PhD Thesis

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  • 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,

    mechanical, now known or hereafter invented, including photocopying or record-

    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