A model of first and second-best social security programs
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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