Advertisement

Inequality in an OLG economy with heterogeneous cohorts and pension systems

  • Joanna Tyrowicz
  • Krzysztof Makarski
  • Marcin Bielecki
Article

Abstract

We analyze the consumption and wealth inequality in an OLG model with mandatory pension systems. Our framework features within-cohort heterogeneity of endowments and heterogeneity of preferences. We allow for population aging and gradual decline in TFP growth. We show four main results. First, increasing longevity translates to substantial increases in aggregate consumption inequality and wealth inequality. Second, a pension system reform from a defined benefit to a defined contribution works to reinforce consumption inequality and reduce wealth inequality. Third, minimum pension benefits are able to partially counteract an increase in inequality introduced by the defined contribution system, at a fiscal cost. Fourth the minimum pension benefit guarantee mostly addresses the sources of inequality which stem from differentiated endowments rather than those which stem from heterogeneous preferences.

Keywords

Consumption Wealth Inequality Longevity Defined contribution Defined benefit 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

Notes

Acknowledgments

The authors thank two anonymous referees for thorough and well-spirited comments. Earlier versions of this paper benefited greatly from cooperation with Marcin Waniek, who has co-authored an early working paper version of this paper and whose help and advice is gratefully acknowledged. Jan Jakub Woznica provided research assistance and Samuel Butterick provided wonderful editorial assistance. Marcin Bielecki gratefully acknowledges the support of National Science Centre grant no. UMO-2012/01/D/HS4/04039. Krzysztof Makarski and Joanna Tyrowicz gratefully acknolwedge the support of National Science Center grant no. UMO-2014/15/G/HS4/04638 All opinions expressed are those of the authors and have not been endorsed by NSC nor NBP. The remaining errors are ours.

Earlier versions of this paper have received extremely valuable comments from Fabian Kindermann, Patrick Puhani, Dirk Niepelt, Hans Fehr, Martyna Kobus, Nicoleta Ciurila, Damiaan Chen, Lukasz Drozd, Borys Grochulski and Jaromir Nosal as well as participants of NIESR, GRAPE, NBP and WSE. Insightful suggestions and remarks were also offered during ICMAIF 2015, NBP Macroeconomic Workshop 2015, World Congress of Comparative Economics 2015, WIEM 2015 and Netspar 2015, SED 2017, MoPaCT workshop (Helsinki, 2016), workshops in University of Mannheim (2016), Higher School of Economics in St Petersburg (2017).

Supplementary material

10888_2018_9391_MOESM1_ESM.pdf (1.9 mb)
(PDF 1.87 MB)

