Working Paper: CEPR ID: DP17078
Authors: Torben M. Andersen; Joydeep Bhattacharya; Anna Grodecka-Messi; Katja Mann
Abstract: A growing literature explores reasons for rising wealth inequality, but disregards the roleof pension systems despite their well-understood influence on life-cycle saving. In theoryand according to available evidence, both pay-as-you-go (PAYG) and fully-funded (FF) pensionschemes crowd out voluntary retirement saving. They differ because aggregate savings decreasein the former but increase under the latter system. Unlike most nations, Denmark has seen adecline in wealth inequality in recent decades. This paper studies a calibrated life-cycle modelof Denmark and employs unique registry data to argue that a Danish pension system transition,from a mostly PAYG to a dominant, mandated FF scheme, explains much of this decline
Keywords: wealth inequality; pension systems; crowding out; lifecycle savings
JEL Codes: D31; E01; E21; H55; G51; J32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| transition from PAYG pension system to FF pension scheme (H55) | decline in wealth inequality (D31) |
| pension system (H55) | wealth distribution (D31) |
| increased savings rates among lower-income households (D14) | asset accumulation (G51) |
| pension reform (H55) | heterogeneous impact across different income groups (F61) |
| transition to FF pension system (H55) | increased net savings among poorer households (D14) |
| wealthier individuals rely less on pension system (H55) | offsetting mandated savings (D14) |