Pension Generosity and Redistributive Effects of Public Pension Systems in the OECD

Pension systems in nearly all mature welfare states have been under reforms in the face of demographic ageing. In many cases, reforms have resulted in less generous benefits and stronger link to previous earnings and qualification periods during the whole career. Less attention has been paid to how pension systems equalize income differences which occur during working life and how recent reforms have affected such – intended or unintended - effects, in part because comparative data has been lacking. For assessing the adequacy effects of pension reforms especially in lower income groups, but also for the political support of pension reforms, issues of redistribution over levels of incomes are vital, though.

This paper focuses on redistributive elements and effects of public old-age pension schemes and their change over time. I first discuss different components of public pension schemes contributing to redistribution and how recent reform trends touch upon them. Then, by utilizing new data on pension generosity for different income levels now available from the Comparative Welfare Entitlements Dataset (CWED2) in up to 31 OECD countries from mid-1970s, I show how levels of pension benefits have developed for different income groups across countries. The analysis shows that while large differences in pension replacement rates for low and high income earners persist in many countries, redistributive features have diminished over time considerable for example in Finland and the UK. Pension systems thus have become more actuarially neutral in terms of the linkage between life-time earnings and later pension benefits.