Uncertainty over the life cycle: implications for pensions and savings behavior

The labor market has become more flexible, the generosity of the welfare state decreases and retirement benefits are under pressure due to population aging and the financial crisis. More freedom of choice in the pension domain is a topic of discussion. At the same time, housing prices dropped and changes in the health and long-term care insurance system increase care related payments for current and future retirees. Individuals and households are therefore increasingly confronted with the self-management of risks. In this project we will analyze uncertainty in income, health, housing prices and family formation and dissolution (divorces) over the life cycle. Secondly, we will investigate how these uncertainties influence accrued pension benefits, and how individuals adjust their consumption, savings, housing and retirement decisions in response to proposed or already implemented policy reforms and financial shocks.

The main research question we would like to answer is:
How much uncertainty do people experience during their life regarding income, health, divorces, and macro-economic shocks? What are the consequences for (pension) savings? And how do people adjust their behavior in response to policy reforms and shocks?

To answer this broad question our theme proposal consists of three subthemes that address several sub-questions.

Subtheme 1. Uncertainty over the life cycle
In this subtheme we analyze the uncertainty in income and health over the life cycle. The following research questions will be addressed:
– How much income uncertainty do Dutch households experience over the life cycle?
– To what extent is income uncertainty attenuated by the family?
(For example, a self-employed individual may pool income risk with a wage employed spouse).
– To what extent do taxes and transfers like unemployment and disability schemes reduce income uncertainty?
– To what extent and when do divorces take place during the life cycle? What are the financial consequences?
– How does the uncertainty in health develop over the life cycle?
– When do health shocks occur and how persistent are these health shocks?

Subtheme 2. Saving behavior before retirement
In this subtheme, we analyze the effect of uncertainty on consumption and saving decisions. Moreover, we investigate retirement savings adequacy. To be more specific, the following research questions will be addressed:
– How do earnings dynamics affect consumption and wealth over the life cycle?
– What are the consequences of income dynamics for inequality in consumption and wealth?
– What is an adequate pension?
– Are people able to make a sensible assessment of their retirement expenditure needs?
– Are people saving enough relative to the life cycle model? Who are saving too little? And who are saving too much according to the life cycle model?
– What would be adequate wealth holdings for the self-employed individuals and for people with a ‘flexible’ job to self-insure against income uncertainty?
– What is the optimal timing for pension contributions over the life cycle (given income uncertainty and household composition over the life cycle)?
– What is the risk of incomplete debt amortization around retirement? To what extent do households self-insure against this risk?

Subtheme 3. Saving behavior after retirement
This subtheme focuses on the role of uncertainty in saving behavior of the elderly. The following research questions will be addressed:
– What are the roles of the precautionary motive and the bequest motive in explaining wealth holdings after retirement?
– Are bequests accidental or intended? Is there a strategic or altruistic motive for leaving a bequest?
– Are possible future uninsured health expenditures an important motive for people to save?
– Can we improve the pension and long-term care insurance system to better align pensions and the optimal amount of long-term care insurance with actual needs?
– What are the effect of means tested contributions for long-term care on saving behavior and well-being of retirees?
– What is the role of inherited wealth on the distribution of household net worth in the period 2005 to 2015?
– What is the role of housing wealth in explaining saving after retirement?

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Netspar, Network for Studies on Pensions, Aging and Retirement, is een denktank en kennisnetwerk, gewijd aan het bevorderen van een beter begrip van de economische en sociale gevolgen van pensioenen, vergrijzing en ‘de oude dag’ in Nederland en Europa.


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