Social Security Reform and Investment in Education: Is There Scope for a Pareto Improvement?

Abstract

We propose a Pareto-improving policy which reduces the overall wage tax burden in an economy with intergenerational trade in a fixed factor of production, here labelled as land. We analyse a second-best environment in which the government cannot resort to non-distortionary land taxes. Reducing the social security contribution rate encourages investment in human capital. Future efficiency gains accruing to complementary land are capitalized in its value. The capital gains may compensate land-owning pensioners for reduced benefits. We also explain why the unfunded pension system may have lost its appeal even for pensioners after its introduction. Copyright (c) The London School of Economics and Political Science 2006.

Redistributive pensions in the developing world

“…If we set up a model without an option for households to save, we arrive at qualitatively similar results to those described in the following. 4 We rely on the assumption of a dynamically efficient economy (Aaron, 1966), which has been discussed on theoretical and empirical grounds by Abel et al (1989), Homburg (1991), or Koethenbuerger and Poutvaara (2006), among others, and is generally considered the more appealing assumption for models on the political economy of social security systems (see Galasso and Profeta, 2002, p. 7). 5 In the literature on social comparison, one often finds disutility terms by comparing an individual's payoff with the payoff of a reference group either in terms of a difference (see, e.g., Ljungqvist and Uhlig, 2000;Choudhary and Levine, 2006;Pérez-Asenjo, 2011) or in ratio form (see, e.g., Persson, 1995;Corneo, 2002;Goerke and Hillesheim, 2013).…”

“… We rely on the assumption of a dynamically efficient economy (Aaron, ), which has been discussed on theoretical and empirical grounds by Abel et al. (), Homburg (), or Koethenbuerger and Poutvaara (), among others, and is generally considered the more appealing assumption for models on the political economy of social security systems (see Galasso and Profeta, , p. 7). …”

The international spillover effects of pension reform

“…Yet another way of modeling can be found in Köthenbürger and Poutvaara (2006) who assume that a decrease of taxation goes along with an increase in the value of a fixed factor.…”

Pension payments and receipts by New Zealand birth cohorts, 1916–1986

“…argued this might be the case in the USA. In addition,Köthenbürger and Poutvaara (2006) argue that a transition to a SAYGO system can be Pareto improving if the reduction in long-term tax rates is capitalised into property values, so that those making the additional payments when working age benefit when retired from an increase in wealth that stems from the lower tax rates paid by their successors.…”