Munich Personal RePEc Archive

Is an unfunded social security system good or bad for growth? A theoretical analysis of social security systems financed by VAT

Maebayashi, Noritaka (2018): Is an unfunded social security system good or bad for growth? A theoretical analysis of social security systems financed by VAT.

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Abstract

This study investigates (i) how unfunded public pensions financed by VAT, as discussed in Japan, affect economic growth, and (ii) whether payroll tax or VAT is the more growth-friendly tax structure for the finance of public pensions. We examine these issues in overlapping generations (OLG) models with parental altruism and find the following results. A public pension system financed by VAT itself may increase economic growth when bequests are operative. By contrast, when bequests are inoperative, public pensions hinder growth unless agents are sufficiently patient. Finally, public pensions financed by VAT have turned out to be more growth-friendly than those financed by payroll tax when bequests are operative.

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