Pension systems are important for the accumulation and distribution of wealth

Torben M Andersen, Joydeep Bhattacharya, Anna Grodecka-Messi, Katja Mann May 05, 2022

Growing income and wealth inequality has recently captured the attention of academics and public discourse. International institutions such as the European Commission, the OECD and the IMF have raised concerns that these developments, particularly the dramatic increases in income and wealth at the top, could leave lasting stains on the fabric. social. Piketty (2014) fuels these concerns by highlighting the self-reinforcing effects of the rich saving more and owning more wealth, thereby appropriating the return on capital. In turn, these effects are perhaps amplified and propagated by intergenerational wealth transfers (Elinder et al. 2016, Boserup et al. 2016, Nolan et al. 2020).

The observed changes in income and wealth inequalities are complex and have multiple explanations (De Nardi and Fella 2017, Hubmer et al. 2020, Benhabib et al. 2019, Jakobsen et al. 2020). Central to this debate is the role of retirement savings, that is, savings to ensure an adequate standard of living after retirement. Pension systems intersect with individual decisions to save. Yet, somewhat surprisingly, their role in this debate has been overlooked, even though this link was featured prominently in a seminal and highly influential World Bank report from 1994.

Prototype retirement systems are (a) the pay-as-you-go (PAYG) system, where the earnings of current working generations are taxed and transferred to existing retirees; and (b) fully funded (FF), where workers contribute mandatory amounts to individualized accounts that are professionally managed and returned to the worker after retirement. In a pay-as-you-go system, part of the responsibility for retirement savings is transferred to the public sector, which means that individuals save less on their own and their financial wealth after retirement is lower. Although voluntary savings are also crowded out in a mandatory FF scheme, total savings increase due to contributions to pension funds. The certain implication is the accumulation of wealth, and its distribution may critically depend on whether the pension system is funded or unfunded. It follows that a country can experience significant changes in both the level of wealth and its distribution, moving from a dominant pay-as-you-go pension system to a mandatory FF system.

In a recent article (Andersen et al. 2022), we study the role of the pension system in the accumulation of wealth and its distribution. We locate our laboratory in Denmark mainly because the evolution of the pension system there is close to the classical reform consisting in introducing mandatory funded pensions in addition to an existing pay-as-you-go pension system. Such reforms are also underway or actively considered in many OECD countries. The choice of Denmark is also significant as it currently has the highest accumulated pension wealth as a percentage of GDP in the OECD (240% in 2020) and is one of the few OECD countries to have experienced a decline in wealth inequality in recent years. It is also worth pointing out that Denmark generates high quality wealth register data.

Pension reform

A significant change in the Danish pension system began in the late 1980s with the increased penetration and gradual introduction of occupational pension schemes following collective agreements. Thus, contributions to the plan are involuntary for the individual, but result from a voluntary negotiation between the parties concerned. The scheme is a defined contribution funded scheme. Contribution rates have been gradually increased and since 2010 they have remained stable between 12% and 18%. Pension funds are run as non-profit organisations, contributions are invested collectively and benefits are paid in the form of annuities and lump sum payments. The Danish public pension system, a pay-as-you-go system, consists of a universal basic pension and means-tested supplements. It remained essentially unchanged during the phase-in period (Andersen et al. 2022).

The reform, which enjoyed and continues to enjoy broad support, would have had several driving forces. It was widely perceived that Denmark had an undersaving problem with low savings rates, which resulted in systematic current account deficits at the macro level. The reform was intended to remedy this savings problem. Moreover, the existing system seemed incapable of providing an acceptable standard of living for retirees from a prospective perspective. The “solution” – raising taxes even more – was not acceptable. Finally, the new scheme is the result of a compromise between unions wanting company-specific employee pension schemes and employers who oppose it.

Effects of pension reform

The reform mentioned above had significant effects on the Danish economy. The savings rate has increased considerably (see chart 1). The same is true for wealth accumulated in pension funds (see Figure 2).

Figure 1 Net savings rate in Denmark, 1980-2019

Source: Statistics Denmark,

Figure 2 Accumulated pension assets in Denmark, 1986-2019

Source: Danish Ministry of Taxes, and

The current account went from a systematic deficit to a surplus.1 Whereas Denmark in the late 1980s had a net foreign debt close to 40% of GDP, there is now a net wealth position of around 75% of GDP.

picture 3 Cross-sectional wealth of Danish households, 2017

Source: Andersen et al. (2022)

Today, private pension assets play a predominant role in the asset portfolio of near-retirees. Wealth inequality declined over this period. The Gini coefficient, defined on the wealth calculated for the entire population, fell from 0.75 in 1992 to 0.69 in 2017. Restricted to the 60-69 age group, the Gini went from 0.63 to 0.51. At the same time, the wealth share of the richest 10% has not increased.

