The effects on intra‐generational inequality of introducing a funded pension scheme: A microsimulation analysis for Estonia

Abstract

This article uses a single male cohort microsimulation model to analyse the intra-generational and distributional effects of a shift in Estonia from a defined benefit pay-as-you-go (PAYG) pension system to a multi-pillared system with a PAYG scheme with contribution-based insurance components and a funded pension scheme. We contribute to the literature on microsimulation by showing how introducing contribution-based insurance components and compulsory defined contribution (DC) schemes can increase pension inequality. Our results show that in the case of a high level of inequality in labour earnings and high longterm unemployment rates, such as in Estonia, the introduction of a very strong link between contributions and future benefits leads to considerably higher inequality in pension incomes as measured by the Gini coefficient. Simulation results for Estonia suggest that inequality in old-age pension incomes more than doubles when the reforms mature. In contrast, the inequality in replacement rates decreases.

Gender Gap in Pension Income: Cross-Country Analysis and Role of Gender Attitudes

“…The calculated Spearman correlation coefficients showed that the higher gender gap in pension income corresponds to the higher share of people covered by occupational pensions (for the total gap in mean and gap on the 90th percentile the correlations are significant). Generally, this supports the idea that the introduction of mandatory second pillar contributions leads to higher inequality in the retirement income (Piirits and Võrk 2019), tightening the link between labour income and pensions especially at the top of the distribution, among high pension income recipients.…”

An appraisal of Turkey's voluntary individual pension system from a perspective of pension equality

“…Private pensions deepened existing labour market inequalities in industrialized countries by leading to uneven coverage and inequality in pension benefits, in particular, for older pensioners, single pensioners, women and ethnic minorities (Behrendt, 2000; Sunley, 2000). Rising inequality and old‐age poverty effect is also found by Zaidi, Grech, and Fuchs (2006), Been, Caminada, Goudswaard, and van Vliet (2017) and Piirits and Võrk (2019) in the EU. Similarly, the shift to a mixed pension model from 1991 to 2015 in China generated pension inequality and wider social stratification by privileging the better‐off (Zhu & Walker, 2018).…”

What works to mitigate and reduce relative (and absolute) inequality? A systematic review

“…The potential distributional effect of pension systems has been the subject of empirical evaluations in several countries. Findings from previous studies agree that shifts from a defined-benefit system towards a quasi-actuarial defined-contribution scheme would reduce intragenerational redistribution, hence increasing the levels of inequality among retirees (Fasang 2012;Lindbeck and Persson 2003;Piirits and Võrk 2019;Tyrowicz et al 2018). Fortunately, this is not associated with higher consumption inequality.…”