24 May 2012

New working paper on mandatory pension savings, private savings, home ownership and financial stability

Working paper no. 58, “Mandatory pension savings, private savings, homeownership, and financial stability”, by Ásgeir Daníelsson has been published. The paper contains theoretical discussion of the issues based on the Life-Cycle hypothesis. It also refers to the conditions in Iceland which is in the second place in the world in terms of the size of its pension system and in one of the top places in terms of homeownership.

The paper shows that national accounting data on savings exhibit a declining trend during the last 30 years while the assets of the pension funds have been growing from 10% to well above 100% of GDP. It is shown that the income insurance that is part of the pension system in Iceland can theoretically explain a large decline in aggregate savings. House price risks lead households to increase their precautionary savings. Mandatory pension schemes cause some decline in households‘ personal equity which increases risks in lending. Some households will go over to renting, especially if renting is not that unattractive. Mandatory pension schemes that decrease risks to public finances may increase overall risks if risks in lending to households, and to those that own rented accommodations, increases more.

The paper is accessible on the Bank's website: Working Papers