Effects of Public Pension Schemes on National Savings in Kenya, 1971-2011
Thinguri, Salome Wambui
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This study seeks to investigate the effect of pensions on national savings in Kenya. The study covers the Kenya Government's public pension schemes for its employees. The Granger causality test was employed to investigate the relationship between these two variables and it was found that there was no causal relationship between the two variables. The long run relationship between the two variables was derived using the Vector Error Correction Model. Analyzing the effect of pensions on savings requires the control of other variables which impact on savings. As a byproduct of this paper I investigated the determinants of savings. The specific variables that were of focus in this paper were inflation rate, real interest rate, GDP, dependency ratio (young and old), life expectancy, and labor force participation rate. The methodology adopted involves the lifecycle model. Annual secondary data of the relevant variables for the period 1971-2011 was used in the analysis. Some variables were not stationary and were made stationary after first differencing. Information was sourced from World Bank publications and the Kenya Government's Consolidated Fund Services. The Vector Error Correction Model was employed to investigate these relationships. The results indicated that pensions expenditure had a negative impact on savings. It was also found that Gross Domestic Product has a positive impact on Gross Domestic Savings. The results also show a negative influence of inflation on Gross Domestic Savings in Kenya. The real interest rate and life expectancy have negative and statistically significant impact on Gross Domestic Savings, suggesting that income effects outweigh the sum of its substitution and human wealth effects. The old age dependency ratio has a negative but statistically insignificant impact on saving while the young age dependency ratio has a positive but statistically significant impact on savings.