Social Security Income and Household Savings: A New Model and Evidence

Abstract

Our motivation for this research is to contribute to the debate about the effect of expected social insurance income during retirement on private household saving, generated by Feldstein (1974) and several responses to it. We consider an alternative model to the Life Cycle Model and empirically test it for G7 and for 27 OECD countries. Our dependent variable is Household Saving Rates, whereas the dependent variables are the Gross Replacement Rates (GRR) and Interest Rate. We do not consider the effect of income simply because, for some countries -saving is a percentage of income. Neither, we consider the effect of income inequality on household savings, due to missing data for many countries. We test the null hypothesis, whether expected social insurance benefits in retirement displace household private savings. We reject the null. The main contribution of this research to the literature is that our new model removes the uncertainty of estimation of expected cash income in retirement. Despite plausible results we obtain, a more extensive GRR data would have been desirable.