The Impact of Pensions and 401(k) Plans on Saving: A Critical Assessment of the State of the Literature

Pensions--broadly defined to include social security as well as employer-provided plans-comprise a significant component of total household resources, but their impact on household wealth accumulation is controversial. This paper reviews previous theoretical and empirical on how pensions affect saving. The empirical literature on the effects of traditional pensions and 401(k) plans contains a range of estimates, but most studies find little effect of pensions on nonpension wealth and some find that pensions raise non-pension wealth. These studies, however, contain a series of econometric baises that overstate the impact of such plans on saving. Evidence suggests that correcting for these factors makes a signficant difference in the estimated impact of pensions on saving. These results do not provide the single, true effect of pensions on saving, but they do cast extreme doubt on the validity of most prior findings.