Arístides Torche () (Instituto de Economía. Pontificia Universidad Católica de Chile.) Gert Wagner () (Instituto de Economía. Pontificia Universidad Católica de Chile.)
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Mandated benefits are supposed to perform better than regular public programs where tax finance and expenditure are unrelated at the individual level. If benefits due to these mandated programs are valued at a one to one basis in relation to the respective tax paid by the recipients, the social cost of one dollar of public funds will be one dollar, without considering administrative costs. If benefits fall below taxes, mandated benefits are characterized by an implicit tax. We examine the Chilean social security system, a large mandated benefit program, distinguishing among two potential sources of inefficiency due to the implicit net social security tax: the dead weight loss, that is, the welfare triangle generated by induced labor market reallocations, and the expenditure inefficiency that is the difference between the tax paid into the system and the benefit obtained from it by the individual. A nationwide sample of individuals and households provides the relevant wage and productivity determinants, allowing the estimation of private value of social security benefits in a scenario where labor may choose among taxed employments and an untaxed sector of the economy. Equalizing differentials between monetary earnings of taxed workers vis a vis non taxed labor, permit us to solve for the implicit net tax and to quantify both sources of inefficiency. We find that total inefficiency constitutes a respectable fraction of GDP, but the welfare triangle itself is a minor component. The policy recommendations is to improve the private benefit valuation, for example, by adjusting taxes by age and better quality and access to the public health system.
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Article provided by Instituto de Economía. Pontificia Universidad Católica de Chile. in its journal Cuadernos de Economía.
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Montgomery, Edward & Shaw, Kathryn & Benedict, Mary Ellen, 1992.
"Pensions and Wages: An Hedonic Price Theory Approach,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(1), pages 111-28, February.
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