Thursday, September 20, 2007
A substantial fraction of taxation and expenditure in developed economies is devoted to social insurance, especially to finance consumption during years of retirement (including consumption of medical care). Systems typically impose a labor income tax—such as a flat-rate payroll tax—during working years to finance payments to retirees.
This chapter first analyzes purely redistributive aspects of social security schemes in a setting in which individuals are taken to be rational, far-sighted utility maximizers not subject to liquidity constraints. Then these assumptions are relaxed for purposes of considering a central feature of social security, the forcing of a minimum level of savings. Finally, but briefly, some additional insurance dimensions are noted. A number of other important features of social security are not inherently related to the central themes of this book and therefore are omitted, including broader fiscal issues involving deficits and investment policy as well as political economy considerations, such as those related to pre-funding and the merits of privatization.