Pension reform and wealth inequality: Theory and evidence

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

ISU General Staff Papers from Iowa State University, Department of Economics

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 fullyfunded plans transformindividuals 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 reformemerges as a key factor explaining the downward trend in wealth inequality.

Date: 2024-09-06
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