Shocks to Future Income and (Lack of) Consumption-Smoothing: Evidence from the Abolition of the State Pension Partner-Supplement in the Netherlands

Abstract

Under the property of fungibility, all components of wealth are equal. Thus (assuming no transaction cost, liquidity constraints, and so on) a change in current income, liquid wealth and future income should lead to similar a response. However, there is ample empirical evidence indicating that the marginal propensity to consume current income is close to one and the marginal propensity to consume wealth is somewhere between zero and unity. Less is known of people’s response to changes in future income. This paper utilizes the abolishment of the state pension partner supplement in the Netherlands to investigate the effect of a change in future income on savings, labour supply, and consumption. We employ a differences-in-differences-in-differences setup and find no effect in people’s labour supply and savings decisions attributable to the supplement abolishment. Our investigated policy change provides a unique dataset to investigate the hypothesis of a zero marginal propensity to consume future income for a variety of reasons. First, we use administrative microdata allowing us to calculate effects with high accuracy. Second, the policy change allows a treatment and control group to be identified. Third, the wealth shock is quantitatively large (around e70,000 for an average household with a young partner with very low or no income). Fourth, the discontinuation of the supplement, enacted on April 2015, followed a 20 year announcement period, including an active campaign in order to inform the public of the policy change.

Keywords: wealth fungibility, pensions, partner allowance