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Discussion of Pension Reforms and the

Allocation of Retirement Savings

by Renata BottazziTullio JappeliMario Padula

Filippo Taddei

Collegio Carlo Alberto

Moncalieri, September 18th, 2008

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ObjectivesEvaluate Displacement Effect of Pension Reform (1992-1997):• How changes in Social Security Wealth affects Private

Wealth Accumulation– following Research Agenda already in Bottazzi et al (2006)

• How changes in Social Security Wealth affects Portfolio Allocation– How much risky investment– Accounting for “Pre-reform” portfolio and cohort heterogeneity

• Important because: necessary to evaluate “true” Welfare Effects of pension reform

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The Sample from Bankitalia

• Pension Reform: 1992-97• Observe in 1989-91 and 2004-06

• Three Groups of People: • Young: started to work after 1995• Middle Aged: less than 18 yrs SS contribution in 1995• Old: more than 18 yrs SS contribution in 1995

• Split by occupational category:• Private Sector• Public Sector• Self-Employed

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Who is the most affected by Reform?

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Main Results

• - Δ Social Security Wealth = 1 year income → + Δ Private Wealth = 1 month income

• (Financial and Real Wealth)/Income increases:– in the North– with Education– with Income

• (Financial and Real Wealth)/Income does not display statistically relevant difference by occupational categories (private, public, self-employed)

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The Value of Information about Pension Reform

• Bankitalia SHIW asks about the Expected Social Security Wealth

• If difference between statutory and expected Social Security Wealth is:–less than median → Informed Individuals:

–more than median → Uninformed Individuals:

• For a one year reduction in SS Wealth, Informed Individuals react by increasing:–Financial wealth by 1 month more

–Real wealth by 5 months more

than Uninformed Individuals

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Distribution of Information

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Real wealth reacts More, but How?

• Real Wealth–Real Estate

→ “7 Months” Increase

–Business Wealth• → “Surprisingly” Decreases: Risk not only Return matters

• Financial Wealth–Risky Assets: Stocks

• → basically NO effect–Riskless Assets: Bonds and Checking Accounts

• → “1 Month” Increase, mostly Treasury Bills

• Response Mostly due to Informed Individuals

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Pension Reform and Financial Markets Participation

• (Slightly) Higher participation in–Real Estate–Business Wealth (strongest) –Financial Wealth: Stocks

• No change participation in –Riskless Assets: Bonds and Checking Accounts

• Informed Vs Uninformed–Riskless Assets (more response by Uninformed)–Business Welath (more response by Informed)

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Pension Reform and Annuity Market Participation

• Jappeli and Pistaferri (2003)–Tax incentives did not work to foster private

pension system

• What about Pension Reform?–Private Pension Plan–Life Insurance

• Nothing, not even information matters

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Main Comment•The authors point out:—To which “extent people will be able to annuitize housing wealth to supplement the fall in income after retirement”—Pension plans and life insurance do not react to Pension Reform and still display very low participation

•Natural Solution:•Home Equity line•Reverse Mortgages•Market for “Free Property”

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Minor Comment

Pension Reform may be one of the sources of peculiar italian real estate price dynamics (Hilbers et al, IMF WP/08/211)

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TotalDonations

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Pension Reform