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A model of first and second-best social security programs

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  • Walter Enders
  • Harvey Lapan

Abstract

This paper employs an overlapping generations model with output uncertainty to investigate how second-best social security schemes can be used to affect expected welfare. As with actual pension plans, our social security plan entails a proportional tax on earned income but provides a rebate that is not directly proportional with that individual's contributions. Thus, under certainty, the plan distorts the labor/leisure choice and lowers welfare. However, we prove that with uncertainty a range of such plans exist which raise expected welfare because it enhances intergenerational risk sharing. Using Monte Carlo experiments we derive the characteristics of the optimal second best plan. Copyright Springer-Verlag 1993

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File URL: http://hdl.handle.net/10.1007/BF03052292
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Bibliographic Info

Article provided by Springer in its journal Journal of Economics.

Volume (Year): 7 (1993)
Issue (Month): 1 (December)
Pages: 65-90

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Handle: RePEc:kap:jeczfn:v:7:y:1993:i:1:p:65-90

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Web page: http://www.springerlink.com/link.asp?id=108909

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  1. Weil, Philippe, 1987. "Love thy children : Reflections on the Barro debt neutrality theorem," Journal of Monetary Economics, Elsevier, vol. 19(3), pages 377-391, May.
  2. Roger H. Gordon & Hal R. Varian, 1985. "Intergenerational Risk Sharing," NBER Working Papers 1730, National Bureau of Economic Research, Inc.
  3. Enders, Walter & Lapan, Harvey E, 1982. "Social Security Taxation and Intergenerational Risk Sharing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(3), pages 647-58, October.
  4. Karni, Edi & Zilcha, Itzhak, 1989. "Aggregate and distributional effects of fair social security," Journal of Public Economics, Elsevier, vol. 40(1), pages 37-56, October.
  5. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  6. Feldstein, Martin, 1988. "The Effects of Fiscal Policies when Incomes Are Uncertain: A Contradiction to Ricardian Equivalence," American Economic Review, American Economic Association, vol. 78(1), pages 14-23, March.
  7. Samuelson, Paul A, 1975. "Optimum Social Security in a Life-Cycle Growth Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 16(3), pages 539-44, October.
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Cited by:
  1. Arrau, Patricio & Schmidt-Hebbel, Klaus, 1995. "Pensions systems and reform : country experiences and research issues," Policy Research Working Paper Series 1470, The World Bank.
  2. Wolfram Richter, 1993. "Intergenerational risk sharing and social security in an economy with land," Journal of Economics, Springer, vol. 7(1), pages 91-103, December.
  3. Andreas Wagener, 2001. "On Intergenerational Risk Sharing within Social Security Schemes," CESifo Working Paper Series 499, CESifo Group Munich.
  4. Matsen, E. & Thogersen, O., 2001. "Designing Social Security - A Portfolio Choice Approach," Papers 21/2001, Norwegian School of Economics and Business Administration-.
  5. Henrik Petersen, Jorn, 1998. "Recent research on public pension systems. A review," Labour Economics, Elsevier, vol. 5(1), pages 91-108, March.

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