Pensions Policy: Evidence on Aspects of Savings Behaviour and Capital Markets
Authors: David G McCarthy , Anthony Neuberger
A new CEPR study 'Pensions Policy: Evidence on Aspects of Savings Behaviour and Capital Markets' by David McCarthy and Anthony Neuberger David McCarthy and Anthony Neuberger, reviews the evidence relevant to policy formulation in important aspects of pensions policy. Against a backdrop of an ageing population and the shift away from state pensions and employer defined benefit plans to private saving and defined contribution plans, the authors have chosen to focus their analysis on possible capital market effects of these changes, and on factors affecting the supply of private savings and the provision of employer-based plans. The evidence suggests that policy-makers should be particularly concerned with the functioning of annuities markets and with encouraging further primary research on the effects of tax incentives on personal savings.
The study begins by looking at how demographics affect capital markets. Increased longevity and declining fertility in Western Europe puts pay-as-you-go pension schemes under great stress. The cost of supporting an increasing number of pensioners falls on a diminishing number of workers. The obvious solutions - increasing contribution rates, cutting benefits, financing through borrowing or general taxation - all have obvious drawbacks. The authors find that the evidence suggests that there is a significant link between age and savings behaviour. However, they find little evidence that people run down their savings rapidly in retirement. The study then looks at the markets for annuities that are needed to convert accumulated savings into lifetime incomes. The review finds that many factors underlie weak demand for annuities. These include self-insurance, perceived poor health status, and myopia in financial decision-making. However, the pension system as currently designed probably forces people to use too much of their pension wealth to buy annuities. Importantly, the review argues that concerns about a melt-down in the stock market as the growing number of elderly try to cash in their savings are grossly exaggerated.
Occupational pension schemes are found to be an important part of pension provision in the UK. However, there is only indirect evidence that workers with pensions are more productive than workers without pensions and little evidence to suggest that there is any connection between defined benefit pensions and productivity. Though pensions may cause workers to be more strongly bonded to their employers, and may be an important tool in selecting certain types of workers from the labour pool of available workers. The employer's obligations under defined benefit pension plans have, paradoxically, not been very clearly defined in the past. This has placed risks on employees that have been undesirable. However, a Pension Protection Fund is likely to be abused by those companies that are in financial straits. A guarantee system paid for by the industry collectively will inevitably involve large subsidies from strong companies to weak ones.
The review examines the evidence on the impact of tax relief on private savings. The authors conclude that surprisingly little is known about the impact of taxes on saving. Theoretical analysis does not specify whether tax incentives should increase or reduce private saving and empirical evidence supports views as divergent as those that 0% or 70% of tax-sheltered saving is additional private saving. They find no convincing evidence that the substantial tax inducements provided to encourage people to save for their pensions actually increase the amount of saving by more than the size of the tax subsidy.
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