We analyze the consumption and wealth inequality in an OLG model with mandatory pension systems. Our framework features within-cohort heterogeneity of endowments and heterogeneity of preferences. We allow for population aging and gradual decline in TFP growth. We show four main results. First, increasing longevity translates to substantial increases in aggregate consumption inequality and wealth inequality. Second, a pension system reform from a defined benefit to a defined contribution works to reinforce consumption inequality and reduce wealth inequality. Third, minimum pension benefits are able to partially counteract an increase in inequality introduced by the defined contribution system, at a fiscal cost. Fourth the minimum pension benefit guarantee mostly addresses the sources of inequality which stem from differentiated endowments rather than those which stem from heterogeneous preferences.
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The authors thank two anonymous referees for thorough and well-spirited comments. Earlier versions of this paper benefited greatly from cooperation with Marcin Waniek, who has co-authored an early working paper version of this paper and whose help and advice is gratefully acknowledged. Jan Jakub Woznica provided research assistance and Samuel Butterick provided wonderful editorial assistance. Marcin Bielecki gratefully acknowledges the support of National Science Centre grant no. UMO-2012/01/D/HS4/04039. Krzysztof Makarski and Joanna Tyrowicz gratefully acknolwedge the support of National Science Center grant no. UMO-2014/15/G/HS4/04638 All opinions expressed are those of the authors and have not been endorsed by NSC nor NBP. The remaining errors are ours.
Earlier versions of this paper have received extremely valuable comments from Fabian Kindermann, Patrick Puhani, Dirk Niepelt, Hans Fehr, Martyna Kobus, Nicoleta Ciurila, Damiaan Chen, Lukasz Drozd, Borys Grochulski and Jaromir Nosal as well as participants of NIESR, GRAPE, NBP and WSE. Insightful suggestions and remarks were also offered during ICMAIF 2015, NBP Macroeconomic Workshop 2015, World Congress of Comparative Economics 2015, WIEM 2015 and Netspar 2015, SED 2017, MoPaCT workshop (Helsinki, 2016), workshops in University of Mannheim (2016), Higher School of Economics in St Petersburg (2017).
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Tyrowicz, J., Makarski, K. & Bielecki, M. Inequality in an OLG economy with heterogeneous cohorts and pension systems. J Econ Inequal 16, 583–606 (2018). https://doi.org/10.1007/s10888-018-9391-0
- Defined contribution
- Defined benefit