Pension Funds, Personal Savings, and Economic Growth

Abstract

Pension funds are the fastest growing of all financial institutions. They now cover half the labor force and represent one-eighth the financial assets of the entire household sector. This study investigates whether pension savings represent a substitution for other forms of personal saving. Past analyses reveal no consensus on this question. The hypothesis examined in this study is that people disregard pension savings and save in other ways and amounts. To the extent this is true, pension funds may enhance economic growth by increasing the aggregate level of savings available for investment. If, on the other hand, people save less in other forms, pension funds may be an important area of concern in the increasing rivalry among financial intermediaries for household deposits. Highlighting the implications of this analysis is the virtual certainty that pension funds will continue to increase in scope and size. As an economic force, pension funds can not be ignored. Their assets presently exceed $258 billion and, with contributions rising at nearly 15 percent annually, they enjoy the fastest growth of all financial institutions.' The economic impacts of pension funds are most noticeable in the channeling of funds to capital markets, the redistribution of income, and wage contract negotiations. Less obvious economic effects, however, may be emerging in the spending and savings habits of many wage earners. And, considering the importance of savings on capital formation and economic stability, the possible impact on saving becomes particularly significant. A savings level change, resulting from pension contributions, could have far reaching implications in terms of national growth and stability. Vincent P. Apilado, Ph.D., is Assistant Professor of Finance in the College of Business Administration at Arizona State University . This paper was submitted in August, 1971. 1 Charles D. Ellis, Danger Ahead for Pension Funds, Harvard Business Review, May-June, 1971, p. 51. Problem and Hypothesis Employees' contributions to pension plans represent a forced saving unavailable to them until retirement or termination prior to vesting.2 Hence, workers may view these contributions as a tax on their earnings without benefits related to present needs. The savings behavior of these individuals may then be wholly independent of their pension contributions. Conversely, individuals who directly associate pension contributions with other forms of saving, may assume their retirement income problems are resolved and decrease the amount saved in other forms. Or, the prospect of a secure retirement income, plus a guaranteed standard of living, can spur them to increase their 2Vesting refers to the right of an employee, on leaving employment before retirement, to receive all or part of the retirement benefits purchased on his behalf by employer contributions. The extent of this right and the requirements for acquiring it depend on the criteria of the pension plan covering the particular worker. See H. E. Davis and A. Straeser, Private Pension Plans, 1960 to 1969--An Overview, Monthly Labor Review, July, 1970, pp. 45-56.