Pension Funding and Growth: A ‘Weak’ Link, at Best

Pension funding has long been touted as a driver of domestic economic growth, but two pension scholars ran the numbers, and they didn't hold up.

(October 17, 2012) – Two Dutch economists read a study showing a significant link between aggregate pension funding and economic growth, and it left them unconvinced. 

“I was skeptical about their methods, and so I thought, ‘let’s try to replicate it and see what happens,’” Eelco Zandberg, a researcher at the University of Groningen in the Netherlands, told aiCIO. He teamed up with Laura Spierdijk, an econometrics professor at the same institution to test the claim. 

As it turned out, Zandberg and Spierdijk could not replicate the finding without relaxing their methodology. “Ours is just one study, but we doubt whether pension funding”—an aggregate annual measure of public and private funds—“really affects economic growth,” Zandberg said. 

The economists found that developing nations’ high rates of economic growth typically correlates with pension reform. In other words, as undeveloped economies begin to advance, their (often brand-new) pension funds grow rapidly at the same time. 

The authors argued that the correlation between these phenomena may well have been misconstrued as causation. The notion that defined benefit and defined contribution pension funding fuels overall growth has influenced the direction of reforms, the authors assert, as well as motivating developing nations to adopt the systems. “In a funded pension system,” Zandberg and Spierdijk wrote, “the contributions can be viewed as savings. Therefore, a higher degree of funding means more people save through their mandatory pension scheme, which should lead to a higher aggregate saving rate. Capital market development could also be stimulated because more resources become available for the capital market when pensions are funded.” 

The authors analyzed a data set of pension funding and growth spanning 54 countries, 29 of which are members of the Organization for Economic Co-operation and Development, and the years from 2001 to 2010. 

 The results: “The link could be a lot weaker than people think,” Zandberg said, while stressing the need for more robust data on emerging market pensions. Furthermore, he noted, “small countries tend to invest a lot overseas, and that’s one of the major reasons their pension funding isn’t reflected in the overall economy.”