Due to the slowdown of demographic and economic growth in developed countries, it has been argued that universal programs in social security should be replaced by means test programs. This reshuffling of the social security system would achieve a double objective: on the one hand it would protect people in need, on the other hand, by reducing the tax rate, it would allow reducing distortions in choices made by working generations, who will also be able to profit from larger expected returns provided in fully funded systems. With the aim of reconsidering the welfare foundations of the argument provided above, in this paper we extend the basic overlapping generations model provided in Feldstein (1985,1987) to the case of heterogeneous labor income. The results show that, in dynamically efficient economies, the argument has to be considered carefully: equilibrium tax rate in a means tested program is lower than under a universal program as long as the returns warranted by a pay as you go system are sufficiently high so that incentive constraints in the means test programs are binding.

A note on social security design. Means tested vs universal programs

BONASIA, Mariangela
2003

Abstract

Due to the slowdown of demographic and economic growth in developed countries, it has been argued that universal programs in social security should be replaced by means test programs. This reshuffling of the social security system would achieve a double objective: on the one hand it would protect people in need, on the other hand, by reducing the tax rate, it would allow reducing distortions in choices made by working generations, who will also be able to profit from larger expected returns provided in fully funded systems. With the aim of reconsidering the welfare foundations of the argument provided above, in this paper we extend the basic overlapping generations model provided in Feldstein (1985,1987) to the case of heterogeneous labor income. The results show that, in dynamically efficient economies, the argument has to be considered carefully: equilibrium tax rate in a means tested program is lower than under a universal program as long as the returns warranted by a pay as you go system are sufficiently high so that incentive constraints in the means test programs are binding.
File in questo prodotto:
Non ci sono file associati a questo prodotto.

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11367/14762
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus ND
  • ???jsp.display-item.citation.isi??? ND
social impact