Redistributive Consequences of Abolishing Uniform Contribution Policies in Pension Funds

In a pension system with uniform policies for contribution and accrual, each participant has the same contribution rate and accrual rate independent of the age at the time of payment. Although a common practice for public sector pension plans in many countries, this is not actuarially fair because the investment horizon of young participants is longer than the investment horizon of the elderly. We show the unintended redistributive intergenerational effects of a uniform contribution system and the consequences of switching from uniform policies to an actuarially fair system, first analytically in a stylized model with three overlapping generations. We then quantify these effects in a detailed model with multiple overlapping generations, realistic parameters and detailed information on the income distribution, calibrated on the Dutch funded pension system. Our base estimate shows that the transition effect of abolishing uniform policies for an actuarially fair system is about 37 billion euros (5% of the Dutch GDP) for an interest rate of 1% (the market interest rate ultimo 2017), but only 11 billion euro for an interest rate of 0% (the market interest rate as of July 2019). For each cohort, the redistributive effects are less than 5% of their total pension. We show that a system with uniform policies implies a transfer of about 10 billion euros from poor to rich.