Redistributive effects of pension reforms: who are the winners and losers?

Abstract

As the heterogeneity in life expectancy by socioeconomic status increases, many pension systems imply a wealth transfer from short- to long-lived individuals. Various pension reforms aim to reduce inequalities that are caused by ex-ante differences in life expectancy. However, these pension reforms may induce redistribution effects. We introduce a dynamic general equilibrium-overlapping generations model with heterogeneous individuals that differ in their education, labor supply, lifetime income, and life expectancy. Within this framework we study six different pension reforms that foster the sustainability of the pension system and aim to account for heterogeneous life expectancy. Our results highlight that pension reforms have to be evaluated at various dimensions. Reforms that may increase the sustainability of the pension system are not necessarily conducive to reduce the redistributive wealth transfers from short- to long-lived individuals. Our paper emphasizes the need for studying pension reforms in models with behavioral feedback and heterogeneous socioeconomic groups.