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Mandatory pension savings and long-run debt accumulation: evidence from Danish low-wage earners

Published online by Cambridge University Press:  29 April 2022

Henrik Yde Andersen
Affiliation:
Danmarks Nationalbank, Copenhagen, Denmark
Niels Lynggård Hansen
Affiliation:
European Stability Mechanism, Luxembourg, Luxembourg
Andreas Kuchler*
Affiliation:
Danmarks Nationalbank, Copenhagen, Denmark
*
*Corresponding author. Email: aku@nationalbanken.dk

Abstract

Based on two decades of Danish register data at the individual level, this paper finds that a 1-dollar increase in pension wealth leads to a 42-cent rise in total debt for a group of low-wage earners. Collective bargaining in the labor market provides time-sector variation in mandatory pension contribution rates, which we exploit in two empirical research designs; an event study and a cross-sectional instrumental variable regression model. Both methods demonstrate that the debt rise is accompanied by increased housing wealth and homeownership rates. Together, the empirical evidence indicates that mandatory pension contributions lead to a significant increase in net wealth, as well as in gross debt.

Type
Article
Copyright
Copyright © The Author(s), 2022. Published by Cambridge University Press

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