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Redistributive Consequences of Abolishing Uniform Contribution Policies in Pension Funds

Author

Listed:
  • Damiaan Chen

    (UvA, DNB)

  • Sweder (S.J.G.) van Wijnbergen

    (UvA, DNB; Tinbergen Institute, The Netherlands)

Abstract

In a pension system with uniform policies for contribution and accrual, each participant has the same contribution rate and accrual rate independent of the age at the time of payment. This is not actuarially fair because the investment horizon of young participants is longer than the investment horizon of the elderly. This paper shows the presumably unintended redistributive effects of a uniform contribution system and the consequences of switching from uniform policies to an actuarially fair system. We first analyze a stylized model with three overlapping generations to show the intuition behind these effects. Then, we quantify these effects in a more detailed model with multiple overlapping generations, realistic parameters and more detailed information on the income distribution, calibrated on the Dutch funded pension system. We first use this model to show that there is a substantial transfer of income from poor to wealthy participants under a pension scheme with uniform policies: about 10 billion euros are transferred from poor to wealthy participants under the current uniform contribution policies in the Netherlands. We then calculate the gross aggregate transition effect of abolishing the uniform policy pension for an actuarially fair system to be about 37 billion euros (or about 5% of the Dutch GDP). For each cohort, the redistributive effects are less than 5% of their total pension.

Suggested Citation

  • Damiaan Chen & Sweder (S.J.G.) van Wijnbergen, 2017. "Redistributive Consequences of Abolishing Uniform Contribution Policies in Pension Funds," Tinbergen Institute Discussion Papers 17-114/VI, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20170114
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    References listed on IDEAS

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    1. Damiaan Chen & Roel Beetsma & Dirk Broeders, 2015. "Stability of participation in collective pension schemes: An option pricing approach," DNB Working Papers 484, Netherlands Central Bank, Research Department.
    2. Ed Westerhout & Jan Bonenkamp & Peter Broer, 2014. "Collective versus Individual Pension Schemes: a Welfare-Theoretical Perspective," CPB Discussion Paper 287.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    3. Ed Westerhout & Jan Bonenkamp & Peter Broer, 2014. "Collective versus Individual Pension Schemes: a Welfare-Theoretical Perspective," CPB Discussion Paper 287, CPB Netherlands Bureau for Economic Policy Analysis.
    4. Eduard Ponds & Clara Severinson & Juan Yermo, 2011. "Funding in Public Sector Pension Plans - International Evidence," NBER Working Papers 17082, National Bureau of Economic Research, Inc.
    5. Chen, Damiaan H.J. & Beetsma, Roel M.W.J. & Broeders, Dirk W.G.A. & Pelsser, Antoon A.J., 2017. "Sustainability of participation in collective pension schemes: An option pricing approach," Insurance: Mathematics and Economics, Elsevier, vol. 74(C), pages 182-196.
    6. Anja Deelen, 2012. "Wage-Tenure Profiles and Mobility," De Economist, Springer, vol. 160(2), pages 141-155, June.
    7. Jan Bonenkamp, 2007. "Measuring lifetime redistribution in Dutch occupational pensions," CPB Discussion Paper 81, CPB Netherlands Bureau for Economic Policy Analysis.
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    Cited by:

    1. Westerhout, Ed, 2020. "The Adverse and Beneficial effects of Front-Loaded Pension Contributions," Discussion Paper 2020-016, Tilburg University, Center for Economic Research.
    2. Westerhout, Ed, 2020. "The Adverse and Beneficial effects of Front-Loaded Pension Contributions," Other publications TiSEM 25806b9b-8208-4ae6-b309-4, Tilburg University, School of Economics and Management.

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    More about this item

    Keywords

    uniform policies; pension funds; transition; income inequality;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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