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Social security and saving rates : a cohort analysis using Italian data Biagi, Federico

Abstract

Like other industrialized countries, Italy has recently experienced a substantial decrease in the fraction of total income saved by the private sector. Working with a repeated series of cross sections (Bank of Italy "Survey on Household Income and Wealth" for the period 1984-1995), this thesis verifies to which extent Social Security can explain the drop in aggregate saving rates observed in Italy after the mid 1980's. Since Social Security wealth is a cohort dependent variable and given the nature of our data, we generate a quasi-panel dataset by creating synthetic cohort measures (in terms of age, sector and education) for all the relevant variables, focusing on individuals between the ages of 20 and 60. Previous studies have tried to link savings and Social Security but very rarely they have specified a structural model where the estimated coefficients can be unambiguously interpreted. We reach such an objective using the simplest consumption model (finite lives, no uncertainty, perfect capital markets and selfish agents), whose implications are that-for given expectations on the Social Security regime-cohort consumption rates are an increasing function of their Social Security wealth to Permanent Income ratios We test our model under different assumptions on the expected prevailing regime (in 1992 Italy experienced a first reform of Social Security that affected the generosity of benefits for private and public sector workers and raised retirement age for the former group) and we find that only under the perfect foresight hypothesis and only for private sector workers, log consumption rates are positively and significantly correlated with Social Security wealth to Permanent Income ratios. This result, far away from reflecting an increasing generosity of Social Security, is due to the raise in retirement age introduced by the 1992 reform. We conclude that Social Security can be held responsible for declining saving rates only for the private sector and only when we consider retirement age provision, and hence that there likely are other common factors that drive the aggregate result. We investigate the role of bequests and we find that wealth allocation within the household could be responsible for the observed rise in consumption rates.

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