottish Journal
of
Political Economy,
Vol.
25,
No.
2,
June 1978
STATE PENSIONS AND PERSONAL SAVINGS*
RICHARD HEMMING
Brunel University, Uxbridge, Middlesex
INTRODUCTION
Given the findings of Kuznets (1946), Modigliani-Brumberg (1954) and
Goldsmith (1956) concerning the long run constancy of the savings ratio one
would expect that a pension asset would be a substitute for other assets in the
individual’s portfolio and indeed Schoeplein (1970) and Friend and Jones
(1969) found that, in general, this was the case although the substitution was
far from perfect. Other researchers though have found that pension savings
and other forms of savings are imperfect substitutes and the additional
savings
of
those induced to save more out-weighed the decrease in savings
as a result of substitution (see Reviglio (1967), Cagan (1965) and Katona
(1965)). The findings of Cagan and Katona related to
private pension
schemes
in the U.S. and they explained their results in terms of
a
recognition effect
and goal gradient effect respectively. Cagan argued that participation in a
scheme induces a realisation that a reasonable income is attainable during
the retirement years and the way to achieve this is through additional savings.
Katona suggested that as an individual nears his aspiration level (in this case
a desired level of retirement income) his savings effort is intensified.
Feldstein (1974) has argued that these findings can be explained without
resorting to either the recognition effect or goal gradient approach. He
discusses the consequences for individual savings of introducing
a
state
pension
scheme by explicitly analysing the individual’s accumulation and
retirement decisions in the context
of
two period life-cycle model. He con-
cludes that the effect on savings of introducing a scheme will be ambiguous,
being the combination of a savings replacement effect which reduces personal
savings and an induced retirement effect which operates in the opposite
direction. When he came to investigate the effect empirically Feldstein found
that the introduction of social security pensions in the
U.S.
had a considerable
depressing effect
on
savings.
The purpose of this paper is to extend Feldstein’s study to the U.K.-his
analysis and approach will be modified in a number of ways to allow for the
major differences between the state schemes in the
U.S.
and the U.K.
The paper is organised as follows. Sections
I
and
I1
present an extension of
the two period life-cycle model outlined by Feldstein
to
a continuous time
*
I
would like
to
thank Professor A.
B.
Atkinson and David Ulph
for
comments on this
work at an earlier stage
of
preparation. Many suggestions made by the Editor and an
anonymous referee of the
Scottish Journal
of
Political Economy
have been incorporated into
this final version. Remaining errors and omissions are
my
own responsibility.
Date
of
receipt
of
final manuscript: 9 December
1977.
10 135

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