A Note on the Tax Rate implicit in Contributions to Pay-as-you-go Public Pension Systems
This is a paper about the (wage) tax implicit in contributions to pay-as-you- go pension systems. I begin by addressing the implicit life-cycle tax rate. It is shown that a popular rule of thumb for "back of the envelope" computations of the proportion of pension contributions constituting a tax is flawed. In a highly stylised model, however, simple algebra suffices to compute implicit tax rates, and the results tally well with existing estimates. I then turn to the implicit tax on current wages created by paygo pension systems. Intuition, formal analysis and numerical examples are provided to show that this tax rate is likely to fall through-out a contributor's working life, and that it may in fact become negative. I explain asymmetries between the growth of per capita wages and population growth, which combine to constitute the aggregate rate of return on paygo contributions.
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Volume (Year): 57 (2000)
Issue (Month): 1 (September)
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Homburg, Stefan & Richter, Wolfram, 1990. "Eine effizienzorientierte Reform der GRV," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 183-191..
- Werding, Martin, 1998. "Zur Rekonstruktion des Generationenvertrages," Beiträge zur Finanzwissenschaft, Mohr Siebeck, Tübingen, edition 1, volume 3, number urn:isbn:9783161468896, May.
- Hans-Werner Sinn, 1997.
"The Value of Children and Immigrants in a Pay-As-You-Go Pension System: A Proposal for a Partial Transition to a Funded System,"
NBER Working Papers
6229, National Bureau of Economic Research, Inc.
- Sinn, Hans-Werner, 1997. "The Value of Children and Immigrants in a Pay-As-You-Go Pension System: A Proposal For a Partial Transition to a Funded System," CEPR Discussion Papers 1734, C.E.P.R. Discussion Papers.
- Schnabel, Reinhold, 1998. "Rates of return of the German pay-as-you-go pension system," Papers 98-56, Sonderforschungsbreich 504.
- Murphy, Kevin M & Welch, Finis, 1998. "Perspectives on the Social Security Crisis and Proposed Solutions," American Economic Review, American Economic Association, vol. 88(2), pages 142-50, May.
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