The Impact of Public Pensions on Personal Retirement Saving in Canada: Some Evidence from Cross-Section Data

Abstract

During recent years much attention has been focused on the question of whether or not public retirement income systems have an adverse on personal saving. The concern has been expressed in a number of countries that if there is any reduction in saving, it could result in a lower rate of capital accumulation and, as a consequence, slower productivity growth. Unfortunately, the, theoretical literature on the subject is inconclusive. Within the framework of a life-cycle model where saving and retirement decisions are made jointly, the overall of public pensions is ambiguous, depending on the relative strengths of the wealth replacement effect and the induced retirement effect [9; 10]. The former reduces saving while the latter tends to increase it. The issue is further complicated by the possibility that individuals might attempt to vitiate what the public pension system does through offsetting changes in private intergenerational transfers in the form of bequests [1; 14]. It would appear, therefore, that only empirical evidence can determine the extent to which public pensions affect personal saving. Whereas in the United States a great deal of research, much of it with conflicting results,' has been devoted to shedding further light on this very important issue, in Canada the subject has been somewhat neglected. What little evidence there is, however, lends little support to the popular view that public pension programs such as Old Age Security (OAS) and the Canada Pension Plan (CPP) have had a negative on saving. Boyle and Murray, in their recent study, conclude from time series regressions that Canada's public pension plans have had no visible on household savings behaviour [2,467].