Private saving determinants in Portugal

The combination of projected expenditure increases in the Portuguese public pension scheme and low rates of private saving constitutes a policy challenge, not least because the former may be associated with the later. The impact of public pension wealth on private saving has been widely studied since the late 1970’s, yet no consensus on the topic has been reached so far. Some authors find evidence that public pension wealth impacts negatively private saving, others argue that the effect is not statistically significant.

The purpose of this paper is to revisit the determinants of private saving. We use time series techniques and data from 1983 to 2012 to test the effect of public pension wealth on private saving in Portugal. The paper embeds a constructed public pension wealth variable in a life cycle consumption/saving model pioneered by Feldstein (1974). The evidence in our paper suggests that public pension wealth has not had any significant impact on private saving.

With mature pay-as-you-go pension systems facing growing opposition regarding their economic and financial impact, our results challenge the idea that these systems reduce private saving, which might be useful for policy making.  A policy that raises the retirement age may reduce the public pension wealth variable, contributing to a decrease in the expenditure of the public pension scheme. On the other hand, reducing the expected post‐retirement period that households have to save for, may also decrease the saving rate.  In other words, the findings show that an increase in the public pension wealth variable does not boost savings suggesting that concerns with saving to cope with the length of the life expectancy at the retirement age are not enough to reject the view that the public pension benefit is a substitute for household wealth. The other results are consistent with expectations: increases in disposable income positively impact saving; there is a significant negative propensity to save out of household wealth increase; and improvement in the government balance engender significant decrease in savings.

Click here to go to the paper by Maria Garcia, Pedro Rodrigues and Francisco Nunes.