http://orcid.org/0000-0002-3227-0617
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Abstract
Many individuals only save money in their savings account for their old-age provision rather than investing in more profitable asset classes. That is despite the existence of subsidized pension products, for which smallest contributions can be made monthly, which guarantee the capital preservation, and which offer higher expected returns than saving money in bank deposits. We investigate the determinants that affect individuals’ decision to leave money on the table by not investing in subsidized pension products. Our results show that financial literacy and financial advice are positively related to holding such pension products. In that, our results emphasize the role of financial literacy and financial advisors for sound financial decision-making in increasingly complex financial markets.
Notes
Acknowledgements
We thank Martin Brown, Tobin Hanspal, Geng Li, Steffen Meyer, Annika Weber, as well as participants at the 21st Annual Conference of the Swiss Society for Financial Market Research (SGF 2018), the 80th Annual Meeting of the German Academic Association for Business Research (VHB), the 2018 Eastern Finance Association Annual Meeting, and the 2018 Annual Meeting of the European Financial Management Association for helpful comments and suggestions.
Notes
1 We provide detailed information on the subsidized pension products under review, as well as their functioning in second section, subsection, “The case of subsidized pension products.”
2 See von Kalckreuth et al. (Citation2012) for further information on the data collection process of the PHF data. We apply survey weights in all of our main analyses to obtain representative results for the German population.
3 Please note that the depicted interest rates are not inflation adjusted. If so, they would have been negative from the years 2010 on.
4 For self-employed individuals, there are complementary products called Rürup pension products.
5 As of 2010, the time the survey took place. In the meantime, the maximum direct personal subsidy has been raised to €175 (2018).
6 If a Riester saver’s partner has no income, he or she can engage in an own contract and pay the minimum contribution of €60 per year to receive the full direct personal subsidy of €154.
7 Please note that in case of both marital partners having one Riester contract, the child subsidy is only granted once per child.
8 Next to the just described components of Riester subsidies, there is also a starter bonus of €200 which is granted to job starters under the age of 25 years.
9 The yearly contributions of the couple (€860) are deducted by the granted subsidies that are comprised of two times the direct personal subsidy of €154 (€308) as well as the child subsidy of €300, resulting in an effective contribution of €252 p.a. In this example, the couple cannot profit from the special tax deduction as the potential tax benefit of €148 is exceeded by the subsidies. We calculated the potential tax benefit using resources from the Federal Ministry of Finance (Bundesministerium der Finanzen Citation2019).
10 As of 2010, the time the PHF survey took place. In the meantime, the guaranteed interest rate for new contracts sunk to 1.75% (2012), 1.25% (2015) and 0.9% (2017).
11 Note that we estimate the internal rates of return based on the amount of money in the Riester contract after 30 years. In reality, this money will be paid out as a pension and is not available as lump sum for the contractor. For further assumptions we had to make, please refer to in the appendix.
12 For population-level summary statistics on the savings and investment behavior of German households, please refer to in the appendix.
13 Note that on population level (i.e., including retired households and those older than 18 and older than 67 years), the fraction of households, who save only using bank deposits equals 25.8%, respectively.
14 With regard to the highest income bracket (yearly net income above €90,000), we find an increase in the likelihood to save only in bank deposits. However, this effect might be driven by potential outliers because only 98 households in our sample belong to this group.
15 For population-level summary statistics of German households (i.e., including retired and younger and older households), please refer to in the appendix.
16 Bucher-Koenen and Ziegelmeyer (Citation2014) use representative SAVE (Sparen und Altersvorsorge in Deutschland) data from 2009.
17 The total amount of outstanding non-mortgage debt includes outstanding balances of credit lines or overdrafts, outstanding balances of credit cards, and outstanding balances on all other non-collateralized loans (i.e., student loans, car loans, consumer loans, instalment loans, and private loans from relatives, friends and employers).
18 Households were provided with a list of items to indicate in which form they received the large gift or inheritance. Please see in the appendix for more details.
19 In in the appendix, we further compare the fractions of households holding subsidized pension products among different demographic variables (e.g., fraction of SP owners in the groups of advised vs. unadvised households).
20 Please see second section (Sample characteristics) and in the appendix for a detailed definition of household net wealth.
21 Please see Figure 2 for the subsidy quotas related to the subsidized pension products under review.
22 For instance, Gathergood and Weber (Citation2014) used as similar measure of liquid savings to assess households’ financial resources available to pay down outstanding consumer credit balances. For an extensive overview of different emergency fund levels, please see especially Chang, Hanna, and Fan (Citation1997).
23 Balance tests of covariates before and after matching as well as additional matching quality indicators are available upon request.