Work

Pension reform and wealth inequality: Theory and evidence

Year: 2024

Type: article

Abstract: A growing literature explores reasons for rising wealth inequality, but is mostly silent on the role of pension systems despite their well-understood influence on life-cycle savings. This paper develops a simple life-cycle model to lay bare the primary theoretical mechanisms connecting pension systems, asset accumulation, and the wealth distribution. Mandated fully-funded plans transform individuals with lower incomes, often characterized as low savers, into asset owners, and may also imply a more equal wealth distribution than pay-as-you-go-based systems. To test the empirical validity of these predictions, the paper explores a pension reform in Denmark, a country that witnessed declining wealth inequality over the last decades. In a calibrated life-cycle model employing unique register data, the Danish pension reform emerges as a key factor explaining the downward trend in wealth inequality.

Source: European Economic Review

DOI: 10.1016/j.euroecorev.2024.104746

Authors: Torben M. Andersen, Joydeep Bhattacharya, Anna Grodecka-Messi, Katja Mann

Institutions: Aarhus University, Iowa State University, Swedish National Bank, Copenhagen Business School

Language: English

Topic: Financial Literacy, Pension, Retirement Analysis

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDGs: Reduced inequalities, No poverty

Open Access status: hybrid

Estimated APC paid: $3,170