IDEAS home Printed from https://ideas.repec.org/p/diw/diwwpp/dp1716.html
   My bibliography  Save this paper

Insurance, Redistribution, and the Inequality of Lifetime Income

Author

Listed:
  • Peter Haan
  • Daniel Kemptner
  • Victoria Prowse

Abstract

In this paper, we study how the tax-and-transfer system reduces the inequality of lifetime income by redistributing lifetime earnings between individuals with different skill endowments and by providing individuals with insurance against lifetime earnings risk. Based on a dynamic life-cycle model, we find that redistribution through the tax-and-transfer system offsets around half of the inequality in lifetime earnings that is due to differences in skill endowments. At the same time, taxes and transfers mitigate around 60% of the inequality in lifetime earnings that is attributable to employment and health risk. Progressive taxation of annual earnings provides little insurance against lifetime earnings risk. The lifetime insurance effects of taxation may be improved by moving to a progressive tax on lifetime earnings. Similarly, the lifetime insurance and redistributive effects of social assistance may be improved by requiring wealthy individuals to repay any social assistance received when younger.

Suggested Citation

  • Peter Haan & Daniel Kemptner & Victoria Prowse, 2017. "Insurance, Redistribution, and the Inequality of Lifetime Income," Discussion Papers of DIW Berlin 1716, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp1716
    as

