Does mandatory pension savings crowd out private savings?: The experience of Sri Lanka

Abstract

The relationship between mandatory pension savings and voluntary household savings is at best uncertain. This is cold comfort for low-income countries which plan to introduce mandatory savings schemes to boost both retirement savings and total savings. More empirical work on low-income countries may help to establish some stylized facts on the savings behavior of households in response to mandatory savings. This paper attempts to shed some light on this issue based on the experience of Sri Lanka, a low-middle income country. We find a significantly negative effect of mandatory EPF savings on non-EPF private savings but suggest that this can be offset, to some degree, through the efficient management of mandatory savings to minimize waste and maximize returns to savings.