Working Paper: CEPR ID: DP12497
Authors: Sweder van Wijnbergen; Damiaan Chen
Abstract: Abstract In a pension system with uniform policies for contribution and accrual, each participant has the same contribution rate and accrual rate independent of the age at the time of payment. This is not actuarially fair because the investment horizon of young participants is longer than the investment horizon of the elderly. This paper shows the presumably unintended redistributive effects of a uniform contribution system and the consequences of switching from uniform policies to an actuarially fair system. We first analyze a stylized model with three overlapping generations to show the intuition behind these effects. Then, we quantify these effects in a more detailed model with multiple overlapping generations, realistic parameters and more detailed information on the income distribution, calibrated on the Dutch funded pension system. We first use this model to show that there is a substantial transfer of income from poor to wealthy participants under a pension scheme with uniform policies: about 10 billion euros are transferred from poor to wealthy participants under the current uniform contribution policies in the Netherlands. We then calculate the gross aggregate transition effect of abolishing the uniform policy pension for an actuarially fair system to be about 37 billion euros (or about 5% of the Dutch GDP). We discuss the four main drivers of this estimate of the transition effect. For each cohort, the redistributive effects are less than 5% of their total pension.
Keywords: uniform contribution policies; pension funds; transition; income inequality
JEL Codes: G23; J32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| uniform contribution policies (G52) | income transfers from poorer to wealthier participants (H23) |
| younger participants subsidize older participants (J26) | inequitable outcomes (I14) |
| abolishing uniform policies (J58) | gross aggregate transition effect (F62) |
| new system (P41) | redistributive effects less than 5% of total pension (H55) |