Pensions and Household Wealth Accumulation

Economists have long suggested that higher pension benefits “crowd out ” other sources of household wealth accumulation. Despite the important role public and private pensions play in policy debates in the United States, the empirical evidence on the extent of crowd-out is mixed. This paper exploits detailed information on pensions in the 1992 wave of the Health and Retirement Study (HRS) and employs a novel empirical strategy that combines two instrumental-variable approaches to identification. The instrumental-variable estimates suggest a significant pension-saving offset: each dollar of pension wealth is associated with about 45- to 60-cent decline in non-pension wealth at the mean. There is evidence of substantial heterogeneity in the pension-saving offset across the wealth distribution, with zero or very small positive offsets at quantiles at or below the median, but significant offsets of 70 cents to dollar-for-dollar in the upper quantiles. Overall, about 80 percent of estimated crowd-out is associated with business equity. Pensions do not appear to crowd out housing equity.