Pension wealth and household saving: evidence from pension reforms in the UK

Using three major UK pension reforms as natural experiments we investigate the relationship \nbetween pension saving and discretionary private savings. Unlike most differences-in-differences \napproaches which rely on average differences between the control and the treatment group, we \nuse economic theory to model the response of each individual household. The model permits us \nto use both time-series and cross-sectional variation in a consistent way to identify the \nbehavioural response. The study is based on data from the Family Expenditure Survey. A \nmeasure of pension wealth is not observed, but we estimate it by applying the rules of the \npension system to observed individual characteristics. The changes in pension wealth as a result \nof the reforms are substantial. The empirical analysis suggests that the earnings-related tier of the \npension scheme has a negative impact on private savings with substitution elasticities \napproaching –1.0. The impact of the flat-rate tier of the scheme is found not to be significantly \ndifferent from zero.