The Displacement Effect of Public Pensions on the Accumulation of Financial Assets

Published: 2009


The generosity of public pensions may depress private savings and provide incentives to retire early. While there is plenty of evidence supporting the latter effect, there remains considerable controversy as whether or not public pensions crowd out private savings. This paper uses international micro-datasets collected over recent years to investigate whether public pensions displace private savings. The identification strategy relies on differences in the progressivity or non-linearity of pension formulas across countries. We also make use of large heterogeneity in earnings across education group and country. The evidence we present is consistent with previous studies using cross-sectional and time-series variation in savings and pensions. We estimate that an extra dollar of pension wealth depresses accumulated financial assets at the time of retirement by 23 to 44 cents and that an extra ten thousand dollars in pension wealth reduces the average retirement age by roughly 1 month.

Key Findings

    • The generosity of public pension systems affects both private saving rates and the timing of retirement.
    • Our study of 12 countries shows that generous public pensions depress lifetime asset accumulation.
    • For every dollar of pension wealth, financial assets are reduced by 23 to 44 cents.
    • Higher public pension levels also induce earlier retirement.
    • Retirement comes one month earlier for every $10,000 of pension wealth.