Permanent income, redistribution and income risk: Empirical analysis on the role of age and social protection benefits (ESSPROS) using Finnish Panel data in 1995–2008

A large register based Finnish income panel data set with detailed information on the composition of income over a 14 year time period, in 1995–2008 is used to examine income risk and redistribution in the working age population, aged 20–59 years. In estimating relative risk premia in factor and disposable income, the level of education, socio-economic status and age are controlled for. The paper considers the extent of risk reduction due to the tax-benefit system which is measured by differences between risk premia of equivalised factor and disposable household income. The extent of risk reduction has decreased over the sample period. In the working-age population, social protection benefits have a positive role in reducing the difference in risk premia between factor income and disposable income while taxes have lost significance during the observation period. In addition, certainty equivalent income concepts are utilised to get some information on inequality in certainty equivalent income concepts and on redistribution of risk. Young adults, 20–29 years old and elderly, near retirement age 55–59 years old, seem to benefit most from social insurance. But all working age groups gain from redistribution in certainty equivalent income relative to unadjusted redistribution of cash. Redistribution of income risk has been reduced over the sample period. The findings are robust to a particular value of the degree of risk aversion assumed.