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Abstract:

DARP Paper
Public Pension Reform, Demographics ,and Inequality
Robert K von Weizsäcker
June 1995
Paper No' DARP 011:


Tags: income distribution; population ageing; old-age insurance reform; fiscal-demographic policy conflicts; social policy design.

Starting from a simple, descriptive model of individual income, an explicit link between the age composition of a population and the personal distribution of incomes is established. Demographic effects on income inequality are derived. Next, a pay-as-you-go financed state pension system is introduced. The resulting government budget constraint entails interrelations between fiscal and demographic impact on the distribution. This is shown not only to change, but in some cases even to reverse the distributional incidence of an aging population. Several policy conflicts arise. The point is re-emphasized by an analysis of the German Pension Reform Act of 1992. The study reveals that the design of the pension formula decisively drives the relation between demographics and inequality.