Coping with Rational Prodigals: A Theory of Social Security and Savings Subsidies

Stefan Homburg

Economica, 2006, vol. 73, issue 289, 47-58

Abstract: The rational prodigality argument, which often serves to justify social security, is considered in a second‐best tax framework with endogenous labour supply. Rational prodigality renders the familiar policies time‐inconsistent. I analyse time‐consistent policies and show that a wage tax suffices to rule out prodigality as a rational strategy. However, by using savings subsidies the solution can be improved upon. The subsidies are shown to be decreasing in income. A social security system with increasing contributions is not needed in either case.

Date: 2006
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https://doi.org/10.1111/j.1468-0335.2006.00447.x

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Working Paper: COPING WITH RATIONAL PRODIGALS: A THEORY OF SOCIAL SECURITY AND SAVINGS SUBSIDIES (2004)
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