References

  1. Bassi, M.: An Egg Today and a Chicken Tomorrow: A Model of Social Security with Quasi-Hyperbolic Discounting, CSEF Working Papers 205. Centre for Studies in Economics and Finance (CSEF). University of Naples, Italy (2008)Google Scholar
  2. Benhabib, J., Bisin, A., Luo, M.: Wealth Distribution and Social Mobility in the US: a Quantitative Approach. NBER Working Papers 21721, National Bureau of Economic Research, Inc (2015)Google Scholar
  3. Börsch-Supan, A., Weiss, M.: Productivity and age: evidence from work teams at the assembly line. J. Econ. Ageing 7, 30–42 (2016)CrossRefGoogle Scholar
  4. Bourguignon, F., Spadaro, A.: Microsimulation as a tool for evaluating redistribution policies. J. Econ. Inequal. 4(1), 77–106 (2006)CrossRefGoogle Scholar
  5. Brzeziński, M.: Accounting for recent trends in absolute poverty in Poland: a decomposition analysis. Post-Communist Econ. 24(4), 465–475 (2012)CrossRefGoogle Scholar
  6. Bucciol, A.: A note on social security welfare with self-control problems. Macroecon. Dyn. 15(4), 579–594 (2011)CrossRefGoogle Scholar
  7. Buyse, T., Heylen, F., Van De Kerckhove, R.: Pension reform in an OLG model with heterogeneous abilities. J. Pension Econ. Financ. 16(2), 144–172 (2017)CrossRefGoogle Scholar
  8. Castañeda, A., Díaz-Giménez, J., Ríos-Rull, J.-V.: Accounting for the U.S. earnings and wealth inequality. J. Polit. Econ. 111(4), 818–857 (2003)CrossRefGoogle Scholar
  9. Cremer, H., Pestieau, P.: Myopia, redistribution and pensions. Eur. Econ. Rev. 55(2), 165–175 (2011)CrossRefGoogle Scholar
  10. Davies, J.B., Sandström, S., Shorrocks, A., Wolff, E.N.: The level and distribution of global household wealth. Econ. J. 121(551), 223–254 (2011)CrossRefGoogle Scholar
  11. De Nardi, M., Yang, F.: Wealth inequality, family background, and estate taxation. J. Monet. Econ. 77(C), 130–145 (2016)CrossRefGoogle Scholar
  12. Deaton, A.: The Analysis of Household Surveys: A Microeconometric Approach to Development Policy. World Bank Publications, Washington, DC (1997)CrossRefGoogle Scholar
  13. Domeij, D., Klein, P.: Public pensions: to what extent do they account for swedish wealth inequality? Rev. Econ. Dyn. 5(3), 503–534 (2002)CrossRefGoogle Scholar
  14. Fehr, H.: Computable stochastic equilibrium models and their use in pension- and ageing research. Economist 157(4), 359–416 (2009)CrossRefGoogle Scholar
  15. Fehr, H., Kindermann, F.: Pension funding and individual accounts in economies with life-cyclers and Myopes. CESifo Econ. Stud. 56(3), 404–443 (2010)CrossRefGoogle Scholar
  16. Fehr, H., Uhde, J.: Means-testing and economic efficiency in pension design. Econ. Model. 44(S1), 57–67 (2014)CrossRefGoogle Scholar
  17. Fehr, H., Habermann, C., Kindermann, F.: Social security with rational and hyperbolic consumers. Rev. Econ. Dyn. 11(4), 884–903 (2008)CrossRefGoogle Scholar
  18. Feldstein, M.: Would Privatizing Social Security Raise Economic Welfare? NBER Working Papers 5281. National Bureau of Economic Research, Inc (1995)Google Scholar
  19. Ferber, J.: Multi-agent Systems: an Introduction to Distributed Artificial Intelligence. Addison-Wesley, Reading (1999)Google Scholar
  20. Fleurbaey, M., Maniquet, F.: Fair social orderings when agents have unequal production skills. Soc. Choice Welf. 24(1), 93–127 (2005)CrossRefGoogle Scholar
  21. Fleurbaey, M., Maniquet, F.: Fair income tax. Rev. Econ. Stud. 73(1), 55–83 (2006)CrossRefGoogle Scholar
  22. Gruber, J., Wise, D.A.: Social Security Programs and Retirement Around the World: Micro-Estimation. University of Chicago Press, Chicago (2004)Google Scholar
  23. Hairault, J.-O., Langot, F.: Inequality and social security reforms. J. Econ. Dyn. Control 32(2), 386–410 (2008)CrossRefGoogle Scholar
  24. Hénin, P.-Y., Weitzenblum, T.: Welfare effects of alternative pension reforms: Assessing the transition costs for French socio-occupational groups. J. Pension Econ. Financ. 4(3), 249–271 (2005)CrossRefGoogle Scholar
  25. İmrohoroğlu, A., İmrohoroğlu, S., Joines, D.H.: Time-inconsistent preferences and social security. Q. J. Econ. 118(2), 745–784 (2003)CrossRefGoogle Scholar