    Download full text from publisher

    File URL: https://www.diw.de/documents/publikationen/73/diw_01.c.575026.de/dp1716.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Mark Huggett & Juan Carlos Parra, 2010. "How Well Does the U.S. Social Insurance System Provide Social Insurance?," Journal of Political Economy, University of Chicago Press, vol. 118(1), pages 76-112, February.
    2. Rolf Aaberge & Magne Mogstad, 2015. "Inequality in current and lifetime income," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 44(2), pages 217-230, February.
    3. Martin Nybom, 2017. "The Distribution of Lifetime Earnings Returns to College," Journal of Labor Economics, University of Chicago Press, vol. 35(4), pages 903-952.
    4. Panizza, Ugo, 2002. "Income Inequality and Economic Growth: Evidence from American Data," Journal of Economic Growth, Springer, vol. 7(1), pages 25-41, March.
    5. Coronado Julia Lynn & Fullerton Don & Glass Thomas, 2011. "The Progressivity of Social Security," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-45, November.
    6. Audra Bowlus & Jean-Marc Robin, 2008. "An international comparison of lifetime labor income values and inequality," Working Papers hal-03459796, HAL.
    7. Giacomo Corneo, 2015. "Income inequality from a lifetime perspective," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 42(2), pages 225-239, May.
    8. Audra J. Bowlus & Jean-Marc Robin, 2004. "Twenty Years of Rising Inequality in U.S. Lifetime Labour Income Values," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(3), pages 709-742.
    9. A. Bovenberg & Martin Hansen & Peter Sørensen, 2008. "Individual savings accounts for social insurance: rationale and alternative designs," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 15(1), pages 67-86, February.
    10. Josep Pijoan-Mas & José-Víctor Ríos-Rull, 2014. "Heterogeneity in Expected Longevities," Demography, Springer;Population Association of America (PAA), vol. 51(6), pages 2075-2102, December.
    11. Nelissen, Jan H. M., 1998. "Annual versus lifetime income redistribution by social security," Journal of Public Economics, Elsevier, vol. 68(2), pages 223-249, May.
    12. Bovenberg, A.L. & Hansen, M. & Sorensen, P.B., 2008. "Individual savings accounts for social insurance : Rationale and alternative designs," Other publications TiSEM 72e236b0-ad63-4bea-a314-6, Tilburg University, School of Economics and Management.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bartels, Charlotte & Neumann, Dirk, 2021. "Redistribution and Insurance in Welfare States around the World," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 123(4), pages 1116-1158.
    2. Fischer, Benjamin & Hügle, Dominik, 2020. "The private and fiscal returns to higher education: A simulation approach for a young German cohort," Discussion Papers 2020/21, Free University Berlin, School of Business & Economics.
    3. Peter Levell & Barra Roantree & Jonathan Shaw, 2021. "Mobility and the lifetime distributional impact of tax and transfer reforms," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(4), pages 751-793, August.
    4. Teresa Backhaus, 2022. "Training in Late Careers - A Structural Approach," CRC TR 224 Discussion Paper Series crctr224_2022_382, University of Bonn and University of Mannheim, Germany.
    5. Korfhage, Thorben, 2019. "Long-run consequences of informal elderly care and implications of public long-term care insurance," Ruhr Economic Papers 813, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    6. Brewer, Mike & Joyce, Robert & Waters, Tom & Woods, Joseph, 2020. "A method for decomposing the impact of reforms on the long-run income distribution, with an application to universal credit," Economics Letters, Elsevier, vol. 192(C).
    7. Richiardi, Matteo & He, Zhechun, 2020. "Measuring economic insecurity: a simulation approach," Centre for Microsimulation and Policy Analysis Working Paper Series CEMPA2/20, Centre for Microsimulation and Policy Analysis at the Institute for Social and Economic Research.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bertrand Garbinti & Cecilia García Peñalosa & Vladimir Pecheu & Frédérique Savignac, 2023. "Trends and Inequality in Lifetime Earnings in France," Working papers 925, Banque de France.
    2. Bartels, Charlotte & Neumann, Dirk, 2021. "Redistribution and Insurance in Welfare States around the World," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 123(4), pages 1116-1158.
    3. Orsetta Causa & Mikkel Hermansen, 2017. "Income redistribution through taxes and transfers across OECD countries," OECD Economics Department Working Papers 1453, OECD Publishing.
    4. Peter Levell & Barra Roantree & Jonathan Shaw, 2021. "Mobility and the lifetime distributional impact of tax and transfer reforms," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(4), pages 751-793, August.
    5. Moshe Justman & Hadas Stiassnie, 2021. "Inequality in Lifetime Earnings, 1986-2012," Working Papers 579, ECINEQ, Society for the Study of Economic Inequality.
    6. Hartley, Gonzalo Reyes & van Ours, Jan C. & Vodopivec, Milan, 2011. "Incentive effects of unemployment insurance savings accounts: Evidence from Chile," Labour Economics, Elsevier, vol. 18(6), pages 798-809.
    7. Garnero, Andrea & Hijzen, Alexander & Martin, Sébastien, 2019. "More unequal, but more mobile? Earnings inequality and mobility in OECD countries," Labour Economics, Elsevier, vol. 56(C), pages 26-35.
    8. Andersen, Torben M & Svarer, Michael, 2009. "Business Cycle Dependent Unemployment Insurance," CEPR Discussion Papers 7334, C.E.P.R. Discussion Papers.
    9. Julio López Laborda & Carmen Marín González & Jorge Onrubia, 2019. "Observatorio sobre el reparto de los impuestos y las prestaciones monetarias entre los hogares españoles. Cuarto informe: 2016 y 2017," Studies on the Spanish Economy eee2019-36, FEDEA.
    10. Mike Brewer & Monica Costa Dias & Jonathan Shaw, 2012. "Lifetime inequality and redistribution," IFS Working Papers W12/23, Institute for Fiscal Studies.
    11. Dennis Fredriksen & Nils Martin Stølen, 2015. "Life time pension benefits relative to life time contributions," Discussion Papers 825, Statistics Norway, Research Department.
    12. Julio López Laborda & Carmen Marín & Jorge Onrubia, 2021. "Observatorio sobre el reparto de los impuestos y las prestaciones entre los hogares españoles. Sexto informe – 2017 y 2018," Studies on the Spanish Economy eee2021-33, FEDEA.
    13. Alessandro Bucciol & Laura Cavalli & Igor Fedotenkov & Paolo Pertile & Veronica Polin & Nicola Sartor & Alessandro Sommacal, 2014. "A large scale OLG model for France, Italy and Sweden: assessing the interpersonal and intrapersonal redistributive effects of public policies," Working Papers 07/2014, University of Verona, Department of Economics.
    14. Richiardi, Matteo & He, Zhechun, 2020. "Measuring economic insecurity: a simulation approach," Centre for Microsimulation and Policy Analysis Working Paper Series CEMPA2/20, Centre for Microsimulation and Policy Analysis at the Institute for Social and Economic Research.
    15. Julia Lynn Coronado & Don Fullerton & Thomas Glass, 2002. "Long-Run Effects of Social Security Reform Proposals on Lifetime Progressivity," NBER Chapters, in: The Distributional Aspects of Social Security and Social Security Reform, pages 149-206, National Bureau of Economic Research, Inc.
    16. Lixin He & Hiroshi Sato, 2013. "Income Redistribution In Urban China By Social Security System—An Empirical Analysis Based On Annual And Lifetime Income," Contemporary Economic Policy, Western Economic Association International, vol. 31(2), pages 314-331, April.
    17. Bishnu, Monisankar & Guo, Nick L. & Kumru, Cagri S., 2019. "Social security with differential mortality," Journal of Macroeconomics, Elsevier, vol. 62(C).
    18. Stefan Groot & Henri de Groot, 2011. "Wage inequality in the Netherlands: Evidence, trends and explanations," CPB Discussion Paper 186.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    19. Luiza Neves de Holanda Barbosa & Miguel Nathan Foguel & Charlotte Bilo, 2017. "The Brazilian Government Severance Indemnity Fund for Employees (FGTS) and unemployment insurance savings accounts in other countries: a comparative analysis of their effects on the labour market," Working Papers 164, International Policy Centre for Inclusive Growth.
    20. Orsetta Causa & Mikkel Hermansen, 2018. "Income Redistribution Through Taxes and Transfers across OECD Countries," LIS Working papers 729, LIS Cross-National Data Center in Luxembourg.

    More about this item

    Keywords

    Lifetime earnings; lifetime income; tax-and-transfer system; taxation; unemployment insurance; disability benefits; social assistance; inequality; redistribution; insurance; endowments; risk; dynamic life-cycle models;
    All these keywords.

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • I24 - Health, Education, and Welfare - - Education - - - Education and Inequality
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:diw:diwwpp:dp1716. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bibliothek (email available below). General contact details of provider: https://edirc.repec.org/data/diwbede.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.