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

Journal of Risk and Insurance, Forthcoming

43 Pages Posted: 1 Jun 2012 Last revised: 24 Apr 2014

See all articles by Hua Chen

Hua Chen

University of Hawaiʻi at Mānoa

Wenyen Hsu

Feng Chia University - Department of Risk Management and Insurance

Mary A. Weiss

Temple University

Multiple version iconThere are 2 versions of this paper

Date Written: March 16, 2014

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

Suggested Citation

Chen, Hua and Hsu, Wenyen and Weiss, Mary A., The Pension Option in Labor Insurance and Its Effect on Household Saving and Consumption: Evidence from Taiwan (March 16, 2014). Journal of Risk and Insurance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2071483 or http://dx.doi.org/10.2139/ssrn.2071483

Hua Chen

University of Hawaiʻi at Mānoa ( email )

2404 Maile Way, E-602e
Honolulu, HI 96822
United States
(808) 956-8063 (Phone)
(808) 956-9887 (Fax)

Wenyen Hsu (Contact Author)

Feng Chia University - Department of Risk Management and Insurance ( email )

100 WenHwa Rd.
Talchung
Taiwan
04-2451-7250 ext 4107 (Phone)
04-2451-2176 (Fax)

Mary A. Weiss

Temple University ( email )

Fox School of Business and Management
1801 Liacouras Walk
Philadelphia, PA 19122
United States
215-204-1916 (Phone)

HOME PAGE: http://www.sbm.temple.edu/~rmidept/weiss.html

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