We relate these developments to Danish pension reforms using a life cycle model with overlapping generations. We integrate a two-pillar pension system (the fully funded second pillar in addition to that of public pensions). By calibrating the model on Danish data, we find that pension reform – ie the gradual introduction of funded pensions – does an excellent job of capturing these developments. Wealth Lorenz curves for the total population and the 60-69 age group, as shown in Figure 4, document the importance of pension wealth in determining the distribution of wealth and a difference for lower wealth deciles.

Figure 4 Lorenz curves for net wealth in Denmark, 2017

Source: Andersen et al. (2022)

Why has the pension reform had an equalizing effect on the distribution of wealth? Under our model, the pension reform has increased retirement savings (the amount of personal savings and the share supported by the government), especially for low- and middle-income people who, left to themselves, would like to borrow. Although we won’t go into detail about the underlying reasons in our paper (other than assuming that people place different weights on their future usefulness), one can, beyond the limits of our model, assign the higher savings to at least three factors. First, people can be present-biased and heavily discount their retirement years, saving insufficiently for retirement. Here, the compulsory aspect of the new scheme compels these households to save more, an effect that is strongest for low-income and very impatient groups. Second, crowdfunding gives low-wealth groups access to financial expertise and the possibility of risk diversification, which is difficult to achieve for individuals at modest levels of wealth (see also Scharfstein 2018). Barriers to financial literacy, often insurmountable for poorer segments of society, can also be overcome. Finally, the average return from pension funds (around 5%) was higher than the implied return via pay-as-you-go pensions (around 2%).


The analysis presented here shows the importance of the design of the pension system for the level and distribution of wealth. It is a separate matter to discuss the normative aspects of wealth distribution and possible policy measures to affect it. Nevertheless, this analysis shows that the design of the pension system should not be neglected in this discussion because it plays an important role. Our work suggests that pension systems should be taken into account in international comparisons of wealth inequalities and their distribution.


Andersen, TM, J Bhattacharya, A Grodecka-Messi and K Mann (2022), “Pension Reform and Wealth Inequality: Evidence for Denmark”, CEPR Working Paper No. 17078.

Andersen, TM, SE H Jensen and J Rangvid (Eds.) (2022), The Danish pension system: design, performance and challengesOxford University Press.

Benhabib, J, A Bisin and M Luo (2019), “Wealth Distribution and Social Mobility in the United States: A Quantitative Approach”, American Economic Review 109(5): 1623–1647.

Boserup, S, W Kopczuk, CT Kreiner (2016), “Wealth Inheritances and Inequalities: Evidence from Denmark”,, 11 March.

De Nardi, M and G Fella (2017), “Savings and Wealth Inequalities”, Review of Economic Dynamics 26: 280–300.

Elinder, M, O Erixson and D Waldenström (2016), “How inheritance influences wealth inequality”,, 20 April.

Hubmer, J, P Krusell and AA Smith (2020), “Sources of Wealth Inequality in the United States: Past, Present and Future”, NBER Macroeconomics Annual 2020 (35): 391-455.

Jakobsen, K, K Jakobsen, H Kleven and G Zucman (2020), “Wealth Taxation and Wealth Accumulation: Theory and Evidence from Denmark”, Economics Quarterly Review 135(1): 329–388.

Nolan, B, JC Palomino, P Van Kerm, S Morelli (2020), “The Intergenerational Transmission of Wealth in Rich Countries”,, 19 September.

OECD (2021), Pensions in figuresParis.

Piketty, T (2014), Capital in the 21st century, Cambridge, MA: Harvard University Press.

Poschke, M and B Kaymak (2016), “Wealth Inequality in the United States: Quantifying the Drivers”,, 17 April.

Scharfstein, DS (2018), “Presidential speech: pension policy and the financial system”, Finance Journal 73 (4): 1463-1512.

Waldenström, D (2021), “Wealth and History: A Reassessment”,, 17 November.

World Bank (1994), “Averting the Old Age Crisis: Policies to Protect Older People and Promote Growth”, Washington, DC: World Bank Group.


1 This also played an important role in supporting the credibility of the Danish exchange rate peg to the euro.

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