The 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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Find related papers by JEL classification: 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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