The Pension Option in Labor Insurance and Its Effect on Household Saving and Consumption: Evidence From Taiwan

• Author: Wen‐Yen Hsu,Mary A. Weiss,Hua Chen
• Date: 01 December 2015
• Published date: 01 December 2015
• DOI: http://doi.org/10.1111/jori.12047

THE PENSION OPTION IN LABOR INSURANCE AND ITS

EFFECT ON HOUSEHOLD SAVING AND CONSUMPTION:

EVIDENCE FROM TAIWAN

Hua Chen

Wen-Yen Hsu

Mary A. Weiss

ABSTRACT

Starting in 2009, the Labor Insurance (LI) program in Taiwan has allowed

workers to choose between pension old-age benefits and one-time old-age

benefits. The introduction of the pension option not only mitigates longevity

risk for workers but also provides a higher expected present value of old-age

benefits to workers than the one-time benefit option (on average). Based on a

lifecycle model with uncertain lifespan, we expect that workers will increase

current consumption and reduce saving in response to this policy intervention.

We use data from the Survey of Family Income and Expenditure in Taiwan to

empirically test this prediction. In order to isolate other systematic structural

changes or economic shocks from the true impact of the pension option on

saving and consumption, we adopt a difference-in-differences approach in this

study. Our results indicate that the implementation of pension benefits in LI

lowers households’ saving by 8.41 percent (NT$50,587) and raises consumption

by 5.73 percent (NT$42,897) for LI workers. In addition, we find that, in general,

households with less saving or consumption tend to be more responsive to this

policy in terms of reducing saving or increasing consumption.

INTRODUCTION

Developed and developing countries have instituted a wide array of social insurance

programs over the past 100 years. Important questions have arisen from the

introduction, expansion, and reform of these programs on economic agents’ behavior.

One of these questions is the effect of these programs on saving—that is, whether

Hua Chen is at the Department of Risk, Insurance and Healthcare Management, Temple

University, 1801 Fa, PA 19122. Wen-Yen Hsu is at the Department of Risk Management and

Insurance, Feng Chia University, 100 Wen Hwa Road, Taichung City, 407, Taiwan. He is also a

research fellow at the Risk and Insurance Research Center, College of Commerce, National

Chengchi University, Taiwan. Mary A. Weiss is at the Department of Risk, Insurance and

Healthcare Management, Temple University, 1801 Liacouras Walk, 624 Alter Hall,

Philadelphia, PA 19122. Correspondence should be addressed to Wen-Yen Hsu via email:

wyhsu@fcu.edu.tw. Hua Chen acknowledges the financial support from Temple University.

© 2014 The Journal of Risk and Insurance. 82, No. 4, 947–975 (2015).

DOI: 10.1111/jori.12047

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these programs crowd out saving. Reductions in saving ultimately affect the long-

term economic growth of a country. This effect on growth must be weighed against

the potential increase in welfare associated with these programs. Welfare gains may

be obtained from increased consumption, by improving risk-sharing mechanisms,

and by allocating the resources of households more efficiently over time.

Social insurance programs may lessen uncertainty arising from various sources and,

thus, reduce the need for savings. Studies of the effect of different types of social

insurance programs on saving include disability insurance (Kantor and Fishback, 1996),

unemployment insurance (Engen and Gruber, 2001), and Medicaid (Gruber and

Yelowitz, 1999). Chou, Liu, and Hammitt (2003, 2006) and Chou, Liu, and Huang (2004)

study the impact of the implementation of National Health Insurance (NHI) for

nongovernment workers in Taiwan. The conclusion of these studies is that saving is

reduced and consumption increased as a result of the social insurance program.

While savings is associated with a country’s growth, an increase in consumption may

have important beneficial consequences as well, especially in countries that run a

current account surplus (such as many Asian countries like Taiwan). Increases in

consumption can stimulate the local economy (i.e., increase demand) and provide the

impetus to improve the economic infrastructure of a developing country (Jha, Prasad,

and Terada-Hagiwara, 2009). This would tend to insulate the country (at least

somewhat) from the deleterious effect of swings in demand for exports as occurred in

the most recent financial crisis. Therefore, it is important to gauge the impact of a

social insurance program on both saving and consumption.

The purpose of this study is to determine the effect on saving and consumption from a

new pension social insurance program in Taiwan. In 2009, a new annuity pension

system in the Labor Insurance (LI) program went into effect, affecting a large part of

the working population. In the meantime, governmental employees had been

provided annuitized pension benefits since 1959, and these employees were not

affected by the policy change in LI. The different timing of offering a pension annuity

benefit to these different groups allows us to identify LI’s effect on saving and

consumption for LI workers.

More specifically, we use a “difference-in-differences” (DID) approach to compare

the change in saving and consumption of a treatment group (workers under LI) with

the change of a control group (government employees).

1

That is, the idea behind the

DID methodology is that a change in outcome for the control group reflects systematic

structural change while any outcome change in the treatment group reflects the same

1

Chou, Liu, and Hammitt (2003) also use the DID approach to empirically test how the NHI in

Taiwan affected (precautionary) saving and consumption. They hypothesize that a reduction

in uncertainty about future health expenses (the risk effect) discourages saving if households

are prudent and that the risk effect would dominate an income effect in their case. The income

effect was hypothesized to be trivial because the partial contribution of premiums paid by

employees only accounted for a small percentage of households’ expenditures. They find that

the introduction of NHI in Taiwan reduced saving by an average of 8.6–13.7 percent and raised

average consumption expenditure by 2.9–3.6 percent, with the largest impact on households

with the lowest saving.

948 THE JOURNAL OF RISK AND INSURANCE