Pensions and Household Saving in The United States

Abstract

The goal of this research is to examine the effects of employer-provided pensions and Social Security on household saving in the United States. Current interest has intensified because of increasing concerns about insufficient saving for retirement, a trend in pensions from defined benefit to defined contribution plans, and a projected financial shortfall in Social Security. Specifically, the debate about whether higher pension benefits "crowd out" private saving has come under sharper focus among researchers and policymakers. If there is a full offset effect of pensions on private saving, then policies targeted to raise pension wealth may not necessarily increase overall retirement saving because households will decrease their private wealth accumulation instead. Three methodologies were employed in Chapter 2 ~ 4 to empirically identify the offset effects using improved data in the Health and Retirement Study (HRS). Chapter 2 presents a cross-sectional analysis in 1992. The findings show a significant but not dollar-for-dollar crowding-out effect for employer-provided defined benefit pensions and little to no offset effect for defined contribution pension and Social Security. To overcome the estimation problems such as unobserved omitted variables and insufficient variation in Social Security wealth when conducting a cross-sectional analysis, I utilize the panel structure of HRS and the recent Social Security reforms to introduce independent variation in pension wealth over time. A panel analysis using HRS data from year 1992, 1998, and 2004 is presented in Chapter 3. The panel analysis shows a statistically significant full offset effect between pensions and private saving in some specifications. Chapter 4 presents the effects of Social Security benefits withheld under the earnings test on household saving. I find evidence for a full offset effect between household saving and benefit withholding under the earnings test for those aged between 62 and normal retirement age and those with higher educational attainment. In summary, this research supports the theory that pensions crowd out private wealth accumulation.