Do Mandatory Pension Savings Cause Debt Accumulation? An Event Study Approach

Abstract

Iceland has in the last decades, as many other countries, built a pension system that relies on a strong foundation of mandatory pillar II pension savings. This has resulted in a rapid growth of pension assets which now account for slightly more than 200 percent of GDP. Whether forced pension savings are successful in stimulating savings or whether they are offset by a redution in voluntary saving or increase in debt has yet to be established in the literature. Exploiting detailed administrative data from Icelandic tax returns this thesis seeks to investigate whether increased mandatory pension savings can play a role in explaining the borrowing decisions of Icelandic households. This is carried out by making use of a historical difference in the mandatory pension contribution rates between public sector and private sector workers in an event study framework where individuals switch between the two sectors. The results do not suggest any indications of mandatory pension savings fuelling debt accumulation in Iceland.