Does Mandatory Saving Crowd out Voluntary Saving? Evidence from a Pension Reform (see here)
Authors: Svend Hougaard Jensen, Sigurður Páll Ólafsson, Arnaldur Smári Stefánsson, Thorsteinn Sigurður Sveinsson and Gylfi Zoega
Abstract: Recently, mandatory pension contributions in the private sector in Iceland were increased substantially while remaining unchanged in the public sector. Taking this as a large natural experiment, this paper studies the effects hereof on households’ voluntary saving using comprehensive third-party reported information on tax-payers’ income, assets and debt for all taxpayers. Using difference-in-differences, we find that households do not reduce voluntary saving when faced with a rise in mandatory saving. Our results are confirmed by an event study of workers switching from the private sector to the public sector. Survey evidence suggests widespread ignorance about the pension system.
How Education Impacts Consumption Smoothing (see here)
Authors: Svend Hougaard Jensen, Sigurður Páll Ólafsson, Thorsteinn Sigurður Sveinsson and Gylfi Zoega
Abstract: We study consumption and saving behavior by education group in Iceland over the years 2005-2019, a turbulent period with dramatic fluctuations in factor incomes before, during and after the collapse of the country’s banking system. Using microdata containing the tax returns of all Icelandic taxpayers, we find that higher education lowers the marginal propensity to consume (MPC) by raising disposable income and relaxing liquidity constraints. Our results, obtained by application of econometric techniques and backed by survey evidence, also have policy implications. With a lower MPC following an increase in the average level of education, the multiplier is also lower, thus reducing macroeconomic volatility and the effectiveness of macroeconomic policy.
The Persistent Effect of a Collapsing Banking System on Households’ Consumption and Saving
Author: Sigurður Páll Ólafsson
Abstract: Using administrative panel microdata of Icelandic taxpayers, I analyze households’ persistent consumption response to the collapse of Iceland’s banking system. The sample period of covers the period of rapid economic growth in Iceland leading up to the global financial crisis (GFC), the collapse of the country’s entire banking system in the wake of the GFC, and, finally, its post-crisis recovery. The large fluctuations and dramatic uncertainty facing Icelandic households post-GFC provide a unique opportunity for analyzing households’ precautionary saving and consumption behavior. Using information on households’ characteristics, I estimate individual-level job-loss probabilities and show how labor market risk persistently affects consumption. I find that households who have recently faced elevated risk subsequently lower their consumption. The drop in consumption is significant and persistent. A one standard deviation increase in uncertainty persistently reduces consumption by a meaningful 0.5% of GDP. Finally, widespread indexation of household debt meant that relatively indebted households saw their debt level rise even further as the currency collapsed and inflation took hold after the GFC/ banking collapse. I show that those households persistently reduce their consumption after the crisis, compared to relatively less indebted households.
Old-Age Saving in a Welfare State
Authors: Torben M Andersen, Andri S Scheving and Gylfi Zoega
Abstract: We contribute to the literature on saving in retirement by studying the saving behavior of retirees in Iceland, a country where health care is free of charge as well as nursing homes. This removes some of the precautionary motive for saving, leaving the bequest motive and other inter-generational transfers, which are the focus of our study. It is shown that saving remains positive in retirement and depends on the number of grown-up children, their income, and their saving. The saving rate drops upon the death of a spouse indicating a transfer of wealth to children. A draft is expected to be completed in the summer of 2024.
The Determinants of Early Retirement
Authors: Torben M Andersen, Andri S Scheving and Gylfi Zoega
Abstract: In Iceland,it is common for people in their sixties to work part-time or leave the labor market before reaching the statutory retirement age. This study examines the factors that affetct early retirement. It looks at the role of marital status, spouse’s labor market participation, wage income, pension, home ownership and debt, amongst other factors. Results are expected to be available by the end of summer 2024.