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A model of first and second-best social security programs

  • Walter Enders
  • Harvey Lapan

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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Article provided by Springer in its journal Journal of Economics.

Volume (Year): 7 (1993)
Issue (Month): 1 (December)
Pages: 65-90

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Handle: RePEc:kap:jeczfn:v:7:y:1993:i:1:p:65-90
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  1. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  2. Enders, Walter & Lapan, Harvey E., 1982. "Social Security Taxation and Inter-Generational Risk Sharing," Staff General Research Papers 10822, Iowa State University, Department of Economics.
  3. Feldstein, Martin, 1988. "The Effects of Fiscal Policies when Incomes Are Uncertain: A Contradiction to Ricardian Equivalence," American Economic Review, American Economic Association, vol. 78(1), pages 14-23, March.
  4. Gordon, Roger H. & Varian, Hal R., 1988. "Intergenerational risk sharing," Journal of Public Economics, Elsevier, vol. 37(2), pages 185-202, November.
  5. Karni, Edi & Zilcha, Itzhak, 1989. "Aggregate and distributional effects of fair social security," Journal of Public Economics, Elsevier, vol. 40(1), pages 37-56, October.
  6. Samuelson, Paul A, 1975. "Optimum Social Security in a Life-Cycle Growth Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 16(3), pages 539-44, October.
  7. Weil, Philippe, 1987. "Love thy children : Reflections on the Barro debt neutrality theorem," Journal of Monetary Economics, Elsevier, vol. 19(3), pages 377-391, May.
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