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ISCUSSION PAPER PI-9609

Old-age Pensions, Retirement Behaviour and Personal Saving

Knut A. Magnussen

ABSTRACT

Since the early 1970s, a large literature has studied the effects of social
security, in particular old-age pensions, on the economic behaviour of
households. In order to survey this literature, we start by introducing a
simple overlapping generations model where the main theoretical effects
are discussed. In a traditional life-cycle setting, it is shown that personal
saving is likely to decline when public pensions are introduced. This result
is modified by allowing for liquidity constraints and endogeneous labour
supply, but could be strengthened by income uncertainty. Many direct
empirical tests, based on different types of data for different countries and
periods, of the effects on saving are surveyed. Since results show that this
literature fails to find unambiguous effects on saving, we also review studies
that have been concerned with modifying factors. Empirical evidence suggests
that pension schemes to some extent affect labour supply and that consumer
behaviour is affected by both liquidity constraints and uncertainty.

Keywords: Social security, saving, retirement behaviour,
liquidity constraints, income uncertainty.