Pension reform and wealth inequality: Theory and evidence

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

European Economic Review, 2024, vol. 165, issue C

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.

Keywords: Wealth inequality; Pension systems; Crowding out; Life-cycle savings (search for similar items in EconPapers)
JEL-codes: D31 E21 E24 E62 G51 H55 J32 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:165:y:2024:i:c:s0014292124000758

DOI: 10.1016/j.euroecorev.2024.104746

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