Redistributive Consequences of Abolishing Uniform Contribution Policies in Pension Funds

Tinbergen Institute Discussion Paper 2017-114/VI

37 Pages Posted: 12 Dec 2017

See all articles by Damiaan Chen

Damiaan Chen

University of Amsterdam

Sweder van Wijnbergen

Universiteit van Amsterdam; Tinbergen Institute; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: November 24, 2017

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). For each cohort, the redistributive effects are less than 5% of their total pension.

Keywords: uniform policies, pension funds, transition, income inequality

JEL Classification: G23, J32

Suggested Citation

Chen, Damiaan and van Wijnbergen, Sweder, Redistributive Consequences of Abolishing Uniform Contribution Policies in Pension Funds (November 24, 2017). Tinbergen Institute Discussion Paper 2017-114/VI. Available at SSRN: https://ssrn.com/abstract=3084626 or http://dx.doi.org/10.2139/ssrn.3084626

Damiaan Chen (Contact Author)

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

Sweder Van Wijnbergen

Universiteit van Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 4011 / 4203 (Phone)
+31-35-624 91 82 (Fax)

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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