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Coping with Rational Prodigals: A Theory of Social Security and Savings Subsidies

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  • STEFAN HOMBURG

Abstract

The rational prodigality argument, which often serves to justify social security, is considered in a second‐best tax framework with endogenous labour supply. Rational prodigality renders the familiar policies time‐inconsistent. I analyse time‐consistent policies and show that a wage tax suffices to rule out prodigality as a rational strategy. However, by 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 not needed in either case.

Suggested Citation

  • 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, February.
  • Handle: RePEc:bla:econom:v:73:y:2006:i:289:p:47-58
    DOI: 10.1111/j.1468-0335.2006.00447.x
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    Cited by:

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    2. Caliendo, Frank N. & Guo, Nick L., 2014. "Roosevelt And Prescott Come To An Agreement," Macroeconomic Dynamics, Cambridge University Press, vol. 18(6), pages 1383-1402, September.
    3. José Luis Iparraguirre, 2020. "Economics and Ageing," Springer Books, Springer, number 978-3-030-29019-1, May.
    4. Guo, Nick L. & Caliendo, Frank N., 2014. "Time-inconsistent preferences and time-inconsistent policies," Journal of Mathematical Economics, Elsevier, vol. 51(C), pages 102-108.
    5. Andrew Coleman, 2014. "The growth, equity, and risk implications of different retirement income policies," New Zealand Economic Papers, Taylor & Francis Journals, vol. 48(2), pages 226-239, August.
    6. Andras Simonovits, 2009. "A Simple Model of Tax-Favored Retirement Accounts," CERS-IE WORKING PAPERS 0915, Institute of Economics, Centre for Economic and Regional Studies.

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    More about this item

    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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