Redistributive Consequences of Abolishing Uniform Contribution Policies in Pension Funds

45 Pages Posted: 15 Jun 2019

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: May 31, 2019

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. 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

Chen, Damiaan and van Wijnbergen, Sweder, Redistributive Consequences of Abolishing Uniform Contribution Policies in Pension Funds (May 31, 2019). De Nederlandsche Bank Working Paper No. 641 (2019). Available at SSRN: https://ssrn.com/abstract=3404137 or http://dx.doi.org/10.2139/ssrn.3404137

Damiaan Chen

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

Sweder Van Wijnbergen (Contact Author)

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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