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This paper analyses the causal effect of changes in public pensions on household spending. The identification exploits the introduction of a new welfare system in Spain during the 1980s and 1990s and uses a novel narrative series of legislated pension changes as an instrument for pension income. Despite public pensions having a limited impact in the aggregate, I find a high, though less than unity, marginal propensity to consume (MPC) for pensioners due to permanent income shocks at the household level. Moreover, large spending responses for pensioners with the highest income and wealth mean that liquidity considerations can be disregarded as a key source of MPC heterogeneity. Instead, a strong precautionary savings motive can explain the excess smoothness of consumption, and costly adjustments explain the skewed spending response for durables.

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This paper estimates the aggregate effects of government income transfers shocks for a sample of EU countries. I construct a new measure of transfers shocks based on a dataset by public finance experts of the European System of Central Banks (ESCB). The identification strategy consists of a narrative analysis of policy actions in old age pensions reported in the ESCB dataset. I find that increases in old age pensions have a positive impact on aggregate expenditure components and employment consistent with a multiplier effect between 0 and 1.