A New Approach to Social Welfare: tax-pension combination

Abstract

We view social welfare as a system that redistributes resources (i) within a generation and (ii) across generations so as to maximize social wellbeing. By setting tax and expenditure institutions properly, we implement optimal social welfare. Notable are the following implications: (i) in the presence of rising earnings inequality, redistribution within a generation is more important than that across generations. Fiscal policies in this line need to be stressed. (ii) Under low rates of population and economic growth, redistribution in the form of pensions loses its efficacy and therefore should not be encouraged for welfare reasons. This point has also been supported by pension reforms in many welfare states. Our preliminary calibration analysis confirms these conclusions numerically.