Degree Name

Master of Commerce (Hons.)


Department of Economics


This paper explores the relationship between the aged pension form of social transfer payments and savings in a growth context This still predominant form of public provision for retirement has long been postulated to have a deleterious effect on savings growth. The initial thrust of the paper will be to effectively collate for the first time, the numerous diverse strands of literature which purport to investigate this subject. This broad survey encompasses both theoretical and empirical issues, and is not restricted to demand-side analysis alone.

A significant body of research contests Feldstein' s claim that increases in government transfers act as a depressant of savings growth. Moreover, an evaluation is carried out on a variety of alternative theoretical solutions to the issue, including endogenous growth, income distribution and dynamic models.

After canvassing this vast array of relevant literature and issues, a version of the wjrJely utilised life-cycle model is ultimately developed. It was through the estimation results of an extended version of this model that Feldstein originally advanced the highly influential proposition that aged pensions may impact adversely an economy's household savings via an asset-substitution effect.

An empirical outcome is provided here, which yields a compelling answer to an issue which has long remained theoretically indeterminate. When tested using Australian data and unit root testing and co-integration econometric procedures, a prop01tionate growth version of model is revealed to be the preferred specification for estimation purposes. The conclusion from this analysis is clear: aged pensions have a statistically insignificant influence upon savings growth. Moreover, this result appears robust under a variety of empirical tests.

Thus the principle policy conclusion to be drawn from the paper, is that the government should not concern itself with savings growth effects when assessing its provision of aged pensions. In so far as this paper highlights both theoretical and empirical weaknesses of the original Feldstein conclusion that pensions reduce savings growth, there remains scope for further research, perhaps through examining other economies.