Changes in Private Pensions and Income Inequality in Retirement: A Decomposition Analysis by Income Source in Nine European Countries (1986–2018)

Abstract

Private pensions have expanded in recent decades in many European countries, albeit to different extent. As private pensions historically have been more unequally distributed than public pensions, it is reasonable to expect that pension privatization has increased the dispersion of incomes among the retired. However, few studies have empirically tested this claim. The purpose of this study is to assess how the expansion of private pensions affects developments of income inequality among the retired. Using microdata from the Luxembourg Income Study, decomposition analyses of income inequality by income source are conducted around 1986 and 2018 in nine European countries. To account for cross-country variations in the public–private pension mix, the study distinguishes between mature multi-pillar systems, emergent multi-pillar systems, and dominant public systems. The results highlight an interesting paradox. Higher shares of private pensions in retirement incomes have a substantial inequality-increasing effect; yet, overall income inequality among the retired has not necessarily increased, for 2 reasons. First, more equally distributed public pensions in emergent multi-pillar systems and declining shares of capital income in mature multi-pillar systems either fully or partially compensated for increased inequality due to larger shares of private pensions. Second, private pensions became more equally distributed among the retired in most countries.