DP17078 Pension reform and wealth inequality: evidence from Denmark

Author(s):	Torben M Andersen, Joydeep Bhattacharya, Anna Grodecka-Messi, Katja Mann
Publication Date:	March 2022
Keyword(s):	Crowding out, life-cycle savings, Pension Systems, Wealth Inequality
JEL(s):	D31, E01, E21, G51, H55, J32
Programme Areas:	Public Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=17078

A growing literature explores reasons for rising wealth inequality, but disregards the role of pension systems despite their well-understood influence on life-cycle saving. In theory and according to available evidence, both pay-as-you-go (PAYG) and fully-funded (FF) pension schemes crowd out voluntary retirement saving. They differ because aggregate savings decrease in the former but increase under the latter system. Unlike most nations, Denmark has seen a decline in wealth inequality in recent decades. This paper studies a calibrated life-cycle model of Denmark and employs unique registry data to argue that a Danish pension system transition, from a mostly PAYG to a dominant, mandated FF scheme, explains much of this decline