On the Optimal Timing of Implicit Social Security Taxes Over the Life Cycle

Social security with rational and hyperbolic consumers

“…) or Fehr (1999, 57). In addition, the implied compensated wage elasticity of labor supply is 0.34 in our benchmark, which is in line with the results of Fenge et al (2006). The coefficient of relative risk aversion η is set at 4.0 in the benchmark.…”

“…Consequently, the immediate policy implications for Germany are twofold. First, reform proposals such as Fenge et al (2006) which intend to alter the weights of the German point system find only weak support. Second, proposals which call for the introduction of a basic allowance for contributions find a strong support, since such reforms reduce initial borrowing constraints.…”

“…However, the computed efficiency effects are rather small. This indicates that a reform of the existing point system in Germany as recently proposed by Fenge et al (2006) has only minor efficiency consequences. Note that the reported efficiency effects are now computed by implementing LSRA transfers as described in the previous section.…”

“…we setr = 0 in order to replicate the existing German earning points system where the weights of the accumulated earning points are independent of the age. As a result, implicit tax rate is falling with rising working age, see Fehr (2000) or Fenge et al (2006). Figure 2 shows the relation between contribution rates and implicit tax rates across the life cycle.…”

“…Recently, Fenge et al (2006) have shown that the latter decrease with age for males while females show a inversely U-shaped ageprofile of compensated labor-supply elasticities. Our model does not distinguish between genders but can distinguish between different income processes.…”