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Redistribution from the Cradle to the Grave: A Unified Approach to Heterogeneity in Age, Income and Wealth

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  • Pierre Emmanuel Weil

Abstract

This paper studies the macroeconomic and cross-sectional consequences of redistributive fiscal policy, with a focus on pensions. Evidence suggests that transfers crowd out private savings heterogeneously across household income, wealth, and age groups. These changes cumulate to dynamic effects on the wealth distribution, which must be taken into account for policymakers with distributional goals. To quantify these channels, I build an overlapping generations heterogeneous agent model based on continuous time methods, joining canonical mechanisms of lifecycle behavior and precautionary savings. Despite its parsimony, the model yields empirically realistic distributions of savings and of the cross-sectional impact of pension reform. I use it to make two main contributions. First, I quantify the cross-sectional impact on savings of pension reform. Adjustment is concentrated among workers in lower-middle wealth groups. Richer households are indifferent about transfers, while the poorest are constrained. Thus, the equilibrium real rate stays largely unchanged, supporting previous efforts which studied these effects in partial equilibrium. Second, in a transition experiment I show that raising social security benefits leads wealth inequality to fall in the short run, but to grow past its original level after fifteen years -- even if the accompanying tax increase is progressive. This follows from lower-middle workers reducing savings most strongly. Means-testing amplifies this effect. Progressive transfers to young workers have similar impact, but through different channels. Transfers encourage riskier portfolios, however crowding out is weaker since it is easier to save than to borrow.

Suggested Citation

  • Pierre Emmanuel Weil, 2018. "Redistribution from the Cradle to the Grave: A Unified Approach to Heterogeneity in Age, Income and Wealth," 2018 Papers pwe433, Job Market Papers.
  • Handle: RePEc:jmp:jm2018:pwe433
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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