Social Security Reform and Investment in Education: Is There Scope for a Pareto Improvement?

We propose a Pareto-improving policy which reduces the overall wage tax burden in an economy with intergenerational trade in a fixed factor of production, here labelled as land. We analyse a second-best environment in which the government cannot resort to non-distortionary land taxes. Reducing the social security contribution rate encourages investment in human capital. Future efficiency gains accruing to complementary land are capitalized in its value. The capital gains may compensate land-owning pensioners for reduced benefits. We also explain why the unfunded pension system may have lost its appeal even for pensioners after its introduction. Copyright (c) The London School of Economics and Political Science 2006.