Coping With Rational Prodigals: A Theory Of Social Security And Savings Subsidies
AbstractThe rational prodigality argument, which often serves to justify social security, is considered in a second-best tax framework with endogenous labor supply. Rational prodigality renders the familiar policies time inconsistent. We analyze time consistent policies and show that a wage tax suffices to rule out prodigality as a rational strategy. However, using savings subsidies, the solution can be improved upon. The subsidies are shown to be decreasing in income. A social security system with increasing contributions is needed in neither case.
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Bibliographic InfoPaper provided by Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Leibniz Universität Hannover with number dp-293.
Length: 11 pages
Date of creation: Jan 2004
Date of revision:
Social Security; Pensions; Subsidies; Optimal Taxation;
Other versions of this item:
- Stefan Homburg, 2006. "Coping with Rational Prodigals: A Theory of Social Security and Savings Subsidies," Economica, London School of Economics and Political Science, vol. 73(289), pages 47-58, 02.
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
- H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
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