Savings Accounts and the Life-Cycle Approach to Social Insurance

Peter Birch Sørensen, Martin Ino Hansen and Lans Bovenberg
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Peter Birch Sørensen: Department of Economics, University of Copenhagen
Martin Ino Hansen: Statistics Denmark

No 06-03, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: Using Danish data, we find that about three fourths of the taxes levied to finance public transfers actually finance benefits that do not redistribute between people but redistribute income over the life cycle of individual taxpayers. This provides a rationale for financing part of social insurance via mandatory individual savings accounts. An account system that offers liquidity insurance and a lifetime income guarantee helps to alleviate the dilemma between insurance and incentives. To illustrate this, we analyse a specific proposal for reform of the Danish system of social insurance, involving the use of individual accounts. We estimate how the reform would affect the distribution of lifetime incomes, the public budget, and economic efficiency. Our analysis suggests that, even with conservative assumptions regarding labor supply elasticities, the proposed reform would generate a Pareto improvement and would imply only a minor increase in the inequality of lifetime income distribution.

Keywords: social insurance; individual accounts; lifetime income distribution (search for similar items in EconPapers)
JEL-codes: H53 H55 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2006-03
New Economics Papers: this item is included in nep-dge, nep-ias and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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