Some Microeconometric Evidence Concerning the Effect of the Canada Pension Plan on Personal Saving

Abstract

Growing criticism of Canada's retirement income system during the past few years has resulted in renewed pressure on both federal and provincial governments to expand public pension programmes, especially the Canada Pension Plan (CPP). Once again, this prospect has aroused fears that an unfunded expansion of the public pension system could have a seriously adverse effect on personal saving. The adverse effect on personal saving, it is argued, could in turn lower investment and thereby reduce even further what is already, by postwar standards, an extremely sluggish rate of productivity growth for the Canadian economy. However, the basis for fearing that public pensions may reduce household saving is somewhat questionable. Since the wealth replacement effect of public pensions on saving may be offset by an induced retirement effect, and perhaps by inter-generational transfers in the form of bequests, the theory at least is inconclusive in this regard.1 Surprisingly enough, unlike in the United States, where the theoretical indeterminacy concerning the overall impact of public pensions on saving has spawned a multitude of empirical studies, the subject has been largely ignored by econometricians in Canada. But sparse though the empirical evidence may be, it does not support the seemingly popular contention that public pensions reduce personal saving. In the only published empirical study to date, Boyle and Murray (1979) conclude from their analysis of time-series data that Canada's public pension plans have had no visible effect on household savings behaviour. This paper presents some cross-sectional evidence on the response of personal saving to public pensions, which appears to conflict with the Boyle and Murray findings. It is organized as follows: Section I describes the methodology and the data base used; the empirical results are analysed in Section II; some conclusions follow in Section III.