The Impact of Privatisation of Pension System on National Saving: The Case of Australia and Iceland

Across industrialised and developing countries public pension systems have been heavily reformed during the last two decades. The major concern relates the sustainability of pay-as-you-go (PAYG) pension schemes. To solve public pension system crisis many proposals were issued to privatize social security (completely or partially) shifting towards scaling down the current PAYG system. This study assesses the validity of the effect of pension reforms on domestic savings in two steps: first, using an ARDL model of Pesaran, Shin and Smith (1996) capable of testing for the existence of a long-run relationship regardless of whether the underlying time series are individually integrated of different orders; second, employing the Kalman filter algorithm, in order to recover the parameter dynamics overtime. We select Australia and Iceland because they have complete mandatory private pillar. The empirical evidence derived from the ARDL approach for Australia and Iceland does support the widely held view that growing mandatory pension funds financial assets has significantly positive impact on national saving. Moreover, using the Kalman filter methodology we show that the pattern of the pension funds’ coefficients seemed to capture well the economic dynamic of the period. The coefficients of pension plans illustrate a shift upward soon after the launch of the reforms in 1993 and in 1998 in Australia and Iceland respectively. Both coefficients show a stable trend after the reforms.