Broken promises? Trust and pension savings in turbulent times

Abstract

Using survey data on household savings and trust, we investigate the determinants of trust in one’s pension fund and its effect on the decision to build up additional retirement savings. Key in our approach is the realization that trust in itself may respond to the usage of additional savings instruments, through learning, experience, and information acquisition, for instance. We therefore use an instrumental variables approach, based on exogenous shocks arising from pension cuts and indexation. We also account for the potential spurious relation between funds’ equity and trust, that could arise in a period of financial crisis. We do so using information on fund size, as this is an important proxy for funds’ economies of scale. These instruments allow identifying the unbiased effect of trust in pension funds on participation in voluntary pension saving plans. We disentangle the effects of age, birth cohort, and time in the determination of trust, and counter previous findings of a positive age gradient with trust. This implies that in the future the level of trust in pension funds will decline. Our main result is to find a positive effect of trust on additional pension savings.