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A Social Security Fallacy

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  • Homburg, Stefan

Abstract

The article investigates whether compulsory old age provisions are justified from an economic point of view. According to a standard argument, some people would not provide sufficiently for their old age in the absence of a compulsory pension system – they would become a charge to the public. This free rider problem can be solved by mandatory lump sum contributions. However, if contributions depend on labour income, as they do in reality, potential free riders consider them as payroll taxes – even if the pension system is fully funded and actuarially fair. Therefore, compulsory contributions which are related to earned income do not solve an economic problem which cannot be tackled by the tax system as well. Put differently, there exists no economic justification for compulsory contributions, the standard argument is false.

Suggested Citation

  • Homburg, Stefan, 2000. "A Social Security Fallacy," EconStor Open Access Articles, ZBW - Leibniz Information Centre for Economics, pages 409-419.
  • Handle: RePEc:zbw:espost:93128
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    File URL: https://www.econstor.eu/bitstream/10419/93128/1/Homburg2000Fallacy.pdf
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    References listed on IDEAS

    as
    1. Martin Feldstein, 1985. "The Optimal Level of Social Security Benefits," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 303-320.
    2. Homburg, Stefan, 2000. "Compulsory savings in the welfare state," Journal of Public Economics, Elsevier, vol. 77(2), pages 233-239, August.
    3. Kotlikoff, Laurence J & Spivak, Avia & Summers, Lawrence H, 1982. "The Adequacy of Savings," American Economic Review, American Economic Association, vol. 72(5), pages 1056-1069, December.
    4. Coate, Stephen, 1995. "Altruism, the Samaritan's Dilemma, and Government Transfer Policy," American Economic Review, American Economic Association, vol. 85(1), pages 46-57, March.
    5. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
    6. Diamond, P. A., 1977. "A framework for social security analysis," Journal of Public Economics, Elsevier, vol. 8(3), pages 275-298, December.
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    Cited by:

    1. Breyer, Friedrich & Franz, Wolfgang & Homburg, Stefan & Schnabel, Reinhold & Wille, Eberhard, 2004. "Reform der sozialen Sicherung: Kurzfassung," EconStor Books, ZBW - Leibniz Information Centre for Economics, number 92399, November.

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    More about this item

    Keywords

    Social security; Public pensions;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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