THE EFFECT OF PUBLIC PENSION ON INDIVIDUALS' INVESTMENT AND CONSUMPTION CHOICES

Abstract

This paper examines the effect of pension on the investment and consumption decisions of individuals. Using a difference-in-differences model, I find evidence that Indian bank account holders decrease the level of their private savings, increase the proportion of their private savings allocated to risky assets, but do not change their consumption, in response to the introduction of a pension scheme (Atal Pension Yojana) in India. Extending the two-period life cycle model formulated by Samuelson (1975) to include uncertainty in asset returns, I also model individuals' responses to the introduction of a pension scheme and provide theoretical explanations for the empirical results. Interestingly, lifetime wealth does not increase with the introduction of the pension scheme, so consumption does not increase. Pension saving becomes a substitute for risk-free assets, and therefore proportion of private savings allocated to risky assets increases and the level of private saving decreases.