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Source of Finance for Social Security Reform with Redistribution

Listed author(s):
  • Yamada, Tomoaki

This study investigates the welfare implications of social security reforms in Japan. Based on the overlapping generations model with idiosyncratic income risk, we consider four social security reform plans: (1) gradual reduction in the replacement rate by half, (2) sudden cut in the replacement rate by half, (3) introduction of a consumption tax, and (4) introduction of a capital income tax. We compute the transition paths of each case, and find that the introduction of a consumption tax and a capital income tax improves the welfare of young and future households, based on ex-ante welfare. We also reveal that two redistribution effects of the basic public pension are keys when considering social security reforms: (a) the insurance effect on lifetime income, and (b) the intertemporal effect that affects the asset and consumption profile.

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Paper provided by Institute of Economic Research, Hitotsubashi University in its series Discussion Paper Series with number a513.

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Length: 46 p.
Date of creation: Jan 2009
Handle: RePEc:hit:hituec:a513
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