Testing the behavioral life-cycle model: The effects of Social Security and pensions on personal saving

This study empirically investigates the behavioral life-cycle model (BLC) by framing the household's financial assets into liquid assets, less liquid assets, housing assets, and future wealth to test the hypothesis that the location of household wealth has effects on saving and consumption. The effects of Social Security and private pensions on personal savings are emphasized in the model through both cross-section and time-series analyses.; This paper uses 1983–1989 Survey of Consumer Finances and 1946–1992 Flow of Funds Accounts data sets. In the model with household net worth growth rate as a dependent variable to proxy household saving rate, the income and other financial assets do not have significant and discernable effects on net worth growth rate. In the model with household non-pension saving as a dependent variable, the results show that the saving behaviors of liquidity constrained households are more consistent with the BLC since social security wealth has a positive effect on non-pension savings while defined contribution plan has a negative effect. This suggests that the liquidity-constrained households, who are more likely to hit the spending income limit, are more likely to borrow against more liquid pension plan.; The aggregate analysis of the impact of social security wealth on consumption is more consistent with the BLC compared to the cross-section analysis since the results show that non-liquid assets, housing assets, and social security wealth do not increase personal consumption while disposable income and less liquid assets significantly increase personal consumption. This study does not confirm Feldstein's finding that the social security system reduces personal savings.; Gender analysis shows that the results of single male-headed households sample favor the BLC because they are more likely to consume out of current income and illiquid assets such as less liquid assets significantly increase their savings. Although the single female-headed households sample does not fully support the BLC, the future wealth in the model has significant and positive effects on net worth growth rates, implying that the social security and pension plans make single women save more.