Social Security Reform in Advanced Countries: Evaluating Pension Finance

By Toshihiro Ihori; Toshiaki Tachibanaki | Go to book overview

7

Integration of tax and social security systems

On the financing methods of a public pension scheme in a pay-as-you-go system

Akira Okamoto and Toshiaki Tachibanaki


Abstract

This chapter explores whether or not the contributions to public pension scheme in the pay-as-you-go system should be substituted by general taxes, e.g. a progressive labor income tax or a consumption tax. The chapter also investigates whether or not such possible integration of tax and social security systems is desirable from the aspects of both efficiency and equity. To analyze the problem, we adopt an extended lifecycle general equilibrium model of overlapping generations with heterogeneity in the ability of labor supply, using the household expenditure survey data. The simulation results indicate that a progressive expenditure tax with full integration is the most desirable policy.


7.1Introduction

One of the most serious social and economic problems in Japan is the aging population. Drastic reform in both the tax and social security systems accommodating this drastic structural change is an urgent policy issue. This study proposes the guidelines of such reforms for Japan. The purpose of this chapter is the following. First, we investigate whether or not the integration of tax and social security (in particular, pay-as-you-go public pension) systems is desirable as regards efficiency and equity. Second, we evaluate what tax base (e.g. a progressive labor income tax, a proportional or progressive expenditure tax, and their combination) is preferable in the integration case.

Here, we will explain the implication of "integration" used in this chapter. The chapter does not address a problem with integration itself, such as a cost reduction by making two organizations one. We focus on the fact that the general government tax revenue currently covers one-third of the flat part (i.e. the basic pension) of public pension benefit in Japan, instead of the contributions to public pension scheme. We explore

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