A Social Security Fallacy

Stefan Homburg

EconStor Open Access Articles and Book Chapters, 2000, vol. 89, issue 2/3, 409-419

Abstract: The article investigates whether compulsory old age provisions are justified from an economic point of view. According to a standard argument, some people would not provide sufficiently for their old age in the absence of a compulsory pension system – they would become a charge to the public. This free rider problem can be solved by mandatory lump sum contributions. However, if contributions depend on labour income, as they do in reality, potential free riders consider them as payroll taxes – even if the pension system is fully funded and actuarially fair. Therefore, compulsory contributions which are related to earned income do not solve an economic problem which cannot be tackled by the tax system as well. Put differently, there exists no economic justification for compulsory contributions, the standard argument is false.

Keywords: Social security; Public pensions (search for similar items in EconPapers)
JEL-codes: H55 (search for similar items in EconPapers)
Date: 2000
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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