Pensions, household saving, and welfare: A dynamic analysis of crowd out

Abstract

This paper specifies a life cycle model of saving and employment and uses it to an- alyze crowd out of private household saving by public and private pensions. Some parameters of the model are estimated and others are calibrated to match life cy- cle employment and asset profiles, and Social Security claiming decisions. Sim- ulation results indicate that defined benefit (DB) and defined contribution (DC) pensions on average crowd out household wealth by $0?09 and $0?37 per dollar of pensionwealth, respectively, while crowd out by Social Security is $0?56.Themag- nitude of crowd out is sensitive to model specification, with more restrictive ver- sions of the model (e.g., no employment decision, no bequest motive, no uncer- tainty) generally resulting in larger simulated crowdout.Awelfare analysis implies that DB pensions and Social Security are not valued by households. The longevity insurance provided by such plans is offset by a high degree of impatience and, for Social Security, low benefits relative to taxes paid. A typical DC pension is valued at