The Pension Option in Labor Insurance and Precautionary Savings: Evidence from Taiwan

Starting in 2009, the Labor Insurance (LI) program in Taiwan has allowed workers to choose between pension old-age benefits and one-time old-age benefits. The introduction of the pension option not only mitigates longevity risk for workers but also provides a higher expected present value of old-age benefits to workers than the one-time benefit option (on average). Based on a lifecycle model with uncertain lifespan, we expect that workers will increase current consumption and reduce savings in response to this policy intervention. We use data from the Survey of Family Income and Expenditure (SFIE) in Taiwan to empirically test this prediction. In order to isolate other systematic structural changes or economic shocks from the true impact of the pension option on savings and consumption, we adopt a difference-in-differences (DID) approach in this study. Our results demonstrate that the implementation of pension benefits in LI lowers households’ savings by 9.25% (NT$ 50,798) and raises consumption by 5.27% (NT$ 42,663) for LI workers. In addition, younger households tend to be more responsive to this policy in terms of increasing consumption, while some older households experience a significant decrease in savings.