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Research Institute of Industrial Economics (IFN) Working Paper Series

No 454:
Social Insurance Based on Personal Savings Accounts: A possible reform strategy for overburdened welfare states?

Stefan Fölster

Abstract: In spite of some cutbacks in entitlements, many welfare states' spending has continuously increased over the past decades, leading to larger tax burdens and often higher marginal tax rates. Proposals for reform often focus on reduced social insurance benefits and more actuarial insurance premia. In this paper it is shown that such reforms may have a smaller potential for reducing the marginal tax rate than commonly assumed, unless they are combined with mandatory personal savings accounts. Social insurance based on personal savings account is compared to other systems in a simple theoretical model and in a simulation within the context of Swedish social insurance. The simulation indicates that marginal tax effects can be reduced significantly by social insurance based on savings accounts without affecting life-tim income distribution much.

Keywords: WELFARE STATE; SOCIAL INSURANCE; (follow links to similar papers)

JEL-Codes: D60; D63; D69; (follow links to similar papers)

40 pages, March 1996

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