Redistribution, Pension Systems and Capital Accumulation

• Main Author: Christophe Hachon
• Format: Article
• Language: English
• Published: Institute of Public Finance 2008-09-01
• Series: Financial Theory and Practice
• Subjects: inequality; pension systems; redistribution; capital
• Online Access: http://www.ijf.hr/eng/FTP/2008/3/hachon.pdf

In this paper we study the macroeconomic impact of a policy which changes the redistributive properties of an unfunded pension system. Using an overlapping generations model with a closed economy and heterogeneous agents, we show that a weaker link between contributions and benefits has an impact on the level of capital per capita if and only if there are inequalities in the length of life. Furthermore, this policy has positive implications for every economic agent if the system has a defined-benefit structure. The tax rate and inequalities decrease, whereas the wealth of each agent increases. However, with a defined-contribution pension system, this policy has a negative impact on every macroeconomic variable except on the wealth of the poorest agents.