Mandatory Pension Contributions: Effects on Household Consumption and Savings

Abstract

Using rich register data from Denmark, we study whether people save enough to maintain their pre-retirement level of consumption during retirement. We find that 77% of retirees do. This high fraction is driven by mandatory labour market contributions. The 23% of individuals who do not save enough to maintain their pre-retirement level of consumption are less likely to have mandatory pension schemes and do not compensate for the lack thereof via voluntary private savings. However, mandatory contributions come at the cost of lower consumption and non-retirement savings during working years. This follows from quasi difference-in-differences estimations showing that people who have seen their mandatory pension contributions increase the most over time have cut consumption and non-retirement wealth accumulation during working years, compared to individuals having experienced only a small increase in mandatory pension contributions.

Keywords: pension savings, consumption

JEL Classification: D14, G11, G20