Saving incentives, old-age provision and displacement effects: evidence from the recent German pension reform

In response to population aging, pay-as-you-go pensions are being reduced in almost all developed countries. In many countries, governments aim to fill the resulting gap with subsidized private pensions. This paper exploits the recent German pension reform to shed new light on the uptake of voluntary, but heavily subsidized private pension schemes. Specifically, we investigate how the uptake of the recently introduced ‘Riester pensions’ depends on state-provided saving incentives, and how well the targeting at families and low-income households works in practice. We show that, after a slow start, private pension plans took off very quickly. While saving incentives were effective in reaching parents, they were less successful in attracting low-income earners, although Riester pensions exhibit a more equal pattern by income than occupational pensions and unsubsidized private pension plans. We also provide circumstantial evidence on displacement effects between saving for old-age provision and other purposes. Households who plan to purchase housing are less likely to have a Riester pension. The same holds for households who attach high importance to a bequest motive. Occupational pensions and other forms of private pensions, however, act as complements rather than as substitutes.