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Should We Refinance Unfunded Social Security?
Author(s) -
Gahramanov Emin,
Tang Xueli
Publication year - 2013
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/ecca.12023
Subject(s) - payroll , payroll tax , economics , consumption (sociology) , margin (machine learning) , welfare , social security , capital (architecture) , pension , labour economics , overlapping generations model , labour supply , revenue , monetary economics , finance , market economy , accounting , archaeology , machine learning , sociology , social science , computer science , history
Within a continuous‐time overlapping generations model, featuring endogenous intensive margin of the labour supply and retirement decision, we analyse the issue of passing the burden of payroll revenues onto consumption or capital. We find that large long‐run welfare gains occur when pension benefits are refinanced by consumption taxes. However, the transition to the new steady state is very painful for a large fraction of existing cohorts. On the other hand, the capital base is too small to sustain pension benefits but could be made larger if capital taxes are raised. Yet that would entail significant welfare losses.