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Pension reform, assets returns and wealth distribution

In OLG framework, it is generally admitted that PAYG pension system generates a lower capital accumulation, a higher level of interest rate but is more inequality reducing. By taking into account different assets returns and unequal access to them, we find that the PAYG pension system generates lower level of interest rate and increases wealth inequality. By using Matsuyama's (2000) technology that generates dynamic endogenous inequality, we represent the bequest and saving behaviour of the agents in an OLG model. This allows us to characterize the optimal investment choice of agents across two assets as a function of their initial endowment and a unique inheritance threshold depending on the equilibrium interest rate. This inheritance threshold divides the population into two categories : the rich-borrowers and the poor-lenders. In this context, we find that, the effect of increasing the contribution rate to the pension system is to increase inequality. Indeed, it increases the number of constrained agents and decreases the equilibrium interest rate. More the initial wealth distribution is egalitarian, more these effects are amplified. As the interest rate is the lending rate of poor-constrained agents, they lose from the reform while unconstrained-rich agents benefit from the reform since the decrease of the interest rate increases the net return of their investment. Unconstrained-rich agents benefit from the reform at the expense of constrained-poor agents.

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Paper provided by Université Panthéon-Sorbonne (Paris 1) in its series Cahiers de la Maison des Sciences Economiques with number v04033.

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Length: 19 pages
Date of creation: Mar 2004
Date of revision:
Handle: RePEc:mse:wpsorb:v04033
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  1. Luisa Fuster, 1997. "Is altruism important for understanding the long-run effects of social security?," Economics Working Papers 234, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Jeffrey B Liebman, 2002. "Redistribution in the Current U.S. Social Security System," Working Papers 02-09, Center for Economic Studies, U.S. Census Bureau.
  3. Angus S. Deaton & Pierre-Olivier Gourinchas & Christina Paxson, 2002. "Social Security and Inequality over the Life Cycle," NBER Chapters, in: The Distributional Aspects of Social Security and Social Security Reform, pages 115-148 National Bureau of Economic Research, Inc.
  4. Gustman, Alan L. & Steinmeier, Thomas L., 2001. "How effective is redistribution under the social security benefit formula?," Journal of Public Economics, Elsevier, vol. 82(1), pages 1-28, October.
  5. Jean-Olivier Hairault & François Langot, 2008. "Inequality and Social Security Reforms," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00754304, HAL.
  6. Krueger, Dirk & Kubler, Felix, 2005. "Pareto improving social security reform when financial markets are incomplete!?," CFS Working Paper Series 2005/12, Center for Financial Studies (CFS).
  7. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-98, April.
  8. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 35-52, January.
  9. Luis Cubeddu, 2000. "Intragenerational Redistribution in Unfunded Pension Systems," IMF Staff Papers, Palgrave Macmillan, vol. 47(1), pages 4.
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