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

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 (SFIE) 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 (DID) approach in this study. Our results indicate that the implementation of pension benefits in LI lowers households’ saving by 8.41% (NT$50,587) and raises consumption by 5.73% (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.

Keywords: pension benefits, precautionary savings, difference-in-differences estimator

JEL Classification: D12, E21, G23, H55, J26