Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 411: Pension reform and wealth inequality: evidence from Denmark

Torben M. Andersen, Joydeep Bhattacharya, Anna Grodecka-Messi and Katja Mann ()
Additional contact information
Torben M. Andersen: University of Aarhus
Joydeep Bhattacharya: Iowa State University
Anna Grodecka-Messi: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Katja Mann: Copenhagen Business School

Abstract: 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.

Keywords: Wealth inequality; pension systems; crowding out; life-cycle savings

JEL-codes: D31; E01; E21; G51; H55; J32

Language: English

63 pages, February 1, 2022

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