The evaluation of the distribution of wealth across members of a society and its determinants has recently gained increasing attention among scientists and policymakers. This project will contribute to make further advancements in this field combining the economics of inequality and the economics of pension literature.
The first part of the project aims at studying, in a comparative way and across time, the role of private and public pensions on the distribution of household wealth in European countries. Differently from previous contributions that only include marketable wealth in the definition of household wealth, we will measure and include in this definition the expected income from pensions, which has been neglected so far. In addition to adopt an inequality of outcome perspective, as is usually done in all existing contributions, we will extend our analysis adopting an inequality of opportunity perspective. The second part of the project aims at showing to what extent public and private pensions reduce or reinforce wealth inequality. For policy discussion, the equalizing power of pension will be compared with standard measures of pension financial sustainability and generosity. The third part of the project aims at understanding the determinants of augmented wealth inequality. We will revise standard causality analyses, including the effect of health condition, education, and financial literacy on wealth inequality, using our new definition of wealth. Moreover, we will study the role played by financial development and the informatization of the financial system on the distribution of augmented wealth.
Our project shares some similarities with studies carried on in Germany (Haan et al. 2017) and the U.S. (Waldron 2007) in the sense that it is concentrated on the analysis of distributional implications in the pension system due to mortality differentials. One of the main contributions of this project is the introduction of heterogeneity in mortality in a large set of countries and in two periods in order to study the distribution of pension wealth. Because individuals with higher socioeconomic status (SES) tend to live longer and enjoy more years of pension wealth than individuals with low SES, the introduction of SES specific mortality can reveal a larger level of inequality in the distribution of pension wealth in a given pension system. It has been largely shown that life expectancy depends not only on sex but also on socioeconomic status but this has never been taken into account in the evaluation of expected income from pensions.
Furthermore, it is also important to distinguish between compulsory pensions and private pension plans in the computation of pension wealth. Compulsory pensions in Europe tend to be organized as Defined Benefit, while private pension plans are voluntary and are organized as Defined Contribution systems. Generally, private pension plans are less equally distributed than compulsory pension schemes. Therefore, it is expected that the addition of pension plans into a measure of total pensions will increase the inequality of pension wealth. Existing contributions focus only of public pensions, whereas through our project we will also include private pensions and we will also focus on the role of the equity release scheme in this analysis, these are pension plans financed by a residential property. Our project will be the first to investigate on the effect of such newly introduced plans in pension wealth and total wealth inequality.
Another innovation that will be introduced through our project is the use of Recentered Influence Function analysis and the adoption of the inequality of opportunity perspective. While both approaches are becoming predominant in normative economics, they have never been applied in the wealth context. Indeed, such approaches can be of predominant importance for the understanding of the root of inequality and the channels through which they perpetuates through dynasties. The opportunity egalitarian perspective has never been used mostly because of the lack of information on individual characteristics, such as, family socioeconomic background, data that are, instead, available in the surveys we will use.
Such analysis will allow us to make light on the roots of the wealth inequality that we currently observe, on how and why it arises and persists, and whether it is inequality of opportunity for wealth to be related to the degree of development of a given society. This might help explain why the huge number of empirical studies, starting with the pioneering work of Kuznets (1955), that have tried to assess this link, have never been able to come to a unanimous consensus (see Ferreira 2010, Ferreira et al. 2017; Marrero and Rodriguez 2013).
For policy discussion, the equalizing power is compared with standard measures of pension financial sustainability and generosity. It could be the case that generous and costly pension systems are not necessarily more wealth equalizing than less expensive pension systems.
The estimation of pension wealth inequality performed in this paper can easily be replicated for other periods and countries and, in this sense, it can add an extra dimension to study, classify and compare pension systems. It would help investigating on how different pension systems perform according to the levels of pension wealth inequality arising from life expectancy inequalities and other dimensions such as financial sustainability, fiscal cost, coverage and generosity.
Last, our project will shed light on some possible determinants of wealth inequality that have never been considered so far, such as the informatization of the financial sector. In this sense, the results of our estimates will help in the elaboration of policy recommendation to deal with the accumulation of wealth, its distribution across the population and across generations.