  26. Jabłonowski, J., Müller, C.: 3 sides of 1 coin—Long-term Fiscal Stability, Adequacy and Intergenerational Redistribution of the reformed Old-age Pension System in Poland, NBP Working Papers 145. Narodowy Bank Polski. Economic Research Department (2013)Google Scholar
  27. Jiménez-Martín, S.: The incentive effects of minimum pensions. IZA World of Labor, pp. 1–84 (2014)Google Scholar
  28. Kaganovich, M., Zilcha, I.: Pay-as-you-go or funded social security? A general equilibrium comparison. J. Econ. Dyn. Control 36(4), 455–467 (2012)CrossRefGoogle Scholar
  29. Kanbur, R., Stiglitz, J.E.: Dynastic inequality, mobility and equality of opportunity. J. Econ. Inequal. 14(4), 419–434 (2016)CrossRefGoogle Scholar
  30. Kindermann, F., Krueger, D.: High marginal tax rates on the top 1%? Lessons from a life cycle model with idiosyncratic income risk. NBER Working Papers 20601. National Bureau of Economic Research, Inc (2014)Google Scholar
  31. Kirman, A.: The economy as an evolving network. J. Evol. Econ. 7(4), 339–353 (1997)CrossRefGoogle Scholar
  32. Krusell, P., Smith, A.A.: Income and wealth heterogeneity, portfolio choice, and equilibrium asset returns. Macroecon. Dyn. 1(2), 387–422 (1997)CrossRefGoogle Scholar
  33. Krusell, P., Smith, A.A.: Income and wealth heterogeneity in the macroeconomy. J. Polit. Econ. 106(5), 867–896 (1998)CrossRefGoogle Scholar
  34. Kumru, C.S., Thanopoulos, A.C.: Social security reform with self-control preferences. J. Public Econ. 95(7), 886–899 (2011)CrossRefGoogle Scholar
  35. Lockwood, B.B., Weinzierl, M.: De Gustibus non est Taxandum: heterogeneity in preferences and optimal redistribution. J. Public Econ. 124(C), 74–80 (2015)CrossRefGoogle Scholar
  36. McGrattan, E.R., Prescott, E.C.: On financing retirement with an aging population. NBER Working Papers 18760. National Bureau of Economic Research, Inc (2013)Google Scholar
  37. Nishiyama, S., Smetters, K.: Does social security privatization produce efficiency gains? Q. J. Econ. 122(4), 1677–1719 (2007)CrossRefGoogle Scholar
  38. OECD: OECD Reviews of Pensions Systems: Ireland. Technical report, OECD Publishing (2014)Google Scholar
  39. Russell, S.J., Norvig, P.: Artificial Intelligence: A Modern Approach. Prentice Hall, Englewood Cliffs (1995)Google Scholar
  40. Sinelnikov-Murylev, S., Radygin, A. (eds.): Russian Economy in 2016. Trends and Outlooks. (Issue 38). Gaidar Institute for Economic Policy, Moscow (2017)Google Scholar
  41. Song, Z.: The dynamics of inequality and social security in general equilibrium. Rev. Econ. Dyn. 14(4), 613–635 (2011)CrossRefGoogle Scholar
  42. St-Amant, P.-A.B., Garon, J.-D.: Optimal redistributive pensions and the cost of self-control. Int. Tax Public Financ. 22(5), 723–740 (2015)CrossRefGoogle Scholar
  43. Stigler, G.J., Becker, G.S.: De Gustibus Non Est Disputandum. Am. Econ. Rev. 67(2), 76–90 (1977)Google Scholar
  44. Storesletten, K., Telmer, C.I., Yaron, A.: Consumption and risk sharing over the life cycle. J. Monet. Econ. 51(3), 609–633 (2004)CrossRefGoogle Scholar
  45. Tesfatsion, L.: Agent-based computational economics: growing economies from the bottom up. Artif. Life 8(1), 55–82 (2002)CrossRefGoogle Scholar
  46. van de Ven, J., Weale, M.: Modelling myopic responses to policy: an enhancement to the NIBAX model. DWP Working Paper 88 (2010)Google Scholar
  47. Wooldridge, M.: An Introduction to MultiAgent Systems. Wiley, New York (2009)Google Scholar
  48. Wooldridge, M., Jennings, N.R.: Intelligent agents: theory and practice. Knowl. Eng. Rev. 10(2), 115–152 (1995)CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  • Joanna Tyrowicz
    • 1
    • 2
    • 3
    • 4
  • Krzysztof Makarski
    • 1
    • 5
    • 6
  • Marcin Bielecki
    • 1
    • 3
    • 6
  1. 1.FAME|GRAPEWarsawPoland
  2. 2.IAAEUTrierGermany
  3. 3.University of WarsawWarsawPoland
  4. 4.IZABonnGermany
  5. 5.Warsaw School of EconomicsWarsawPoland
  6. 6.National Bank of PolandWarsawPoland

Personalised recommendations