Optimal Social Security Design
The Bank of England; University of London - Imperial College Business School; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
James A. Sefton
Imperial College London; National Institute of Economic and Social Research (NIESR)
CEPR Discussion Paper No. 3290
This Paper considers the optimal design of public pension provision for the retired and income support for those of working age. We consider social security systems that differ in terms of the level of benefits, degree of means testing and the nature of contributions. We aim to find which system maximises the expected utility of agents behind an initial veil of ignorance about their future labour productivity. We also explore whether systems which differ from the (ex-ante) optimal one could be reformed. We ask whether agents who already know what their productivity is would vote for a move towards a system that they would have found optimal from behind a veil of ignorance about their own position on the wages ladder. We also consider which systems could be sustained in an economy where reform is decided by majority voting. We find a substantial role for means testing in optimal welfare systems. We also find the possibility of multiple equilbria in welfare systems.
Number of Pages in PDF File: 44
Keywords: Social Security, pensions, optimal taxes
JEL Classification: H10, H20, H30working papers series
Date posted: April 30, 2002
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