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Myopia and Social Security Financing

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  • Sheng-Cheng Hu

    (Purdue University)

Abstract

This article compares the welfare effects offinancing Social Security with consump- Abstract tion and payroll taxes in an economy in which a segment of the population is myopic. The article shows that so long as there are myopic agents who fail to allocate consumption according to the first-order optintality condinons, social welfare can be improved by a switch from the payroll tax to the consumption tax in financing Social Security. The gains from the tax substitution are larger the higher the rate of return on capital and, up to a point, the larger the myopic population. Furthermore, means testing is more likely to improve social welfare if moral hazard is less serious or if Social Security is financed by the consumption tax instead of the payroll tax.

Suggested Citation

  • Sheng-Cheng Hu, 1996. "Myopia and Social Security Financing," Public Finance Review, , vol. 24(3), pages 319-348, July.
    • Handle: RePEc:sae:pubfin:v:24:y:1996:i:3:p:319-348
    DOI: 10.1177/109114219602400302
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    References listed on IDEAS

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    Cited by:

    1. Lars Kunze & Christiane Schuppert, 2009. "Financing Social Security by Taxing Capital Income – A Bad Idea?," Ruhr Economic Papers 0090, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    2. Lars Kunze & Christiane Schuppert, 2010. "Financing social security by taxing capital income: A bad idea?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 66(3), pages 243-262, September.
    3. repec:zbw:rwirep:0090 is not listed on IDEAS
    4. Docquier, Frederic, 2002. "On the optimality of public pensions in an economy with life-cyclers and myopes," Journal of Economic Behavior & Organization, Elsevier, vol. 47(1), pages 121-140, January.
    5. Rowena A. Pecchenino & Patricia S. Pollard, 2005. "Aging, Myopia, and the Pay‐As‐You‐Go Public Pension Systems of the G7: A Bright Future?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(3), pages 449-470, August.

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