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On the Design of Social Security Contributions

Yasushi Iwamoto

No CARF-J-025, CARF J-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This paper proposes the social insurance contribution rule that is based on a unified framework. It also discusses a desirable direction of reform. If the rule is based on that of private insurance, the contribution should be related to benefits. When a policy purpose requires mandatory enrollment, however, the insurance should take either of the following two schemes: (1) it reduces a burden of a low-ability-to-pay person, and revenue loss is subsidized by tax revenue, or (2) the contribution is related to the person's ability to pay, and the social insurance conducts income redistribution inside it. The latter has more similarity with the existing rule. Therefore, the unequal burden on different sources of income should be eliminated as soon as possible, and then the contribution should apply the ability-to-pay principle. Since the social insurance is engaged in income redistribution, government subsidies financed with taxes can be replaced by social insurance premiums.

Pages: 17 pages
Date: 2006-06
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