1. Public Pension Reforms and Private Savings
Minki Hong
Korea Labor Institute
August, 2009

2. Contents Previous Studies Korea National Pension Scheme
Estimation Method: CIC / DID
Results

3. Previous Empirical Studies
(1) Estimate pension wealth(PW)
(2) Regress private wealth on PW
Calculating PW is very complicated:
Earning profiles, retirement age,
Results are sensitive to estimated PW
Ideally require perceived wealth, smaller than PW by law.
 Using PW overestimates the effects.

4. Desirable Solutions
1. Use information on perceived pension wealth by individuals
 Bernheim & Levin (1989)
(+ pension reforms & panel data would be more desirable)
2. Compare outcomes between the treatment group and the control group
→ This paper’s approach

5. Korea National Pension Scheme
Funded, defined benefits program
Before 1999, covered
workers workplace with 5+ workers
In 1999, extended to all residents
(1) the self-employed
(2) non-regular workers
(3) workers in small business

6. Korea National Pension Scheme
The self-employed account for 34% of total employment.
Among the self-employed (aged 26-59), about 74% participated in the National Pension program as of 2002.
Many self-employed run a very small business ( very volatile).

7. Korean National Pension : Contribution
Contribution rate
workers : 4.5% (U.S. : 6.2%)
self-employed : 9% (U.S. : 12.4%)
(U.S. : 2.9% Medicare..)

8. Korean National Pension : Benefits

9. Structure of KNPS by cohort
Age
As of 2002
Eligible
Ages
Contribution
Years
Replacement
Rates
25-29 65
36-40
0.54
30-34
64-65
30-35
0.45
35-39
63-64
24-29
0.36
40-44
62-63
18-23
0.26
45-49
60-61
11-16
0.16
50-54 60
6-10
0.1

10. Structure (cont.)
Change in saving by policy reform will be greater the closer the individual is to retirement age (Gale, 1998) Stronger effect of the pension on older individuals.
For older individuals, the replacement rate is low due to the short period of contribution by KNPS
 Weaker effect on older individuals
The actual effect is level across ages.

11. Data Dependent variable: saving rates
Korea Labor and Income Panel Study
HHs whose head is the self-employed
aged
t=0 (before reforms) : 1998
t=1 (after reforms) : each.
Dependent variable: saving rates
No information after 2004 on participation in KNPS.
No information in 1998 on assets.

12. Summary Statistics (’98/’02)
Mean
S.D.
10th
perc
25th
50th
75th
90th N
Control
t=0
0.155
0.24
0.020
0.232
0.490
131
t=1
0.164
0.19
0.096
0.248
0.409
Treat
0.198
0.22
0.151
0.331
0.498
439
0.197
0.30
0.041
0.143
0.278
0.468

13. Estimation Method Changes-in-Changes by Athey and Imbens (2006) CIC
DID
Effect of
Policy
Heterogeneous
Same
Adoption of
Endogenous
Exogenous
Rescaling
Not matter
Matter

14. Changes-in-Changes : Observable
Comparing two produces the whole distribution of effects
Fs are estimated nonparametrically
Control
(g=0)
Treatment
(g=1)
t=0
F(0,0)
F(1,0)
t=1
F(0,1)
F(1,1)

15. CIC with covariates 1. Regress D: four group-time dummy
X: size, own a house, net income,
age, gender, marital status…
2. Construct residuals with the group/time effect be added back in
Then apply CIC

16. Estimation Results (CIC)
Saving
Rates
1998 and 2000
1998 and 2001
1998 and 2002
1998 and 2003
mean
0.0097
(0.0280)
(0.0343)
(0.0290)
(0.0491)
10th perc
0.0114
0.007
(0.0134)
(0.0159)
(0.0174)
(0.0117)
25th perc
0.0055
0.0026
(0.0120)
(0.0227)
(0.0192)
(0.0254)
50th perc.
0.0202
(0.0413)
(0.0335)
(0.0484)
(0.0483_)
75th perc.
0.0235
-0.046
(0.0428)
(0.0547)
(0.0504)
(0.0704)
90th perc.
0.0428
0.0451
0.0267
(0.0379)
(0.0742)
(0.0902)
(0.0964)

17. Estimation Results (DID)
Saving Rates
1998 and 2000
1998 and 2001
1998 and 2002
1998 and 2003
mean
0.0094
(0.0276)
(0.0316)
(0.0256)
(0.0364)
10th perc
0.0478
0.0002
0.0247
(0.0235)
(0.0296)
(0.0232)
(0.0326)
25th perc
0.0441
0.0125
0.0172
(0.0236)
(0.0257)
(0.0212)
(0.0343)
50th perc.
0.0426
-0.022
(0.0333
(0.0328)
(0.0438)
75th perc.
(0.03
(0.038)
(0.0321)
(0.0395)
90th perc.
(0.0420)
(0.0325)
(0.0428)

18. Results Mean effects are close to zero. General reason :
(1) precautionary and bequest motives
of savings
(2) uncertainty on pension benefits
HH below 50th perc. (have zero saving rates) were not affected
← liquidity constraints

19. Results (cont.) HH around 50 to 75 perc.:
SR drop by 5-6% points, corresponds
25% offset
HH 90th + perc are not affected
← (1) replacement rate is low
(2) pension wealth accounts for small portion of their wealth.

20. Results from DID Mean effects are close to CIC
DID estimator tends to overestimate the negative effect for HH with high SR.