Alternative mechanisms for financing social security
Shome, P. | Squire, Lyn | CPD
The objective of this paper is two-fold. First, it clarifies the role of different assumptions made by previous authors in the determination of results regarding the neutrality or non-neutrality of social security's impact on capital accumulation and labor supply. To this end, it analyzes the differential effects of alternative financing mechanisms - fully-funded and pay-as-you-go schemes - within the framework of a multiperiod model with overlapping generations. Second, the paper addresses the question of the optimal size of social security. It contrasts the standard procedure of equating optimality to the maximization of a representative individual's utility function with an approach which rationalizes the need for social security by reference to a paternalistic concern for the welfare of the retired population. Section I describes the central model and the main issues that are addressed in the following sections. Section II investigates "positive" concerns. Section III is concerned with normative issues of optimality in both an individualistic and a paternalistic framework. A concluding section summarizes the main results and an appendix elaborates a more complicated version of the simple normative model developed in Section III.
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