Arbeitspapier
Efficiency versus Insurance: Capital Income Taxation and Privatizing Social Security
We study the interactions between capital income tax and social security privatization in the context of rising longevity. In an economy with idiosyncratic income shocks, redistributive defined benefit social security provides some insurance against income uncertainty. This insurance comes at the expense of efficiency loss due to labor supply distortions. The existing view in the literature states that reducing this distortion by introducing (partially funded) defined contribution social security would reduce welfare because the loss of insurance and the transitory fiscal gap dominate the efficiency gains. However, prior research financed the transitory costs of the reform by taxing consumption. We show that in the context of longevity, capital income taxation provides a superior alternative: welfare gains are sufficient to outweigh the loss of insurance and transitory fiscal gap. We provide explanations for a mechanism behind this result and we reconcile our results with the earlier literature.
- Language
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Englisch
- Bibliographic citation
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Series: IZA Discussion Papers ; No. 14805
- Classification
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Wirtschaft
Computable General Equilibrium Models
Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
Fiscal Policy
Social Security and Public Pensions
Retirement; Retirement Policies
- Subject
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longevity
capital income taxation
social security reform
fiscal policy
welfare effects
- Event
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Geistige Schöpfung
- (who)
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Makarski, Krzysztof
Tyrowicz, Joanna
Komada, Oliwia
- Event
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Veröffentlichung
- (who)
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Institute of Labor Economics (IZA)
- (where)
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Bonn
- (when)
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2021
- Handle
- Last update
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10.03.2025, 11:41 AM CET
Data provider
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Object type
- Arbeitspapier
Associated
- Makarski, Krzysztof
- Tyrowicz, Joanna
- Komada, Oliwia
- Institute of Labor Economics (IZA)
Time of origin
- 2021
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