Pension finance in a calibrated model of saving and income distribution for the UK

Traditional macroeconomic models are based on the concept of a single representative consumer. A great deal can be gained by constructing a dynamic general equilibrium economic model which represents the behaviour of a panel of consumers spread out along the income distribution. Such a framework allows us to assess the distributional impact of policy changes. We present here such a model, showing the behaviour of consumers facing uncertain incomes and we use it to assess the distributional impact of changes to pension provision. We find that means testing of old age pensions increases inequality among the retired because of the effect it has on incentives to save.