Old-age pensions, retirement behaviour and personal saving

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 endogenous 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 JEL Classification: D12, D91, E21, H55

Acknowledgement: This survey is a part of the Welfare State Program financed by
NORAS. Work on the project started when the author visited London School of Economics in 1992/93 and support from Norges Banks fond til økonomisk forskning and Den norske Banks fond is gratefully acknowledged.