Essays on Pensions and Savings

Eelco Dirk Zandberg

Publisher: University of Groningen, Groningen, The Netherlands

Printed by: Ipskamp Drukkers

P.O. Box 333

7500 AH Enschede

The Netherlands

ISBN: 978-90-367-8200-5 / 978-90-367-8199-2 (electronic version)

c 2015 Eelco Zandberg

All rights reserved. No part of this publication may be reproduced, stored in a re-

trieval system of any nature, or transmitted in any form or by anymeans, electronic,

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ing, without prior written permission of the publisher.

Essays on Pensions and Savings

Proefschrift

ter verkrijging van de graad van doctor aan de Rijksuniversiteit Groningen

op gezag van de rector magnificus prof. dr. E. Sterken

en volgens besluit van het College voor Promoties.

De openbare verdediging zal plaatsvinden op

maandag 19 oktober 2015 om 16.15 uur

door

Eelco Dirk Zandberg

geboren op 13 juli 1982 te Haskerland

Promotores

Prof. dr. L. Spierdijk

Prof. dr. R.J.M. Alessie

Beoordelingscommissie

Prof. dr. B.W. Lensink

Prof. dr. A.H.O. van Soest

Prof. dr. A. Barrett

Acknowledgements

When I applied for a PhD position at the Faculty of Economics and Business back

in 2009 I expected to write a thesis about monetary policy in a globalizing world.

Six years later I have finished a thesis about pensions and savings.

First of all, I would like to thank Laura for giving me the opportunity to start

working on a topic that was completely new for me at the time. During my PhD

you kept stimulating me to work on issues that interested me. When I indicated

after a fewmonths that I preferred to change the research topic a little bit, you were

the first to support me.

After two years RobAlessie becamemy second supervisor. The rigorwithwhich

you commented onmy papers was very welcome and has resulted in a better thesis

in the end. Also, I have appreciated your endless patience and willingness to dis-

cuss issues around household saving patterns.

I would like to thank the PhD coordinators, Martin Land and Linda Toolsema,

and of course the rest of the SOM office for their willingness to assist with all kinds

of administrative duties.

This thesis would not have existed without the financial support of Netspar.

Thank you for giving me the opportunity to work four years on these very interest-

ing issues.

The first two persons who really enthused me for doing research were Jakob de

Haan and Richard Jong-A-Pin. The research-oriented course Political Economics,

which you taught in the spring of 2007, made me decide to apply for the Research

Master and subsequently a PhD position.

Jochen Reiner became one of my best friends after we were study mates during

the Research Master. After the Research Master you started a PhD in Frankfurt,

but we kept visiting each other every few months. And we still talk about doing

research every now and then, despite the fact that you are an assistant professor in

Marketing in the meantime and I am working in the private sector.

I would like to thank my FEB colleagues, in particular Pim, Allard, Remco,

Tomek, Rients, Lammertjan, and Peter. The conversations at the coffee machine

ii

usually had one thing in common: They were neverending and always converged

to discussions about cycling. A special thanks goes to Aljar Meesters. The discus-

sions we had about statistics, econometrics, and science in general were very valu-

able to me. You partly changed my point of view.

Thanks to my current colleagues at TKP Pensioen for taking care of my duties

when I had to take off to work on my thesis. A special thanks goes to my former

boss, Max Pieters, for immediately suggesting me to take two full weeks off when

I indicated that I really needed some time to finish the last chapter of the thesis.

Thanks to my family for always supporting me. A special thanks goes to Dicky

and Madeleine for taking care of our two little boys many, many times. With your

help it became a little bit easier to write a PhD thesis while raising two children.

Finally, the three most important people in my life: I would not have finished

this thesis without you. Thank you for all your support, Suzanne, Julian, and To-

bias. I dedicate this thesis to you.

Eelco Zandberg

Contents

1 Introduction 1

1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1.2 Chapters 2-4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

1.2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

1.2.2 Chapter 2: Research Question, Findings, Conclusions . . . . . 4

1.2.3 Chapter 3: Research Question, Findings, Conclusions . . . . . 5

1.2.4 Chapter 4: Research Question, Findings, Conclusions . . . . . 5

1.3 Chapter 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

1.3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

1.3.2 Chapter 5: Research Question, Findings, Conclusions . . . . . 7

2 Education level and age-wealth profiles 9

2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

2.2 Theoretical Considerations . . . . . . . . . . . . . . . . . . . . . . . . . 12

2.2.1 The Dutch Pension System . . . . . . . . . . . . . . . . . . . . 12

2.2.2 Life Cycle Model . . . . . . . . . . . . . . . . . . . . . . . . . . 13

2.3 The Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

2.4 Econometric Framework . . . . . . . . . . . . . . . . . . . . . . . . . . 22

2.4.1 Empirical Strategy . . . . . . . . . . . . . . . . . . . . . . . . . 22

2.4.2 Permanent Income . . . . . . . . . . . . . . . . . . . . . . . . . 24

2.5 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

2.6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

2.A Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

3 The retirement replacement rate 41

3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

3.2 The U.S. Pension System . . . . . . . . . . . . . . . . . . . . . . . . . . 43

iv Contents

3.2.1 First pillar: Social Security . . . . . . . . . . . . . . . . . . . . . 43

3.2.2 Second pillar: Employer-provided pension schemes and 401(k)

plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

3.2.3 Third pillar: IRAs and other annuities . . . . . . . . . . . . . . 45

3.3 Calculating Replacement Rates . . . . . . . . . . . . . . . . . . . . . . 46

3.4 Which Variables are Correlated with the Replacement Rate? . . . . . 53

3.5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

3.A Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

4 Retirement replacement rates and saving behavior 61

4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

4.2 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

4.3 Identification and Empirical Model . . . . . . . . . . . . . . . . . . . . 68

4.4 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

4.4.1 Baseline Specification . . . . . . . . . . . . . . . . . . . . . . . 72

4.4.2 Age-Wealth Profiles . . . . . . . . . . . . . . . . . . . . . . . . 74

4.4.3 Robustness Checks . . . . . . . . . . . . . . . . . . . . . . . . . 77

4.5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

5 Funding of pensions and economic growth 89

5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

5.2 Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

5.2.1 Aggregate Saving Rate . . . . . . . . . . . . . . . . . . . . . . . 91

5.2.2 Other Channels . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

5.3 Data Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

5.4 Empirical Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

5.4.1 Short-run effects . . . . . . . . . . . . . . . . . . . . . . . . . . 97

5.4.2 Long-run effects . . . . . . . . . . . . . . . . . . . . . . . . . . 100

5.5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

References 107

Samenvatting (Summary in Dutch) 117

Chapter 1

Introduction

1.1 Introduction

Most Western countries face an aging population. For example, in the Netherlands

the ratio of workers to pensioners will fall from four in 2012 to two in 20401. In other

Western countries, the numbers are comparable. This is caused by two things: First,

the Post-World War II baby boom. This event will have a temporary effect on the

age structure of Western countries. The second cause, increasing life expectancy, is

permanent. Although increasing life expectancy is a joyful thing in itself, it poses

large challenges to health care costs and the economic viability of pension systems.

Several measures have been taken to meet the aging challenge. The legal retire-

ment age has been