Effects of Public Pension Schemes on National Savings in Kenya, 1971-2011
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Date
2014-03-07
Authors
Thinguri, Salome Wambui
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Abstract
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.
Description
Department of Applied Economics, 2013