Pensions, Savings and Housing: A Life-Cycle Framework with Policy Simulations

Victoria University of Wellington Public Finance Working Paper No. 01/2015

46 Pages Posted: 3 Feb 2015

See all articles by John Creedy

John Creedy

Victoria University of Wellington - Te Herenga Waka

Norman Gemmell

Victoria University of Wellington - Te Herenga Waka - Victoria Business School

Grant M. Scobie

Government of New Zealand - Treasury

Date Written: November 19, 2014

Abstract

The objective of the paper is to explore the saving and consumption responses of a representative household to a range of policy interventions such as changes in taxes and pension settings. To achieve this, it develops a two-period life-cycle model. The representative household maximizes lifetime utility through its choice of optimal levels of consumption, housing and saving. A key feature of the approach is modelling the consumption of housing services as a separate good in retirement along with the implications for saving. Importantly, the model incorporates a government budget constraint involving a pay-as-you-go universal pension. In addition, the model allows for a compulsory private retirement savings scheme. Particular attention in the simulations is given to the potential impact on household saving rates of a range of policy changes. Typically the effect on saving rates is modest. In most instances, it would take very substantial changes in existing policy settings to induce significant increases in household saving rates.

Keywords: Savings; Housing; Retirement; Intertemporal elasticity of substitution; rate of interest; taxation

JEL Classification: D12; H24; H31; J26

Suggested Citation

Creedy, John and Gemmell, Norman and Scobie, Grant M., Pensions, Savings and Housing: A Life-Cycle Framework with Policy Simulations (November 19, 2014). Victoria University of Wellington Public Finance Working Paper No. 01/2015, Available at SSRN: https://ssrn.com/abstract=2559533 or http://dx.doi.org/10.2139/ssrn.2559533

John Creedy

Victoria University of Wellington - Te Herenga Waka ( email )

P.O. Box 600
Wellington, 6140
New Zealand

Norman Gemmell (Contact Author)

Victoria University of Wellington - Te Herenga Waka - Victoria Business School ( email )

PO Box 600
Wellington 6140
New Zealand

Grant M. Scobie

Government of New Zealand - Treasury ( email )

PO Box 3724
Wellington, 6011
New Zealand

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