Redistributive Consequences of Abolishing Uniform Contribution Policies in Pension Funds
45 Pages Posted: 15 Jun 2019
Date Written: May 31, 2019
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. Although a common practice for public sector pension plans in many countries, this is not actuarially fair because the investment horizon of young participants is longer than the investment horizon of the elderly. We show the unintended redistributive intergenerational effects of a uniform contribution system and the consequences of switching from uniform policies to an actuarially fair system, first analytically in a stylized model with three overlapping generations. We then quantify these effects in a detailed model with multiple overlapping generations, realistic parameters and detailed information on the income distribution, calibrated on the Dutch funded pension system. The system implies a substantial transfer of income from poor to wealthy participants of about 10 billion euros. The gross aggregate transition effect of abolishing the uniform policy pension for an actuarially fair system is about 37 billion euros (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: Suggested Citation