The Effect of Private Pension Plans on Personal Savings

Abstract

THE recent focusing of union demands on noncontributory pension plans raises the question of the possible effects of this newest development in the field of collective bargaining on personal savings. Does the accumulation of huge pension reserves represent merely a rechanneling of savings or does it represent a net addition to the savings stream? The whole magnitude of the problem of the accumulation of private pension reserves can be sized up in making the following rough calculations: The current cost of most pension plans is estimated at around 5 per cent of the payroll. Under the unlikely hypothesis that pension plans of similar scope will ultimately spread through the entire non-agricultural private segment of the economy, their aggregate annual cost (before provision for accumulating reserves for past service pension credits) would amount to about 3 per cent of Gross National Product, while for a number of years benefit payments would remain relatively small. This is clearly an extreme assumption. If, however, the scope of the Federal Old-Age and Survivors Insurance (OASI) Program is broadened in accordance with HR-6ooo, and private pension plans continue to spread, a few years from now funds channeled into both types of penson reserves (plus investment income on such reserves) may very well run at the rate of 2 per cent of GNP. On the other hand, over the long pull, net domestic capital formation (including residential housing) is likely to average less than io per cent of GNP per annum.1 Thus, annual accumulations of pension reserves alone may amount to about one fourth of the average domestic capital formation. A considerable proportion of corporate needs for long-term funds is currently met from internal sources and does not involve any debt instruments. Unless the demand for external financing increases, reserve accumulations in (private and public) pension funds are likely to be equal to considerably more than one fourth of the amount of available investment securities and mortgages. Obviously, the total effect of pension plans on aggregate savings will depend (i) on the effect of the financial cost of these plans on the price level, (2) on the incidence of this cost on particular groups of income receivers whose money income and ability to save may be reduced, (3) on the degree to which dissaving will be reduced, and (4) on the ability and willingness of workers covered by such plans to save more or less than otherwise. The ability of all income receivers to save will depend on the way in which the cost of pension plans will be borne by the economy. To the extent that it will be passed on in increased prices, it will reduce the real income of all consumers (not just of the potential beneficiaries of the pension plans); to the extent that it will reduce dividend disbursements, it will change the income distribution and reduce the ability to save of a large segment of recipients of property income. Moreover, increased security is likely to affect the covered workers' willingness to save. (i) Since old-age pension plans involve postponement of the payment of a part of labor income until retirement age, current consumption of wage earners must be lower than if equivalent increases were granted in current wages. Suppose that, productivity remaining unchanged,2 organized labor is successful in obtaining the N-th round of wage increases. The price level will rise, some redistribution of income will take place, but consumption in real terms is likely 1 The average rate of net domestic capital formation, derived from Kuznets' estimates for I869-i9i8, is IO.9 per cent of GNP. It declined to 8.5 during the prosperous twenties (I9I9-28) and dropped sharply to i.5 per cent during the thirties (I929-38). The postwar (I946-49) average was I4.6 per cent. 2 This assumption is made for illustrative purposes only. The same argument could be developed under a number of alternative assumptions.