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The long-term effects of employer-sponsored pension plans on non-workplace returns on investments

Published online by Cambridge University Press:  11 December 2018

Derek Messacar  and
René Morissette
Derek Messacar*
Affiliation:
Statistics Canada and Memorial University of Newfoundland
René Morissette
Affiliation:
Statistics Canada
*
*Corresponding author. Email: derek.messacar@canada.ca
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Abstract

What is the effect of having an employer-sponsored pension plan (EPP) on financial performance in non-workplace investments? This paper offers new insight into this unresolved empirical issue using administrative data on more than 345,000 tax filers from Canada. The paper makes two key contributions. First, an approach for inferring relative returns on investments is developed based on a longitudinal analysis of saving flow-of-funds and wealth data related to the use of the tax-free savings account (TFSA). The analysis shows that there is substantial heterogeneity in asset balances across individuals with equivalent saving histories. Second, having an EPP is shown to raise the average return on investment in other tax-preferred saving plans, albeit by a modest amount of approximately 0.50–1.25% over 5 years since the TFSA was introduced. This result is robust to augmenting the analysis to an instrumental variables approach, exploiting variation in the availability of EPPs across cohorts by sex and industry of employment.

Keywords

Administrative tax dataemployer-sponsored pension planfinancial competenceinstrumental variablesreturn on investmenttax-free savings account

JEL classification

D14: Household Saving • Personal Finance G11: Portfolio Choice • Investment Decisions J32: Nonwage Labor Costs and Benefits • Retirement Plans • Private Pensions
Type
Article
Information
Journal of Pension Economics & Finance , Volume 19 , Issue 2 , April 2020 , pp. 198 - 216
Copyright
Copyright © Crown Copyright. Published by Cambridge University Press 2018

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