Human Capital Transfers: Implications for Equity in Social Security Systems

Abstract

How social security should be financed over the next 50-75 years is a subject of continuing public debate. A major issue in this debate is whether to continue to finance the system fully with the present or a modified payroll tax, or to shift part of the financing to other revenue sources. Also at issue is the extent to which retirees' benefits should be tied to their ? the social security taxes paid by themsel? ves and their employers.1 As this discussion has progressed over the years, numerous proposals for improving or reforming social security have been developed and advocated. These proposals stem from two different conceptions of the role and goals of social security.2 One view is that social security is or should be an income transfer system in which the distribution of bene? fits and taxes are evaluated independently. According to this view, the purpose of social security is to maintain a minimum or socially accept? able standard of living for the aged population. Therefore, the distribu? tion of benefits should not be tied strictly to a person's lifetime social security contributions, but should instead be based on criteria that assure a desired level of income support. And, it is usually argued, taxes to support the system should conform to ability-to-pay principles. Financing social security with a regressive payroll tax thus conflicts with equity principles that should govern income redistribution programs. The other view of social security is that it should be a benefits received program. This approach would assign income redistribution functions to government welfare programs and link retirement benefits closely, if not strictly, to individual contributions (taxes). That is, indi? viduals who are able to do so would pay their own way, and the needy would be relieved of social security contributions during working years and supported by a poverty relief program in old age. Social security would thus be separated from welfare. Missing from the reform proposals derived from these views of social