On the optimal linkage of social security benefits to payroll taxes

Firouz Gahvari, Randy Beach

Research output: Contribution to journalArticle

Abstract

This paper employs a three period overlapping generations' model to investigate (i) the labor supply effects of the linkage between the benefits of a pay-as-you-go social security program and the payroll taxes that finance them and (ii) the nature of the optimal linkage. The main result of the paper is that, for a given statuary tax rate, the weights that must be placed on earnings of different periods (in benefit calculation) depend on population and productivity growth rates only. This result implies that the optimal net tax rates are not uniform over the life cycle unless the economy is on its steady state golden rule path. Moreover, if the economy is on the golden rule path, the optimal net tax rates are not only uniform but also zero. The paper also demonstrates that, if preferences are additively separable, as more weight is placed on earnings when young labor supply by the young increases while labor supply by the middle-aged decreases.

Original languageEnglish (US)
Pages (from-to)110-121
Number of pages12
JournalResearch in Economics
Volume70
Issue number1
DOIs
StatePublished - Mar 1 2016

Keywords

  • Benefit formula
  • Labor supply
  • Optimal linkage
  • Pay-as-you-go
  • Social security

ASJC Scopus subject areas

  • Economics and Econometrics

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