DP1943 | The Reform of Pension Systems: Winners and Losers Across Generations

Publication Date

31/08/1998

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Abstract

In this paper we perform simulations with a stylized model of Germany and the United Kingdom to show which generations might be direct gainers, and which losers, from a transition to funded state pensions. We estimate what the structure of inter-generational bequests would need to be in a pre-reform equilibrium for different generations to be insulated from the effects of a transition to a fully funded pension system. We calibrate a simple overlapping generations model and estimate the money value of the losses or gains to each generation as the unfunded state system is wound down. If there is altruism toward future generations, bequests of wealth are likely to exist. We show that it is likely that more than one generation will be direct losers as a result of a transition (especially in Germany). If more than one generation are direct losers, then in order for those generations not to be net losers, the chain of bequests (in the initial equilibrium) needs to satisfy a simple condition: this is that the cumulated value of the sum of losses of all the previous generations that are direct losers needs to be less than the pre-reform bequest of each generation to the next generation.