Working Paper: NBER ID: w0568
Authors: Martin Feldstein
Abstract: Much of the recent discussion about the relation between pensions and inflation has emphasized the adverse impact that the un-expected rise in inflation has had on pension recipients and on the performance of pension funds. In contrast, the present paper focuses on the way that pensions are likely to evolve in response to the expectation of continued inflation in the future and to the uncertainty about the rate of inflation. The unfortunate effects that occurred when inflation caught pensioners and pension fund managers by surprise should not be confused with an inability to adjust to future conditions, even uncertain future conditions. As I shall explain, the persistence of a high rate of inflation is likely to increase the share of total saving that goes into private pensions. Since the tax treatment of pension contributions allows individuals to save in this way for retirement on the same terms that they would under a consumption tax,' the existence of the private pension system may be one of a few things that prevents the national saving rate from going even lower in the current inflationary environment.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expected inflation (E31) | shift towards partial indexing of pensions (H55) |
| inflation uncertainty (E31) | impact on pension funding strategies (G23) |
| expected inflation (E31) | increase in share of total savings in private pensions (D14) |
| inflation (E31) | alters investment decisions between pensions and household savings (D14) |