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Coping With Rational Prodigals: A Theory Of Social Security And Savings Subsidies

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  • Homburg, Stefan

Abstract

The rational prodigality argument, which often serves to justify social security, is considered in a second-best tax framework with endogenous labor supply. Rational prodigality renders the familiar policies time inconsistent. We analyze time consistent policies and show that a wage tax suffices to rule out prodigality as a rational strategy. However, 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 needed in neither case.

Suggested Citation

  • Homburg, Stefan, 2004. "Coping With Rational Prodigals: A Theory Of Social Security And Savings Subsidies," Hannover Economic Papers (HEP) dp-293, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    • Handle: RePEc:han:dpaper:dp-293
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    References listed on IDEAS

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    1. Lindbeck, Assar & Weibull, Jorgen W, 1988. "Altruism and Time Consistency: The Economics of Fait Accompli," Journal of Political Economy, University of Chicago Press, vol. 96(6), pages 1165-1182, December.
    2. repec:diw:diwwpp:dp200 is not listed on IDEAS
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    5. Homburg, Stefan, 2000. "Compulsory savings in the welfare state," Journal of Public Economics, Elsevier, vol. 77(2), pages 233-239, August.
    6. Stefan Homburg, 2001. "The Optimal Income Tax: Restatement and Extensions," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 58(4), pages 363-395, November.
    7. Matthews, Steven & Moore, John, 1987. "Monopoly Provision of Quality and Warranties: An Exploration in the Theory of Multidimensional Screening," Econometrica, Econometric Society, vol. 55(2), pages 441-467, March.
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    Cited by:

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    2. 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.
    3. 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.
    4. D'Orlando, Fabio & Sanfilippo, Eleonora, 2010. "Behavioral foundations for the Keynesian consumption function," Journal of Economic Psychology, Elsevier, vol. 31(6), pages 1035-1046, December.
    5. Andrew Coleman, 2011. "Mandatory Retirement Income Schemes, Saving Incentives, and KiwiSaver," Motu Notes Note_06, Motu Economic and Public Policy Research.
    6. Erin Cottle Hunt & Frank N. Caliendo, 2022. "Social security and risk sharing: A survey of four decades of economic analysis," Journal of Economic Surveys, Wiley Blackwell, vol. 36(5), pages 1591-1609, December.
    7. José Luis Iparraguirre, 2020. "Economics and Ageing," Springer Books, Springer, number 978-3-030-29019-1, March.
    8. 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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    Keywords

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    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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