Private pension annuities out of savings or housing wealth? A comparative study of Italy and the Netherlands

The life-cycle model (Modigliani, 1960) predicts that people accumulate assets for consumption smoothing and thus to compensate possible income drops, especially upon
retirement. This includes also housing that, as any other asset, can possibly be decumulated (or downsized) later in the life-cycle. Unanticipated wealth shocks (including shocks to housing wealth) should lead to a modification of the individuals’ consumption-saving path. There are factors that complicate the decumulation of housing wealth and the “pass-through” of housing-wealth-changes on individuals’ consumptions and savings. Housing is at the same time a consumption good and a form of illiquid wealth; often there are no instruments (such as reverse mortgages) to efficiently extract it, and parents may have bequest motives that prevent the decumulation of housing wealth. Therefore, it was argued that housing wealth is just a sideshow and early empirical evidence show that elderly are unlikely to move (Venti and Wise, 1990), the effects of housing wealth on savings are mild or insignificant (Skinner, 1989) and that housing wealth is “non-fungible” (Levin 1992). However, more recent models predict that housing windfalls are spent while young (Skinner, 1996) and more recent empirical evidence finds significant wealth effects on consumption (Mian and Sufi 2013; Paiella and Pistaferri 2017; Angrisani and Hurd, 2015). Also, findings show that housing significantly affect pension goals of younger individuals (Knoef, 2018) and expected retirement age (Farnham and Sevak, 2015), and for homeowners the primary residence is part of their retirement plan, because their house is an important vehicle to accumulate savings (Lusardi and Mitchell, 2007).

Most research thus looked at the possible displacement of free savings, while the link between housing and pension wealth has hardly been explored. This is partially due to lack of data, but also to the fact that in many countries the accumulation of pension wealth is compulsory and should not respond to any outside stimulus. Recent trends in system reforms (whereby individuals must take decisions in terms of retirement age and its costs) and labour market dynamics (self-employment is on the rise, and is a way to elude compulsory participation in the pension system) though, suggest a link between housing and pension wealth. In this project, we will provide empirical evidence of the substitution between the two. In particular, we will look at the role of housing as retirement savings in two countries: Italy and the Netherlands.

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