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Public pension reform, demographics, and inequality

Abstract

Starting from a simple, descriptive model of individual income, an explicit link between the age composition of a population and the personal distribution of incomes is established. Demographic effects on income inequality are derived. Next, a pay-as-you-go financed state pension system is introduced. The resulting government budget constraint entails interrelations between fiscal and demographic variables, causing an additional, indirect demographic impact on the distribution. This is shown not only to change, but in some cases even to reverse the distributional incidence of an aging population. Several policy conflicts arise. The point is re-emphasized by an analysis of the German Pension Reform Act of 1992. The study reveals that the design of the pension formula decisively drives the relation between demographics and inequality.

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Earlier versions of this paper were presented at the Universities of Bonn, Frankfurt, Mannheim, Hamburg, München, Göttingen, Trier and Regensburg, as well as the International Centre for Economics and Related Disciplines at the London School of Economics, the Annual Congress of the German Economic Association in Lugano, the Center for Economic Research at Tilburg University, the German-Norwegian Seminar in Social Insurance Economics at the University of Bergen, the Annual Meeting of the European Society for Population Economics in Tilburg, and the European Science Foundation Conference “Economics of Aging” in Barcelona. I am grateful to the participants there for helpful suggestions, to Frank Cowell, François Laisney, Bengt-Arne Wickström, and two anonymous referees for detailed and constructive comments, and to the German National Science Foundation as well as the Ruhrgas Scholarship Program in Economics for financial support.

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von Weizsäcker, R.K. Public pension reform, demographics, and inequality. J Popul Econ 8, 205–221 (1995). https://doi.org/10.1007/BF00166652

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  • DOI: https://doi.org/10.1007/BF00166652

Keywords

  • Income Inequality
  • Budget Constraint
  • Pension System
  • Individual Income
  • Government Budget