The Effect of Workplace Pensions on Household Saving: Evidence From a Natural Experiment in Taiwan

• DOI: http://doi.org/10.1111/jori.12254
• Date: 01 March 2020
• Published date: 01 March 2020
• Author: Tzu‐Ting Yang

©2018 The Journal of Risk and Insurance. Vol.XX, No. XX, 1–22 (2018).

DOI: 10.1111/jori.12254

The Effect of Workplace Pensions on Household

Saving: Evidence From a Natural Experiment in

Taiwan

Tzu-Ting Yang

Abstract

Population aging causes financial imbalances in pay-as-you-go public pen-

sion programs. To remedy this problem, while ensuring the adequacy of

retirement savings for employees, many countries complement or substitute

public pensions by regulating their workplace pensions. This article exploits

a pension reform in Taiwan that has mandated, since 2005, that all private-

sector employers contribute at least 6 percent of an employee’s monthly wage

to an individual pension account. I use workers in the unaffected sectors as

a comparison group and employ a difference-in-differences method to es-

timate the impact of the reform on household saving rates. My estimates

suggest that making private pensions mandatory significantly reduces the

household saving rate by between 2.06 and 2.45 percentage points, thus im-

plying that a $10 increase in the workplace pension could offset $5 to $6 of

household savings.

Introduction

There are several reasons why individuals may not have enough savings for retire-

ment; for example, a lack of self-control in relation to spending means they do not

have enough savings to support future consumption, and survey evidence shows

that most respondents believe they should save more for retirement (Bernheim, 1995;

Angeletos et al., 2001; Adams, 2014). In line with this concern, many countries provide

public pensions to assist in this regard. However, aging populations have resulted in

Tzu-Ting Yang is at the Institute of Economics, Academia Sinica. Yang can be contacted via

e-mail: ttyang@econ.sinica.edu.tw.I am grateful to Kevin Milligan, Joshua Gottlieb, and Thomas

Lemieux, the two anonymous referees, and coeditor for their insightful suggestions and very

valuable corrections. I would also like to thank Alexandre Corhay, Nicole Fortin, Patrick Fran-

cois, Weina Zhou, Yi-Ling Lin, Zhe Chen, ZhengFei Yu, Marta Lachowska, and all participants

at the 2013 European Meeting of the Econometric Society (EEA-ESEM), the 2012 Asian Meeting

of the Econometric Society,the 35th Fall Research Conference of the Association for Public Pol-

icy Analysis and Management (APPAM,2013), the CRDCN 2012 National Conference (Statistic

Canada), and the UBC seminar for valuable discussions on this work. The Survey of Family

Income and Expenditure (TSFIE) was provided by the TaiwaneseDirectorate-General of Bud-

get, Accounting, and Statistics (DGBAS). This article represents the views of the author and not

those of the DGBAS.

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a fiscal strain on pay-as-you-go public pension systems, and so the use of manda-

tory workplace pensions is becoming a popular way for governments to increase the

provision of pensions without incurring a great deal of new public spending. Sev-

eral developed countries have begun to complement or substitute public pensions

by mandating workplace pensions; for example, Australia and the Netherlands have

long traditions of legislation on compulsory workplace pensions.1The British gov-

ernment introduced new legislation to require all employers, by 2018, to provide

workers with a workplace pension plan and to make employer pension contributions

(i.e., automatic enrollment).2

However, the ability of mandatory workplace pension schemes to increase employ-

ees’ retirement wealth depends on the degree of substitutability between workplace

pensions and household savings. Under the assumption that the investment returns

between workplace pensions and household savings are similar,3if workplace pen-

sions offset household savings partially, such interventions could increase workers’

retirement savings. If, on the other hand, workplace pensions substitute perfectly for

household savings, then legislation requiring employers to offer pensions to their

workers may not really help employees accumulate more wealth for their retirement.

In this article, I estimate the causal effect of workplace pensions on household savings

by analyzing a pension reform in Taiwan that mandated, from 2005 onward, that all

private-sector employers should pay a minimum contribution of 6 percent of each

employee’s monthly wage to the latter’s individual pension account. Before the re-

form, most private-sector employees in Taiwan did not receive employer-sponsored

pensions when they retired. Thus, this reform has substantially increased the pension

coverage of this cohort and raised employers’ pension contributions. I exploit this

policy change to obtain exogenous variations in employer’s pension contributions

for the affected workers and employ a difference-in-differences (DID) approach to

overcome potential endogeneity problems when estimating the effect of workplace

pensions on household savings (Gale, 1998). I find that the 2005 pension reform in

Taiwan significantly reduces the household saving rates (as a percentage of dispos-

able income) of private-sector employees by between 2.06 and 2.45 percentage points,

1Australia introduced a new compulsory occupational pension system, the Superannuation

Guarantee, in 1992 that requires employers to contribute a percentage of an employee’s salary

into the latter’s individual pension account (Tapia, 2008). The Netherlands also has mandatory

occupational pensions covering more than 95 percent of employees (Tapia,2008).

2The new workplace pensions law in the United Kingdom came into force in 2012, beginning

with the largest employers, whereas small and medium businesses were obliged to set up

workplace pension schemes by 2018. Employers need to repeat the automatic enrollment

process every 3 years, that is, reenrollment.

3Here, I would like to remind readers that the investment returns between workplace pensions

and household savings could be different. Especially in this case, if the rate of return on

household savings is more than the rate of return on workplace pensions, overall saving for

retirement might decline, even if workplace pensions only partially offset household savings.

Thus, I need to impose this assumption when discussing the policy implications based on my

estimates.

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