There is a lot of pressure in the developed countries to modify the pay-as-you-go social security systems. The demographic trends show that the present contributions and benefit levels are unsustainable in the long run.Furthermore, the current system is often charged with distorsions in the labor supply and a reduction in household savings, leading to underinvestment. To quantify the issues, a number of simulation studies have been carried out in various countries. It is often unclear to separate in these studies, depending on the precise assumptions made regarding the demographic trends or taxes, the important from the accessory. We try to clarify the debate through a simple theoretical overlapping generation model, which shows the long run effect of various financing arrangements, through public debt, a wage tax or a tax on interest income. The studies on the USA of Feldstein et Samwick (FS) [1996, 1997] and Kotlikoff, Smetters etWalliser (KSM) [1996], all in favor of a funded system, find very different estimates of the associated gains~: around 10\% of the wage bill for (FS) against less than 2\% for (KSM). Our theoretical analysis lead us to link this difference to the initial source of inefficiency~: lack of capital for the former, distorsion in the labor supply due to the social security contributions of the pay-as-you-go system for the latter.
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Paper provided by DELTA (Ecole normale supérieure) in its series DELTA Working Papers with number
98-04.
Find related papers by JEL classification: H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions G23 - Financial Economics - - Financial Institutions and Services - - - Pension Funds; Other Private Financial Institutions
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