The Impact of Reducing the Pension Generosity on Inequality and Schooling

Miguel Sanchez-Romero, Vienna Institute of Demography
Alexia Fuernkranz-Prskawetz , TU Vienna, Institute of Statistics and Mathematical Methods in Economics and VID/ÖAW

In this paper we investigate the impact of a reduction in the pension replacement rate on the schooling choice and on inequality. We develop an overlapping generations model in which individuals differ by their life expectancy and in the cost of attending schooling. Individuals optimally choose their consumption path and their educational attainment. Within our framework we first show how many progressive pension systems are ex ante regressive due to the difference in life expectancy across skill groups and, second, we derive the conditions under which a reduction in the replacement rate may increase the number of skilled workers and reduce inequality.

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 Presented in Session 36. Economics, Human Capital and Labor Markets