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Longevity gap and pension contribution cap

Author

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  • András Simonovits

    (ELKH KRTK KTI, BME MI, Budapest, Tóth Kálmán u 4, 1097, Hungary)

Abstract

A basic function of public pension systems is to guarantee a satisfactory old-age income for short-sighted low earners. In proportional (i.e., earnings-related) systems, this requires a sufficiently high contribution rate. At the same time, there should be a cap on the pension contribution base to leave sufficient room for the efficient private savings of prudent high earners. Taking into account the dependence of life expectancy on the earnings (figuratively called longevity gap), a well-chosen cap has an additional advantage: it limits the unintended income redistribution from the short-lived to the long-lived. Our strongly stylized model is able to illustrate numerically the impact of the contribution rate and of the cap on the social welfare and the unintended income redistribution.

Suggested Citation

  • András Simonovits, 2022. "Longevity gap and pension contribution cap," KRTK-KTI WORKING PAPERS 2209, Institute of Economics, Centre for Economic and Regional Studies.
    • Handle: RePEc:has:discpr:2209
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    References listed on IDEAS

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    1. Martin Feldstein & Jeffrey B. Liebman, 2002. "The Distributional Aspects of Social Security and Social Security Reform," NBER Books, National Bureau of Economic Research, Inc, number feld02-1, January.
    2. András Simonovits, 2018. "Simple Models of Income Redistribution," Springer Books, Springer, number 978-3-319-72502-4, March.
    3. Robert Holzmann & Robert Palacios & Edward Palmer & Stefano Sacchi, 2020. "Progress and Challenges of Nonfinancial Defined Contribution Pension Schemes," World Bank Publications - Books, The World Bank Group, number 32439, April.
    4. Fehr, Hans & Kallweit, Manuel & Kindermann, Fabian, 2013. "Should pensions be progressive?," European Economic Review, Elsevier, vol. 63(C), pages 94-116.
    5. Barr, Nicholas & Diamond, Peter, 2008. "Reforming Pensions: Principles and Policy Choices," OUP Catalogue, Oxford University Press, number 9780195311303.
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    Cited by:

    1. Farid Flici & Inmaculada Dominguez-Fabian, 2024. "Sustaining Algeria’s Retirement System in the Population Aging Context: Could a Contribution Cap Strategy Work?," Risks, MDPI, vol. 12(6), pages 1-11, June.
    2. András Simonovits, 2022. "Longevity gap, indexation and age-specific average pensions," KRTK-KTI WORKING PAPERS 2217, Institute of Economics, Centre for Economic and Regional Studies.

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    More about this item

    Keywords

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    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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