COPING WITH RATIONAL PRODIGALS: A THEORY OF SOCIAL SECURITY AND SAVINGS SUBSIDIES

Stefan Homburg

Hannover Economic Papers (HEP) from Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät

Abstract: The rational prodigality argument, which often serves to justify social security, is considered in a second-best tax framework with endogenous labor supply. Rational prodigality renders the familiar policies time inconsistent. We analyze time consistent policies and show that a wage tax suffices to rule out prodigality as a rational strategy. However, 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 needed in neither case.

Keywords: Social Security; Pensions; Subsidies; Optimal Taxation (search for similar items in EconPapers)
JEL-codes: H2 H55 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2004-01
New Economics Papers: this item is included in nep-pbe
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Related works:
Journal Article: Coping with Rational Prodigals: A Theory of Social Security and Savings Subsidies (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:han:dpaper:dp-293

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