CFCM Seminar: Pavel Brendler (Bonn)

Earnings inequality and income redistribution through social security

Abstract:    There has been no major reform of the public pension system in the U.S. since 1970s, even though earnings inequality has increased and population has aged. To account for this fact, I construct a heterogeneous agent model with incomplete financial markets, in which a government maximizes the weighted welfare of all generations alive by choosing both the level of the replacement rate schedule and the degree of pension system progressivity. The Pareto weights are specified as a function of individual's lifetime earnings and individual's age. Using the model, I estimate the changes in the parameters of the Pareto weight function during 1977-2018, accounting for occurred changes in inequality and aging. Consistent with the voter turnout data, the model predicts a gradual shift in Pareto weights to older and earnings-richer households.

(NB: change of paper to that previously advertised)