Nonseparable Preferences and Optimal Social Security Systems

40 Pages Posted: 10 Sep 2007 Last revised: 7 Jul 2010

See all articles by Borys Grochulski

Borys Grochulski

Federal Reserve Banks - Federal Reserve Bank of Richmond

Narayana Kocherlakota

University of Minnesota - Twin Cities - Department of Economics

Date Written: September 2007

Abstract

In this paper, we consider economies in which agents are privately informed about their skills, which are evolving stochastically over time. We require agents' preferences to be weakly separable between the lifetime paths of consumption and labor. However, we allow for intertemporal nonseparabilities in preferences like habit formation. We show that such nonseparabilities imply that optimal asset income taxes are necessarily retrospective in nature. We show that under weak conditions, it is possible to implement a socially optimal allocation using a social security system in which taxes on wealth are linear, and taxes/transfers are history-dependent only at retirement. The average asset income tax in this system is zero.

Suggested Citation

Grochulski, Borys and Kocherlakota, Narayana, Nonseparable Preferences and Optimal Social Security Systems (September 2007). NBER Working Paper No. w13362. Available at SSRN: https://ssrn.com/abstract=1012816

Borys Grochulski (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

HOME PAGE: http://www.richmondfed.org/research/economists/bios/grochulski_bio.cfm

Narayana Kocherlakota

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States
612-625-5318 (Phone)
612-624-0209 (Fax)

HOME PAGE: http://www.econ.umn.edu/~nkocher/

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