Lachowska & Myck: What Is the Relation between Public Pensions and Private Savings?

From the article:

Pension systems where current pension benefits are financed by current revenues, also known as pay-as-you-go systems, are vulnerable to demographic changes such as increased longevity and declining fertility. In part because of lower birth rates in the United States, a 2014 Social Security Board of Trustees report projects that by 2033, the costs of Social Security programs will increase so that revenues will pay for only about 77 percent of scheduled benefits (U.S. Government Printing Office 2014). To deal with such demographic changes, over the past 20 years many European countries, including Italy, Poland, Sweden, and Germany, have reformed their pension systems (see, for example, Szczepański and Turner [2014]). A common theme of pension reforms has been to change the design of future pensions in order to encourage people to work longer and save more for retirement. Such reforms provide an opportunity to estimate whether, in response to lower future pensions, people save more on their own, or, equivalently, to answer whether pay-as-you-go public pensions crowd out private saving. The public pension crowd-out is an important policy parameter, because it tells us how much people would save on their own if Social Security benefits were lowered.

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