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Inequality in an OLG economy with heterogeneous cohorts and pension systems

Author

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  • Joanna Tyrowicz

    () (FAME|GRAPE
    IAAEU
    University of Warsaw
    IZA)

  • Krzysztof Makarski

    () (FAME|GRAPE
    Warsaw School of Economics
    National Bank of Poland)

  • Marcin Bielecki

    () (FAME|GRAPE
    University of Warsaw
    National Bank of Poland)

Abstract

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.

Suggested Citation

  • Joanna Tyrowicz & Krzysztof Makarski & Marcin Bielecki, 2018. "Inequality in an OLG economy with heterogeneous cohorts and pension systems," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 16(4), pages 583-606, December.
  • Handle: RePEc:kap:jecinq:v:16:y:2018:i:4:d:10.1007_s10888-018-9391-0
    DOI: 10.1007/s10888-018-9391-0
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    More about this item

    Keywords

    Consumption; Wealth; Inequality; Longevity; Defined contribution; Defined benefit;
    All these keywords.

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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