Pension Reform and Wealth Inequality : Theory and Evidence

Pension systems are of crucial importance for life-cycle savings. Since the early 2000s, a transition to a multi-pillar architecture, adding a funded occupational scheme to existing public plans, has been underway in almost every OECD nation. While many aspects of this transition – its financing, riskiness, political economy – have been studied, the extant literature ignores its effects on wealth accumulation and inequality. This paper develops a simple life-cycle model that lays bare the main mechanisms connecting pension systems, asset accumulation, and distribution. Notably, mandated fully-funded plans convert low-income people (often low savers) to asset owners, increasing net saving and reducing wealth disparities. These mechanisms are quantitatively explored using a calibrated life-cycle model of Denmark employing unique registry data. The Danish pension system transition explains much of the recent decline in Danish wealth inequality