In this paper we empirically analyse the impact of retirement benefits on consumption and personal saving in South Africa using the Feldstein 1974 specification and procedure. By using a basic extended Ando-Modigliani life cycle model we show that the introduction of retirement
programs crowds out discretionary household saving and consumption of contributors to such programs. There against, benefits paid by these programs contribute positively to consumption
with a concomitant decline in the national pool of savings.
However, taxes on retirement benefits affect the discounted value thereof and any change
in such tax policy would therefore affect the saving behaviour of contributors in the opposite
direction of the tax policy. We use time series data on consumption per capita, disposable
labour-income per capita and pension and benefit payments from provident funds both public and privately managed. Using OLS, we find that estimates of retirement benefits are robust when regressed with the per capita government deficit and per capita durable consumption.
The estimates are also stable when regressed with the full Barro specification (which includes
the per capita government deficit, per capita durable consumption expenditure and the product
of unemployment and per capita disposable income).