Social Security Taxation When Benefits are Tied to Contributions

There is a substantial body of literature addressing the issue of optimal Social Security taxation. The most common theme in this literature concerns the optimal Social Security tax in a growing economy. For example, papers by Diamond (1965), Samuelson (1975), and Hu (1979) demonstrate that a Social Security tax can alter the private sector's saving behavior. As such, Social Security can be used as a policy tool to change the economy's capital/labor ratio and the economy's growth path. The optimal Social Security tax is that which brings about the most preferred growth path. For an economy in which no growth occurs, it is often argued that Social Security cannot improve upon the performance of the private economy, Actuarially fair programs will simply replace private saving; actuarially unfair programs will produce distortions within the economy. However,.in Enders and Lapan (1981), we derived the optimal Social Security tax for a stationary economy in which all agents have rational expectations.